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a considerable portion of foreign investment has been by foreign central banks in U.S. Treasury securities. From 1999 to 2003, these rose to $249 billion from $44 billion. The figure for this year will undoubtedly be higher than last year since foreign central bank purchases of Treasurys were already at $202 billion just through June. As a consequence, foreign ownership of the U.S. national debt has risen to $1.8 trillion or half of the privately held debt .. The Japanese are the largest foreign holders of U.S. Treasury securities, with a total $720 billion in September, up from $317 billion just four years earlier. The Chinese have become the second largest holders, with $174 billion worth, a sharp increase from $62 billion in September 2000.

The reason for these large purchases of Treasury securities is that the Japanese and Chinese have been trying to prevent their currencies from rising against the dollar. They have done this by using their own currencies to buy dollars, which are then invested in Treasury securities. The problem is that this process cannot go on indefinitely. It complicates monetary policy and threatens foreign central banks with large capital losses should U.S. interest rates rise .. There is growing evidence that foreigners are getting weary of financing the U.S. budget deficit. The Chinese and Japanese are both talking about cutting back on Treasury purchases and diversifying more into euro-denominated assets. In order to continue selling its bonds, the Treasury will have to increase the interest rate it pays. Some other consequences are that the dollar will fall further against foreign currencies, which will raise the prices we will have to pay for foreign goods. This will raise the inflation rate, which will encourage additional tightening of monetary policy by the Federal Reserve ..