LOS ANGELES — Fasten your seat belts — and get ready for a major test of the core stability of the global financial system. How do we know that a jolt is coming? Just consider that:

World markets went into a serious dollar tailspin on March 11 after Japanese Prime Minister Junichiro Koizumi raised the specter of his treasury “diversifying” its foreign-currency holdings. Implicitly referring to Japan’s huge savings pile of $840 billion, Koizumi bluntly told a Diet parliamentary committee: “I think it’s necessary to have diversity.”

The prime minister’s candor then triggered a selloff of U.S. treasury investments by foreigners (who feared a plunge in the value of the dollar) that jacked up yields on long-dated U.S. bonds to an eight-month high. Today’s markets are nervous about excessive foreign capital flows into the United States — and they should be.

Imagine an alcoholic whose friends “help him out” by delivering vodka instead of milk bottles to the door every day for breakfast. This is what in effect Japan, a solid ally, and China (sometime economic partner) are doing by providing foreign funds to an American culture that’s overspending and undersaving.

Japan and China will continue to act this way, right up until the dollar breaking point, because the practice is in their economic interest. The large-scale dollar-buying keeps the exchange-rate value of their countries’ own currencies from rising too high, which would raise the price tags of their exports in the all-important U.S. market.

Many officials moved too quickly to pooh-pooh the selling frenzy as a minor overnight downtick. All rally-round-the-currency syndromes rightly make us extremely nervous. For starters, Japanese economic officials quickly sought to downplay the prime minister’s comment.

Hiroshi Watanabe, vice minister of finance for international affairs, said: “We don’t plan to take action now at all” to diversify out of dollars. Although Japan “is always considering whether it’s appropriate in the long run” to hold its reserves in certain securities, “nobody is considering” a shift out of dollars now.

Notice, though, the qualification “now” — twice in those two sentences alone. And note the feel-good debt-serving comment of U.S. Treasury Secretary John W. Snow: “The U.S. remains the best, safest, most secure place to invest in the world. Our markets here are the deepest, the most liquid and most efficient anywhere in the world. We produce the best risk-adjusted returns, so no I’m not (worried).”

Consider how a nightmare scenario — of a possible stampede from the dollar — would play out emotionally in a place like Asia. Remember, China and Japan together account for about 77 percent of these foreign dollar holdings. Both countries benefit enormously from strong American consumer demand and a strong dollar.

But they also remember how crudely and rudely the U.S. conducted itself during the Asian financial crisis (1997-98). Washington let troubled Asian countries stew in their own negative economic juices, prevented Japan from taking a strong role, repeatedly offered China bad currency advice and didn’t pitch in to help until the currency virus was almost on its own doorstep.

“One of America’s biggest strengths is that it is a nation with limited memories,” writes the astute Kishore Mahbubani, in his new book, “Beyond the Age of Innocence,” a truly timely and essential volume of Asian political wisdom.

“Asians, by contrast, have long memories,” he said. “They can recall important historical events. The Asian financial crisis will be remembered for a long time. The lessons will be complex. . . . But one clear strand will emerge in the historical memory: how a generous country walked away from them in their hour of need.”

The Bush administration is scarcely responsible for the sins of the preceding administration. But, like it or not, it inherits those Asian memories and, even though it is very much in the interests of Asia to not see the U.S. economy fall on its face, Asians are human like the rest of us. Just as Osama bin Laden punched America in the face on Sept. 11, 2001 to the cheers of some people in the world, don’t be surprised if Asia were to be forced into executing a serious run on the U.S. dollar and sheds few tears in the process.

Perhaps the only question is which Asian nation will be the first to “diversify” from the dollar in large quantities. The truth is no one wants to be the first out the door in the selloff.

But it is also true that no one wants to be the last out the door when and if a dollar panic sets in. Keep those seat belts ready.

In a time of both misinformation and too much information, quality journalism is more crucial than ever.
By subscribing, you can help us get the story right.