Serious Money:The world economy has enjoyed the most extended period of above-trend economic growth in more than three decades and - apart from perhaps Lebanon, Venezuela and Zimbabwe - the expansion continues, writes Charlie Fell.

It is hardly surprising against this background that risk assets of almost every variety continue to move higher and risk premiums remain near all-time lows. Analysts from Wall Street and beyond concur with market trends and argue that a golden age of globalisation is at hand. The perennial optimists argue that the increasing integration of financial and product markets worldwide means that investors can sit back and enjoy the ride.

Unfortunately, traditional economic theories suggest otherwise and shoving square pegs into round holes can only last so long.

The global economic expansion of recent years has been virtually all-inclusive from the West to the East but it has been built on imbalances that continue to grow ever larger - excess savings in the East and debt-fuelled consumption in the West.

The western world, particularly America, suffers from a chronic deficiency of savings, which Asia, notably China, has been more than willing to supply. Consequently, the impact of the growing imbalances has so far been benign, reducing the perceived need to implement appropriate policy responses that will ensure a smooth adjustment.

The rise in global imbalances is often blamed solely on China and its phenomenal investment driven export growth, which has been fuelled by a grossly undervalued currency. It is undoubtedly true that China's quasi-fixed exchange rate regime has enabled its export sector to flourish and its current account surplus to rise to 9 per cent of GDP.

But it has also subsidised a savings deficient American economy where the net national savings rate has dropped to a record low of 1 per cent in recent years while the current account deficit has soared to almost 7 per cent of GDP. The fact of the matter is that the US has had no alternative but to import excess savings from abroad in order to grow.

The recycling of China's surplus into American assets in order to prevent a significant appreciation of its currency has led to lower interest rates in the US than would otherwise have been the case. The reduction in borrowing costs has enabled American households to engage in a debt-fuelled consumption boom despite the stagnation in median household income in real terms since 1999.

Additionally, lower interest rates contributed to the boom in house prices, which enabled households to extract equity from their homes and sustain the upward momentum in consumption. Furthermore, the relatively stronger dollar has boosted consumers' external purchasing power and the lower cost of imports has also placed downward pressure on the rate of inflation.

Finally, the six percentage point reversal in America's fiscal position from surplus to deficit since the late 1990s has been financed more cheaply.

Unfortunately, persistent external deficits of the size that America's "have now, pay later" economy is running are simply not sustainable in the long run. Net foreign liabilities already amount to 25 per cent of US GDP and, should current trends continue, they will exceed 50 per cent within five years or 15 per cent of world GDP.

Exporters of excess savings are sure to demand higher returns on the US assets they purchase as the country's level of indebtedness grows.

Furthermore, America's net income balance plunged into the red in 2006 for the first time on record and it should continue to deteriorate in the years ahead as net foreign liabilities grow. This will exacerbate the current account deficit and, consequently, reduce income for present and future generations of Americans.

The US needs to implement appropriate policies to prevent a disorderly adjustment of global imbalances. A successful reversal of America's external deficit requires a depreciation of its real exchange rate and an increase in domestic savings rates as well as fiscal consolidation.

It is unlikely that this or the next administration will be prepared to take the harsh but necessary action. Meanwhile, China is unlikely to engineer the sharp appreciation in the value of its currency given the economic pain that it would impose on agricultural workers, not to mention the losses it would suffer on its large and growing foreign exchange reserves, which amount to roughly 40 per cent of GDP.

Consequently, the imbalances will persist, which suggests that a crisis is almost inevitable at some point. Dollar assets will continue to lag.