U.S. foreign debt

[Brad De Long]

>Thank you Brad for the analysis. I'll have to take my chances that I shall
>reveal myself to hopelessly confused by posing a couple of questions
>about the following:
>
> >
> > 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.
>
>As for this 'a lot' in (d), how much will a dollar devaluation
>really help US exporters in lieu of a pickup in real investment activity
>abroad? The cutoff will be quite a bit more damaging if you are wrong
>about the 'a lot', correct?

NICing East Asia is pretty open to U.S. exports; Europe likewise; 
Japan isn't. But I'm not sure if the cutoff would be more damaging or 
if it would just make the dollar fall further, which would be bad for 
the standards of living of those of us who consume a lot of imports, 
would generate some inflation, but would be not at all bad for the 
rest of us...


>
>Another question:
>
>If one assumes that there have been few derivatives created to insure
>foreign holders of US debt against dollar decline, can't the US
>then actually engineer a devaluation in order to stick it to foreign
>holders of that debt

Why do you think Larry Summers keeps on saying that "A strong dollar 
is in America's interest"? Its when creditors start thinking that 
maybe the government is thinking about adopting such an economic 
strategy that large-scale capital flight starts...

Brad