Last week's declaration by the vice-director of China's central bank sent shockwaves through global markets. Amid signs that China was thinking of reallocating its foreign reserve holdings out of dollars, Xu Jian declared that the dollar was "losing its status as the world currency." As if we needed reminding.

There was a time when countries which enjoyed trade surpluses - which is to say, they were owed money by their trading partners - lodged their surpluses in gold. Since World War II, though, more and more countries preferred to use the U.S. dollar for their reserves. As the currency of the world's largest economy, backed by a prudent government and a conservative central bank and - for a long time - exchangeable with gold, the dollar was seen to be as good as gold, but a lot more liquid.

That meant that instead of stashing their reserves in vaults, governments lodged them in U.S. bank accounts, bought American real estate, or loaned the U.S. government money. It was a sweet arrangement for the U.S. It meant that Americans could live beyond their means, secure in the knowledge that the rest of the world would do the saving for them. With U.S. Treasury paper in demand, interest rates remained low. That meant firms and households could borrow cheaply. Driven by cheap credit, the stock and real estate markets rose.

Borrowed time

This decades-long trend peaked in the 1990s, when the U.S. economy reached unprecedented levels of wealth. The problem was that it was all done on borrowed time. Americans were not investing. Besides, wages remained more or less flat: cheap dollars enabled U.S. firms to outsource their production to the 'emerging markets' that had burst on to the world scene in the wake of communism's collapse. Thereby, they did an end-run around U.S. labour. Chinese workers competed with Americans for jobs, depressing wages.

Borrowed money

Profits rose, and the stock market took off. For a time, an illusion of prosperity took hold as Americans, abetted by the then-new phenomenon of 24-hour business television, bought shares. But that, too, was done by borrowed money. When, in the summer of 1999, an indebted 'day trader' - one of the millions of Americans who tried to make a living trading shares over the Internet - entered two Atlanta brokerages and shot nine people dead, it was like an omen of the stresses about to break across America.

The boom peaked in 2000. Days after then-President Bill Clinton hosted a conference celebrating what he proclaimed as America's new economic age, the stock market crashed. In the following years, the U.S. Federal Reserve Board jettisoned its reputation for prudence and ran to the market's rescue, cutting interest rates to stanch the bleeding. The stock market bubble became a real estate bubble, then a commodities bubble. Throughout it all, U.S. authorities were losing control. Foreigners lost confidence in the Fed. In a trickle, at first, they began exiting the U.S. economy.

This year, the trickle became a flood. The dollar has plummeted so far, it will take dredging machinery to find it. As import prices have leapt, U.S. inflation remains stubborn. It may only get worse: as it becomes more expensive to do so, firms may outsource less to China. That means U.S. wages will finally rise.

In the short run, therefore, things will actually improve for ordinary Americans. But for the testosterone-driven yellers on the business channels, the future looks bleaker. Rising inflation, depressed profits, and high interest rates may cause markets to crash again. The impact of such a turn of events on the world economy remains to be seen. But these are interesting times.