Now that the dollar has dropped 43 percent from its high against the euro, the process of global financial rebalancing is seriously under way. The US' trade and current account deficits have begun to shrink relative to US and world GDP. Asian current account surpluses are about to start to shrink as well, especially if growth slows markedly in the US in the aftermath of the end of its housing boom.
At the moment, Europe is feeling most of the pain, as the euro's value has risen furthest and fastest against the dollar. But Latin America and Asia will start to feel distress as well, as the US sheds its decade-long role as the global economy's importer of last resort.
As long as imbalances of world trade and capital flows unwind slowly and smoothly, the magnitude of any global economic distress should be relatively small.
Of course, it will not seem small to exporters and their workers who lose their US markets, or to Americans who lose access to cheap capital provided by foreigners.
Yes, the US might enter a small recession -- the odds are roughly 50-50 of that happening. Yes, a US recession might spill over to the rest of the world and cause a worldwide recession. And yes, global economic growth over the next five years is unlikely to be as rapid as growth in the last five years.
A formal recession, however, is not an overwhelming probability and is likely to be small.
The prospect of a truly hard landing -- one where global investors wake up one morning, suddenly realize the US current accounts cannot be sustained, dump dollars and crash the global economy -- is becoming less likely with each passing day.
Under two scenarios -- both concerning China -- the unwinding of global imbalances could cause regional if not global depression.
In the first scenario, China keeps up its attempt to maintain full employment in Shanghai, Guangzhou, and elsewhere not by stimulating domestic demand but by trying to boost exports further by keeping the yuan stable against the dollar and falling in value against the euro.
The effort to maintain the dollar-yuan exchange rate at a level approved by China's State Council has already led to an enormous increase in the Chinese economy's financial liquidity.
The consequences of this are now manifested in property and stock market inflation, but not yet in rampant and uncontrolled consumer price inflation -- at least for now.
But if China does not accelerate the yuan's revaluation, the world might see a large burst of consumer inflation in China in the next two or three years.
If so, the consequences will be a choice between stagflation on the one hand and the destructive run-away inflation of post-World War II Latin America on the other.
The fall-out from this scenario, however, would be largely confined to Asia.
The second scenario is more dangerous for the entire world. In this scenario, once again China continues to attempt to maintain full employment by keeping the yuan undervalued. But this time, the Chinese government manages to restrain domestic inflation, so the US' trade deficit with Asia stops falling and starts rising again.
Five or six years hence, the world economy faces the danger of a sudden crash in the value of the dollar and the euro against Asian currencies.
Four years ago, I would have said that the principal source of international economic disorder was made in the US.