U.S. foreign debt

[Brad De Long]

>Doug Henwood wrote:
>
> > I've just put up a graph with "deep caption," as they say at Vanity
> > Fair, on the growth of U.S. foreign debt - $1.3 trillion in fresh
> > borrowing during the Clinton years alone:
>
>In your comments there you note, "But those are weak countries, not an
>imperial colossus. What happens to a colossus when it gets cut off
>is very hard to predict."

Two scenarios:

First, when the "cutoff" occurs the dollar falls by some large share 
of its value as demand for dollar-denominated assets tanks, we get to 
see exactly how good our central bank is at guiding expenditure 
shifting, but when the dust clears we find that (a) foreign portfolio 
investors in the U.S. have lost perhaps 1/3 of the real value of 
investments, (b) U.S. consumption has shrunk some (but U.S. savings 
has increased), (c) U.S. investment is down some, and (d) U.S. 
exports are up a lot.

Second, when the "cutoff" occurs we suddenly discover that a lot of 
portfolio investment in the U.S. is either denominated in dollars or 
else that New York institutions have written a lot of derivatives 
insuring foreign investors against a dollar decline.

In which case, all hell breaks loose...

Brad DeLong, who is 90% on scenario 1, 10% on scenario 2...