If there is a loss of confidence in the U.S. economy, or if European or Japanese investments become more attractive, there will be outflows of capital, irrespective of the distribution of investors' nationalities. I do not consider that the level of debt service in relation to GDP is the central issue. Of much greater significance is the relationship between the influx of foreign capital into the US bond market and the level of the dollar. Despite a widening trade gap, the US dollar has been able to sustain its value in the recent period because of the inflow of foreign capital into the bond and equity markets, an inflow which has ensured that interest rates have not risen. I'm curious as to your opinion on the level of U.S. interest rates.
Interest rates are substantially higher in the U.S. than in Europe or Japan.
I believe that continued fear about the weakness of non-U.S. economies is the real reason US rates haven't risen further already, not the fact that inflation remains low. However, if the trade deficit continues to widen at its present record rate, and doubts emerge about the dollar's value, then there can be a very rapid movement of these funds out of U.S. bonds. Such a movement would bring an escalation in interest rates, leading to a possible plunge in the share market and a further fall in the dollar. In today's far more highly-leveraged conditions, in which industrial corporations and financial institutions alike have borrowed vast amounts of money in order to buy stock, the consequences of anything approaching such a interest rate rise would be even more severe. But I'm not inclined to think that the interest rate hike will be nearly as large as in 1978-79, because the reasoning behind that hike was that inflation had to be ended.