President Bush hasn’t much discussed what could be his biggest economic problem. It’s not budget deficits or jobs. It’s the possible crash of the dollar on foreign exchange markets. Even if Mr. Bush understood it (that’s unclear), he would be hard-pressed to explain it to the public. Worse, there are no obvious ways to prevent it. Little wonder Mr. Bush hasn’t said much. But a dollar crash, if it occurred, could trigger a terrifying global slump.

The dollar lubricates the world economy; it’s used for much trade and cross-border investment. In some form, a “dollar problem” has long existed. After World War II, there was a “dollar gap”: Europe and Japan didn’t have enough dollars to import the food and machinery needed for recovery. America filled the gap with foreign aid and policies encouraging multinational American firms to invest abroad. These policies provided dollars, although America still ran big trade surpluses.

The problem now is similar and different. Like the 1950s, today’s outflow of dollars stimulates the global economy. Unlike the 1950s, it involves huge American trade and current-account deficits. (The “current account” includes trade plus other “current” overseas payments, such as travel, freight costs, and dividend payments.) In 1990, the American current account deficit was $79 billion, or 1.4% of gross domestic product. In 2004, it’s expected to hit about $665 billion, or 5.6% of GDP. The ballooning deficit has two basic causes.

First, the American economy has grown faster than other advanced economies. Since 1990, American economic growth has averaged 3% annually compared with 2% for the European Union and 1.7% for Japan. America’s higher growth sucks in imports; Europe’s and Japan’s slower growth hurts American exports.

Second, the global demand for dollars props up its exchange rate, making American exports more expensive and American imports cheaper. Indeed, many countries, particularly in Asia, fix their currencies to keep their exports competitive in the American market. To prevent the dollar from declining, government central banks in Japan, China, and other Asian countries have purchased more than $1 trillion of U.S. Treasury securities. Private investors have also bought lots of American stocks and bonds. All told, foreigners own about 13% percent of American stocks, 24% of corporate bonds, and 43% of U.S. Treasury securities.

Up to a point, this arrangement benefits everyone. The world gets needed dollars; Americans get more imports. But we may now have passed that point. Hazards may outweigh benefits. The world may be receiving more dollars than it wants. A sell off could spill over into the stock and bond markets and cause a deep global recession. Here’s how.

Foreign traders and investors sell dollars on foreign exchange markets. The dollar declines in relation to the euro, the yen, and other currencies. The dollar’s decline means that the value of foreigners’ investments in U.S. stocks and bonds – measured in their own currencies – is also dropping. So, foreigners stop buying American stocks and start selling what they have. The stock market drops sharply.

Presto: the makings of a global recession. The stock-market slide causes American consumer confidence and spending to weaken. If foreigners also flee the bond market, long-term interest rates on bonds and mortgages might rise. Higher currencies make Europe’s and Japan’s exports less competitive. Their industries stagnate. Recessions in America, Europe, and Japan would hurt the Asian, Latin American, and African countries that export to them.

Note, however, that the dollar’s vulnerability is merely a symptom of something else: the addiction of Europe and Asia to exporting to America. If their economies grew faster on their own, the massive American payments deficits wouldn’t have emerged. The dollar would have quietly drifted down. Foreigners would have invested less in America because they’d have more investment opportunities at home. But Europe suffers from suffocating taxes and regulations. Japan has long favored export-led growth. And about 35% of China’s exports go to America.

There’s a stubborn contradiction. The world may be getting more dollars than it wants; but it likes the source of those dollars – large American trade deficits. China has resisted American pressure to raise the value of its currency; Europeans and Japanese deplore the recent increases in their currencies. Because the dollar’s vulnerability reflects other countries’ weaknesses, no American president can cure it alone. Contrary to popular wisdom, for example, American budget deficits don’t cause American trade deficits.

In the late 1990s, trade deficits widened even though budget deficits declined. No one knows what will happen. The massive American payments deficits could continue for years, with foreigners investing surplus dollars in American stocks and bonds. We’re in uncharted waters. If we hit a shoal, it will be bad for everyone.