As a result, there has been an immense rise in foreign ownership of American securities of all kinds, but especially government bonds. Foreign ownership of the U.S. federal debt passed the halfway mark in June 2004. About a third of corporate bonds are now in foreign hands, as is more than 13 percent of the U.S. stock market. One analyst has half-seriously calculated that at the current rate of foreign accumulation, the last U.S. Treasury held by an American will be purchased by the People's Bank of China on Feb. 9, 2012.

To those familiar with the Latin American debt crises of the 80's and 90's, there's a case to be made that the United States is on the road to becoming a Latin American country. While it is certainly true that our net external debt is now as large in relative terms as some Latin American debts have been in past crises, there's a difference. Latin American countries have generally had to borrow in the currency used by their creditors. A decline in the borrowing country's currency, say the peso, threatens to send its dollar-denominated debt skyrocketing in peso terms.

But the happy position of the United States is more like that of Britain in the aftermath of World War II, when a substantial part of its war debt was owed in sterling to current or former colonies. Because Britain borrowed in its own currency, it had control over the unit of account. As the pound slid from $4 to below $2 from the 40's to the 70's, its sterling liabilities were reduced by half in terms of the key postwar currency.

Could the dollar follow a similar downward path? It has happened before. Between March 1985 and April 1988, the dollar depreciated by more than 40 percent against the currencies of America's trading partners. As a fiscal strategy, dollar depreciation has much to recommend it. At a stroke, American exports would regain their competitiveness overseas and Asian imports would become more expensive, leading to at least some contraction — though not an elimination — of the trade deficit. Foreign creditors would take the hit, finding their dollar assets suddenly worth much less in terms of their own currencies.

So what's the catch? A sudden increase in the dollar price of American imports could stoke inflation in the United States. There is already some patchy evidence of an upturn in inflation. Whichever measure you use, prices are certainly rising at a faster rate now than they were two years ago, as are hourly earnings. As measured by the spread between conventional bonds and inflation-proof bonds, inflation expectations are also up slightly.

But is that really a catch? Not necessarily. Because higher inflation means that the real value of your debt ends up being reduced (in terms of the purchasing power of the amount that you owe) — provided, that is, that your debt is not adjustable-rate or index-linked.

Alas, those are two really serious caveats.





It's a pretty safe bet that if a dollar decline shows signs of boosting inflation, the Federal Reserve will raise interest rates. The credibility of the new Fed chairman would be on the line. Even a federal-funds rate above 5 percent might seem too low. Bear in mind that the federal-funds rate (the overnight rate at which the Fed lends to the banking system) has been going up for two years, from its nadir of below 1 percent in June 2004. Now ask yourself, Who has been most affected by this monetary tightening?