In November 2001, the authorities again restructured the public debt, this time exchanging dollar denominated bonds for domestic guaranteed loans.

In 1994, Mexico shook the global economy when the extent of its domestic (but dollar denominated) debt in the so called tessobonos became apparent.

b Total public debt denominated in pesos and foreign currency.

The principal risk I see today is that being borne by investors in dollar denominated debt and I don t believe they are charging a fair price for what they are doing.

Second, the costs of the insurance premium the outsize, largely dollar denominated reservoir of China s foreign exchange reserves have been magnified by political risk. With US government debt repayment now in play, the very concept of dollar based riskless assets is in doubt.

As a result, holders of dollar denominated assets should be looking forward to two alternative scenarios.

In neither scenario does it make sense to hold huge amounts of dollar denominated assets today.

And that raises serious questions about the wisdom of China s massive investments in dollar denominated assets.

Many developing countries have made progress since the 1990 s in shifting from dollar denominated debt toward foreign direct investment and other types of capital inflows, or in paying down their liabilities altogether.

The actual budget increase cannot be determined simply by noting a change in the dollar denominated amount.

Therefore, foreign speculators should, any day now, dump their dollar denominated assets onto the market, and so bring about the dollar decline that they so fear.

One might think that foreign investors would quake in terror at these terms and shy away from dollar denominated assets.

If rich country central banks can buy long term bonds, then emerging country central banks can buy dollar denominated bonds.

In Europe, the market for Greek debt has frozen, and interest rate spreads between Irish and German euro denominated debt recently reached alarming levels.

Moreover, the debt is denominated in rupees and has an average maturity of more than nine years.

That will sharply reduce the pace of foreign exchange accumulation and cut into China s open ended demand for dollar denominated assets.

They continue to hold very large positions in dollar denominated assets, which they would not do if they thought the US faced a choice between a cheap dollar and a deep depression.

By plowing more than two thirds of its mammoth foreign currency reserves into US dollar denominated assets, China has gained significant political leverage.

The interest rates on the euro denominated sovereign debt of the twelve euro zone governments are all very similar.

With everyone else buying, selling, and holding dollars, it pays to do the same, since markets in dollar denominated assets will be the deepest.

Second, the costs of the insurance premium the outsize, largely dollar denominated reservoir of China s foreign exchange reserves have been magnified by political risk.

The most obvious means of recapitalizing China s banks would be to inject renminbi denominated government debt into the banking sector.

Japan, China, and other export oriented East Asian economies are indeed eager to keep the value of the dollar relatively high, and their central banks have piled up close to 2 trillion in dollar denominated assets.

At the same time, periphery countries held a lot of dollar denominated obligations which they had to repay when they could not roll them over.

Yet the typical investor in dollar denominated assets whether a rich private individual, a pension fund, or a central bank has not taken the steps to protect themselves against the very likely dollar decline in our future.

Supported by a dollar denominated line of credit, the EPU s 15 Western European member states established exact dollar exchange rate parities as a prelude to anchoring their domestic price levels and removing all currency restrictions on intra European trade.

US debt hardly looks like a bargain right now, even without the sinking dollar.

As a result, China s dollar denominated foreign exchange reserves, which account for the largest share of all the foreign holdings of US government securities, will suffer interest rate losses.

While China has taken minor measures to slow the increase in its dollar denominated holdings, it has been unwilling to risk a fully convertible currency for domestic political reasons.

These problems can become particularly acute in an economy without an effective lender of last resort and or one that issues only domestically denominated debt.

Worse, the debt that states raise abroad is usually denominated in a currency whose value they cannot control. So a gradual, invisible reduction in the debt burden by debasing the currency is rarely an option.

China's government regards the threat of capital losses on its dollar denominated securities as less important than the need to maintain near full employment in coastal manufacturing cities like Shanghai.

China has recycled about 60 of these reserves back into dollar denominated US government securities, because it wants to limit any appreciation of the renminbi against the world s benchmark currency.

With rebalancing will come a decline in China s surplus saving, much slower accumulation of foreign exchange reserves, and a concomitant reduction in its seemingly voracious demand for dollar denominated assets.

European governments debt may all be denominated in euro, but German and Italian debt are hardly the same thing, so the government euro bond market lacks the depth and liquidity of the US Treasury Bill market.

The dollar s slide after 1985 made the real burden of Latin America s dollar debt much lighter.

But, already before the recent debt ceiling imbroglio, the dollar had begun to lose its luster.

Because all of the accumulated debt is denominated in euros, it makes all the difference which country leaves the euro. If Germany left, the euro would depreciate.

Exporters of any particular commodity should issue debt that is denominated in terms of the price of that commodity, rather than in dollars or any other currency.

Once portfolio investors start selling their dollar denominated securities, a stampede will follow, causing the dollar's value to crash and triggering the first major global financial crisis of the twenty first century.

If the dollar is likely to fall against the euro over the next several years, investments in euro denominated bonds issued by the German or French governments may provide higher safe returns.

European and other international banks had acquired a lot of dollar denominated assets which they habitually funded in the interbank market as the market dried up, they were forced to buy dollars.

By contrast, if Italy left the eurozone, its euro denominated debt burden would become unsustainable and would have to be restructured, plunging the global financial system into chaos.

Second, China s foreign assets are denominated almost exclusively in US dollars, while its foreign liabilities are denominated mostly in renminbi.

Since all of the accumulated debt is denominated in euros, it makes all the difference who remains in charge of the monetary union.If Germany left, the euro would depreciate.