The rest of the world would have to sit back and watch as we took back what was ours and sold the proceeds at an inflated price to the rest of the world. Just stopping the outflow of $700 Billion/yr for US oil imports would repay the entire official US debt within 20 years.

In the short term (i.e. today and tomorrow) this isn’t true, since there is a flight to short term US treasuries as the world financial system crumbles.

In the immediate to long term, it’s really hard to figure out what the currency dynamics will be since we have really only a vague idea of what the new financial order will look like.

http://www.ft.com/cms/s/0/93373ed4-92b0-11dd-98b5-0000779fd18c.html

Chinese and other Asian investors — governments, banks, firms and individuals — will be reluctant to finance the Treasury bailout plan without higher interest rates as a sweetener. For now, Europe’s top-rated bonds look like a better bargain: “U.S. bill and bond yields will have to go up to attract Asian buyers,” Lo says. He sees yields on the benchmark 10-year Treasury bond rising to 4.3% from less than 3.7% now.

“Whatever the U.S. is trying to issue would have to be relatively more attractive than what the rest of the world is offering,” agrees Joanne Hon, head of Asia research for Thomson Reuters. And a Thomson Reuters survey of 100 market analysts in August — before Wall Street melted down and Treasury announced its rescue plan — was already predicting that 10-year Treasury yields would rise to 4.5% over the next year.

http://www.businessweek.com/print/magazine/content/08_41/b4103032192140.htm

Shared Sacrifice Will Ease the Credit Crunch. Foreign lenders will have to take a haircut while American consumers spend less and taxpayers take a hit

by Michael Mandel

Is the U.S. heading for another Great Depression? Probably not—but we are about to go through a period future generations may call the Great Repudiation.

The root cause of today’s crisis lies not in the housing market but in America’s foreign debt. Over the past four years the U.S. private sector has borrowed an astonishing $3 trillion from the rest of the world. The money, directly and indirectly, came from countries such as China, Germany, Japan, and Saudi Arabia, which ran huge trade surpluses with America. Foreign investors trusted their funds to U.S. financial institutions, which used much of the money for mortgage loans.

But American families took on a lot more debt than they could comfortably afford. Now no one is sure how much of that towering sum the U.S. is going to pay back—and all the uncertainty is roiling the financial markets.

The Washington bailout debate boils down to this question: Who is going to bear the burden of the $3 trillion mistake? Will low- and middle-income borrowers have to cut back on spending to pay their mortgage bills? Will taxpayers have to chip in big bucks to pay for defaults on those debts? Or will Washington act in a way that imposes large losses on foreign investors—in effect, repudiating some of the debt? The best outcome is shared sacrifice among borrowers, taxpayers, and foreign investors—but that result may be politically difficult to achieve.

FINDING A FAIR PLAN

Since mid-2004, American households have taken on a bit more than $3 trillion in mortgage debt. The official statistics are very fuzzy, but it looks like at least one-third of the debt, and perhaps half, was financed with foreign money. As a result, foreign investors are sitting on an enormous mountain of mortgage-related securities.

from: http://www.moneymorning.com/2008/09/06/jim-rogers-book/

(Q): Is there a specific signal that this is “over?”

Rogers: Sure…when our entire U.S. cabinet has Swiss bank accounts. Linked inside bank accounts. When that happens, we’ll know we’re getting close because they’ll do it even after it’s illegal – after America’s put in the exchange controls.

(Q): They’ll move their own money.

Rogers: Yeah, because you look at people like the Israelis and the Argentineans and people who have had exchange controls – the politicians usually figured it out and have taken care of themselves on the side.