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The United States and China are beginning high-level strategic talks in Washington DC, with the dollar perhaps emerging at the top of the agenda. China has expressed its concern to the Obama administration about the rising US deficit and how the US might protect its currency from a devaluation. US Treasury Secretary Timothy Geithner and Secretary of State Hillary Clinton will host two days of meetings covering topics from the global economic crisis to North Korea. The "Strategic and Economic Dialogue" is the Obama administration's first with China.

The US is now facing a deep-seated structural problem. Its budget deficit might reach US$1.8 trillion (Bt61 trillion) this year, while its quantitative easing monetary policy threatens the stability of the dollar. Many people are wondering how the US can bridge the gap in its spending, which is mismatched with a revenue shortfall.

To finance the budget deficit, the US Treasury Department will have to issue bonds. Bond issues on this gigantic scale will have to be absorbed mainly by foreign governments. But with the ongoing economic crisis, sovereign governments will not have any surplus funds with which to subscribe to the US bonds. This automatically will force the US Federal Reserve to step in to buy up the US Treasuries. And this is nothing more than moving money from the left pocket to the right pocket.

Besides this, the problems in the US financial system have not been properly addressed. Instead of restructuring bad assets, US authorities have sought to inject liquidity into the banks to keep them afloat. The banks in turn use the government money offered at almost no cost - the US interest rate is approaching zero per cent - to repay its debt. The banks are cautious about lending into a weak economy.

US authorities hope that the banks will lend money again so that consumers will go back to buying and businesses will start to invest. But this is no way to tackle the financial and economic crisis. In the aftermath of a bust of the economic bubble, radical restructuring of assets is the key. But this restructuring process has not happened in earnest yet because the US authorities are afraid of widespread bankruptcies and further unemployment. But without the pain, there will be no gain.

In the past, the US looked upon the yuan's exchange rate as the problem. The US would like China to adopt a more flexible currency system so as to allow the yuan to appreciate and thereby reduce China's surplus with the US and the world. But this issue is no longer relevant as the US, with its insolvent financial system and weak economy, no longer negotiates from a strong bargaining position. China now has the upper hand because it is the creditor country. China now cares how its $2 trillion in assets, dominated by US dollar holdings, are going to be protected by a more stable US policy.

The US now wants China to rely more on domestic demand and not exports for growth. At the same time, China wants the US to restructure its deficits and financial system and also give a chance to the yuan to play a more prominent role in the global financial system. For China's yuan to enter the global stage, it will have to undergo a big-bang reform so that the currency is fully convertible. Thailand is recognising this trend. Recently, the Bank of Thailand said it was studying the possibility of diversifying its foreign reserves management by investing its surplus in the yuan. This is the right policy to pursue because Thailand should not maintain all of its wealth in one basket.

"Raising personal incomes and strengthening the social safety net to address the reasons why the Chinese feel compelled to save so much would provide a powerful boost to Chinese domestic demand and global growth," Geithner and Clinton wrote in a joint article published in yesterday's Wall Street Journal.

Few global problems "can be solved without the US and China together," Geithner and Clinton wrote. "The strength of the global economy, the health of the global environment, the stability of fragile states and the solution to non-proliferation challenges turn in large measure on cooperation between the US and China.

"Both nations must avoid the temptation to close off our respective markets to trade and investment," Geithner and Clinton added. "Both must work hard to create new opportunities for our workers and our firms to compete equally, so that the people of each country see the benefit from the rapidly expanding US-China economic relationship."

We will, in time, see the results of the US-China talks, which will shape the course of events in the coming months and years. But the result will not come to pass without hard and painful action, particularly from the US, which is now printing money like there is no tomorrow. Ben Bernanke, the Federal Reserve chairman, has said he will do everything in his power to prevent another recession. But US actions so far show that it has not yet hit the target.