Now and Yen: Obama Bonds?

The U.S. Treasury faces a quandary next year. It will need to fund a gigantic budget deficit as a result of the financial rescue through a sale of securities, but could face resistance from foreign investors, the biggest holders of U.S. Treasuries, who might be leery of holding dollar-denominated assets.

Hold on, hasn't the dollar been climbing of late? Yes, but many contend that its rise has been inflated by American investors liquidating foreign assets for dollars. The long, steep slide of the dollar is expected to resume soon.

The prospect of a sharply weaker dollar against the yen has prompted economists in Tokyo to call for Barack Obama to issue U.S. Treasury securities denominated in yen and other foreign currencies, the Asian Times reports.

"The U.S. will be forced to issue foreign currency-denominated US Treasures in its hour of need," Kazuo Mizuno, chief economist in Tokyo at Mitsubishi UFJ Securities, told the paper. "The U.S. cannot finance its deficit by itself. The U.S. financial system cannot survive without foreign investors. We will see 'Obama Bonds' in the future."

When the dollar has been weak before, in the 1990's and 1980's, there were calls for yen-denominated Treasuries.

And there were Carter Bonds, denominated largely in German marks. Treasury sold some $6.4 billion of these bonds between 1978 and 1980.

Yves Smith on the Naked Capitalism blog says of the Obama Bonds proposal:

"What has been interesting is that even though this idea is obvious (and unless the trajectory changes, inevitable) our foreign creditors have not said anything of the kind in a public forum. Given how forward the Chinese often are, and how they seem particularly unhappy about continues dollar accumulation (even though their currency peg is the proximate cause), they have been surprisingly quiet on this topic."