As has been blogged in the past, one big risk to the US economy is if the countries that have bought US debt in the past determined not to do so, or not to do so in such quanities, in the future. One reason for this move would be the continued decline in the dollar’s value which has resulted from many years of inflation and the recent cuts in interest rates. Therefore it is with some concern that I read the following headline: “Japan and China lead flight from the dollar.”

Quote:
Data from the US Treasury showed outflows of $163bn (£80bn) from all forms of US investments. “These numbers are absolutely stunning,” said Marc Ostwald, an economist at Insinger de Beaufort.

Asian investors dumped $52bn worth of US Treasury bonds alone, led by Japan ($23bn), China ($14.2bn) and Taiwan ($5bn). It is the first time since 1998 that foreigners have, on balance, sold Treasuries.
Mr Ostwald warned that US bond yields could start to rise again unless the outflows reverse quickly.
…
The US requires $70bn a month in capital inflows to cover its current account deficit, but the key sources of finance are drying up one by one.

BNP Paribas said America has relied on “hot money” from abroad to cover 25pc to 30pc of the US short-term credit and commercial paper market over the last two years.

This flow is now in danger after the seizure in parts of the market over the summer and after the Federal Reserve’s half point rate cut, which has shaved the US yield advantage over other countries.

Ian Stannard, a Paribas currency analyst, said the data was “extremely negative” for the dollar. “It exceeds the worst fears. It is not just foreigners who are selling US assets. Americans are turning their back as well,” he said.

Here is a link to the whole article:

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/10/16/bcnchina116.xml

Mike