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The $7 Trillion Problem That Could Sink Asia

Aug. 2 (Bloomberg) -- “It’s our currency, but it’s your problem.” This musing from Nixon-era Treasury Secretary John Connally is about to find new relevance as the White House battles Republicans over raising the U.S. debt limit.

Connally couldn’t have foreseen how right he would be 42 years on as Asia sits on almost $7 trillion in currency reserves, much of it in dollars. Asia’s central banks engaged in a kind of financial arms race after a 1997 crisis, stockpiling dollars as a defense against turmoil. That altered the financial landscape in two ways: One, Asia now has more weapons against market unrest than it knows what to do with. Two, Asia is essentially America’s banker, with China and Japan having the most at stake.