s, who had the additional misfortune of having to borrow in dollars. As their own currency lost the confidence of world markets, they lost value against the dollar. This only increased their real debt burden. The optimists say, ''It can't happen here."

First, we're the people who print dollars. So if the dollar is losing value, it just means the money that we owe the rest of the world is getting cheaper. Lucky us.

Second, we enjoy a codependency with our creditors. For instance, China, which keeps lending us money to finance our deficits, may be accumulating dollar credits that are losing their real worth. But China needs us to keep absorbing their products, so China will go right on lending.

And third, the United States remains the anchor of the world economy. So even though other nations may not like America's immense trade and budget deficits, nobody is going to risk pushing the world into depression by crashing the dollar.

That, as I say, is the optimistic view. Well, dream on.

Yesterday, the bipartisan Congressional Budget Office, possibly the last intellectually honest government agency in George Bush's Washington, reported that our fiscal situation is even worse than expected.

According to the CBO's latest ''Budget and Economic Outlook," the projected deficit for 2005 will be about $400 billion. The CBO declares, politely but unmistakably, that it doesn't buy the Bush administration's budgetary gimmickry of trying to keep anticipated military outlays out of the official budget.

''The absence of further appropriations for activities in Iraq and Afghanistan," CBO states, ''masks a further deterioration in budget projections over the [next] ten years."

Specifically, the deficit for the next decade is $504 billion worse than anticipated in CBO's previous estimate last September.

The agency goes on to warn that other challenges not currently itemized in official administration projections, such as Medicare, Medicaid, and Social Security, will only increase future deficits. And, of course, if the Bush administration succeeds either in making permanent his major tax reductions (most of which sunset after 10 years), or in adding $2 trillion of borrowing to privatize Social Security, the fiscal situation would go from merely disastrous to catastrophic.

But back to our story, ''It Can't Happen Here." America's deteriorating fiscal situation, unfortunately, is not lost either on world money markets or on the Federal Reserve. Although no world leader would willfully plunge the world into depression, that's not how markets work. Markets are purely self-interested.

Lately, markets, with good reason, have been betting against the dollar. As the US trade deficit approaches a staggering 7 percent, it's not clear how much longer foreign investors will keep investing in dollars and dollar-securities, such as corporate stocks and government bonds.

As for the Chinese, Clyde Prestowitz of the Economic Strategy Institute, formerly a senior trade negotiator in the Reagan administration, offers the following scenario: In a future crisis involving the tense China-Taiwan relationship, the Chinese ambassador suggests to Secretary of State Condoleezza Rice that maybe the United States would like to move its warships 500 miles away from Taiwan. Rice demurs. The next day, the Bank of China sells a few --just a very few to get our attention -- US Treasury securities. Money markets reel.

Would the Chinese play such a risky game? They have their own interests, geopolitical as well as economic. They are certainly not an American pawn, less so with every passing year. Miscalculations have happened in world economic relations before, and with calamitous results.

The Federal Reserve, meanwhile, is increasingly worried about inflation, largely of the imported variety due to the weak dollar. The Fed is steadily raising interest rates. With every quarter-point hike, consumers pay more for mortgage and credit card loans, investors in stocks become more wary, and the air goes out of the economy. Alan Greenspan kept rates very low long enough to get George W. Bush reelected. Now he is reverting to type.

The Bush administration is putting itself, and America's economic future, in grave jeopardy. The only good news is that all this bad news makes Social Security privatization, or permanent tax cuts for the wealthy, less than an even bet.

Robert Kuttner is co-editor of The American Prospect. His column appears regularly in the Globe.

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Would the Chinese play such a risky game? Take a close look at this article from Wednesday's Associated Press wire

DAVOS, Switzerland (AP) - China has lost faith in the stability of the U.S. dollar and its first priority is to broaden the exchange rate for its currency from the dollar to a more flexible basket of currencies, a top Chinese economist said Wednesday at the World Economic Forum.

At a standing-room only session focusing on the world's fastest-growing economy, Fan Gang, director of the National Economic Research Institute at the China Reform Foundation, said the issue for China isn't whether to devalue the yuan but "to limit it from the U.S. dollar."

"The U.S. dollar is no longer - in our opinion is no longer - (seen) as a stable currency, and is devaluating all the time, and that's putting troubles all the time," Fan said, speaking in English.

"So the real issue is how to change the regime from a U.S. dollar pegging ... to a more manageable ... reference ... say Euros, yen, dollars - those kind of more diversified systems," he said.

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Journal Seymour Hersh buttressed this assessment in a recent interview with Democracy Now:

"Another salvation may be the economy. It's going to go very bad, folks. Y0u know, if you have not sold your stocks and bought property in Italy, you better do it quick. And the third thing is Europe -- Europe is not going to tolerate us much longer. The rage there is enormous. I'm talking about our old-fashined allies. We could see something there, collective action against us. Certainly, nobody -- it's going to be an awful lot of dancing on our graves as the dollar goes bad and everybody stops buying our bonds, our credit -- our-- we're spending $2 billion a day to float the debt, and one of these day, the Japanese and the Russians, everybody is going to start buying oil in Euros instead of dollars. We're going to see enormous panic here. But he could get through that. That will be another year, and the damage he's going to do between then and now is enormous. We're going to have some very bad months ahead."

Anyone who buys into the Bush administration idea that htis nation can go it alone without the rest of the world needs a few refresher courses in Economic 101. The minute the rest of the world gets tired of our belligerence, they can turn us off economicaly as easily as flicking a light switch.

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