Why America's debt makes it a dangerous place

The US has sold so many Treasury bills that it has lost control of its currency - and its economy. If you intend to invest there, beware: it is a risky place, regardless of its current credit rating.

The US government now has $2061billion of Treasury bills in circulation. This is effectively the size of the loan it has taken from the rest of the world in order to finance its economy and is one of the reasons that the US dollar has depreciated so significantly against many other currencies over the last few years. Since 2001 the US dollar has depreciated 43% against the Swiss franc and 47% against the euro. This depreciation has been fairly orderly but there are increasingly important reasons why a disorderly depreciation, or even a run on the currency, could occur.

The largest holder of T-bills is Japan with $592 billion, closely followed by China with $502 billion and the OPEC members who between them officially have $154 billion. However, a lot of OPEC members also own T-bills via proxy that are held in the UK. The high oil price has seen the foreign exchange reserves of these countries swelled with dollars, as oil is primarily priced in US dollars. China has accumulated their holdings due to the huge levels of trade that are carried on with the rest of the world using dollars. Japan has long been a keen buyer of T-bills but has recently started to reduce its holdings (by 3.6% in the last year). Asian central banks don't publicise the allocation of their currency reserves but they hold about $4.35 trillion in total foreign exchange reserves and about 70% of these are thought to be dollar-denominated. US dollars and dollar-denominated assets are held in a wide range of foreign countries, some of whom have strained political relations with the US due to the aggressive foreign policy of the Bush administration and one has to wonder how far they will bend to the will of a financially weak and economically exposed America.

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