A weakening dollar is raising alarms.

Is the delicate balance that has kept the global economy going despite jaw-dropping U.S. debts about to give way? A growing number of economists think so.

Harvard University president Larry Summers has dubbed this the “balance of financial terror.” He and other economists fear a crisis that will lower U.S. living standards.

The current arrangement, where America buys and borrows while Asia sells and saves, is creaking under the weight of exchange rates that many analysts say are coming apart.

If the analysts are right, American consumers may soon confront sticker shock at favorite retailers such as Wal-Mart and Home Depot. American automakers, on the other hand, might get a chance to climb out of a bathtub of red ink.

The Bush administration says do not panic. White House advisers say global debts and exchange rates would sort out smoothly if the rest of the global economy would follow the growth path America is walking.

Economists with Germany’s Deutsche Bank say recycling dollars from America to Asia and back again will keep rewarding both sides. Michael Dooley, David Folkerts-Landau and Peter Garber see it as a new Bretton Woods Agreement, an international system devised in 1944 to stabilize exchange rates that lasted for almost 30 years.

“Our story has been that the countries in Asia that have been lending us money will find it in their interest to continue to do so,” Dooley said. “And the United States will still get enough foreign money to keep interest rates low and continue to use world savings for both investment and consumption.”

Other economists do not see how that approach can be sustained.

$600 billion in loans to U.S.

The United States is borrowing $600 billion a year to finance its trade and budget deficits. Most of the lenders are Asian governments. China has bought more than $500 billion in U.S. Treasury bonds. Japan holds more than $720 billion. South Korea, Taiwan and Hong Kong each hold more than $100 billion.

The Asians are lending to hold down the value of their currencies, say U.S. economists, which keeps prices low for Asian exports to the United States. If an Asian currency begins to rise against the dollar – which is happening to Japan’s yen – it gives the others a pricing advantage in the U.S. market.

Sure enough, Japanese officials complained Dec. 1 the dollar was too weak and suggested Europe and Japan should push it back up.

John Williamson of the Institute for International Economics in Washington argues the International Monetary Fund must knock heads in Asia to produce a 10 percent to 30 percent rise in those currencies against the dollar.

“At some stage, American consumers are going to have to recognize they’ve been living beyond their means,” he said.

An orderly realignment of exchange rates would be less painful than a recession, which is the other way to curb U.S. borrowing, Williamson said.

Lowering the value of the dollar gives the United States an advantage over every other debtor. Other countries borrow dollars and have to pay interest in dollars, even if their own currencies collapse. But the United States can inflate away its debts by lowering the value of its own currency.

A weakened dollar would put a brake on U.S. imports because they would be more expensive. It would also spur U.S. exports.

Dollar’s value hurts oil producers

The dollar’s value directly affects the income of oil-producing countries because oil is priced in dollars. When the dollar weakens, it drains income from Russia, Saudi Arabia and other leading oil exporters. So far, prices have increased far beyond the losses caused by a weakened dollar, but producers are inclined to hold on to their winnings.

Russia and Indonesia said in early December they might start buying euros and other currencies to lessen their exposure to a declining dollar. The Bank of International Settlements on Dec. 6 reported a 13 percent shift in oil-producer reserves from dollars to euros in the last three years.

Clyde Prestowitz, president of the Economic Strategy Institute, sees a painful adjustment ahead.

“The whole global economy is kind of a Ponzi scheme,” he said.

“Our job is to borrow and consume at ever-increasing rates. Everybody else – particularly the Chinese, the Japanese, the Koreans – saves and produces and exports, and provide us financing so we can go on buying.”

“We get to live beyond our means, and they are happy to soak up unemployment,” he said.

Prestowitz said the dollar is going to have to fall more than 50 percent against some currencies to bring global accounts back to balance – “which means a fall in the standard of living.”

U.S. manufacturers, who suffer most from cheap imports, formed the Coalition for a Sound Dollar to argue the value of the dollar is too high.

“We really view China as the lynchpin in this,” said Patricia Mears, the coalition’s executive director. “China is looking for job creation and internal stability, and they have taken a currency position for export-led growth.”

Dooley agrees China is the lynchpin. But he does not see Beijing strengthening its currency any time soon.

From a Chinese perspective, the most important economic problem of the age is finding jobs for the 200 million people moving from farms to cities.

Manufacturing exports can solve that problem if the Chinese currency remains pegged to the currency of the major buyer of those goods – the United States.