PhilipMartin: The petrodollar issue typically refers to the 1970s when the world was awash in excess reserves held by oil producing nations. That is not the case today. Japan alone holds more dollars than all Middle East oil producers combined. The UK, China, Belgium, Luxemburg, Canada, Netherlands, Switzerland, Germany, Ireland, Taiwan and a group of banking centers all hold larger reserves of US currencies than all ME oil producers combined.

ME producers are already investing less in the US. Current reserves earned by ME oil countries have partially gone to paying down debt and investing in the ME. Witness stock market booms in ME countries.

However, your basic point is still right, it's just that the dollars we are talking about are not petrodollars. If Japan, the UK and China (the big three holder of US currency assets - in that order), were to invest elsewhere, the US would suffer.

However, we need to go back to why they invest in US assets. Especially in the case of Japan and China, there is a huge exchange rate motivation. If China took their money out of the US they would either have to invest inside or outside of China. In either case their exchange rates would skyrocket vis-a-vis the dollar and their export driven economy would stall. This impact would be greater if the reserves were invested in China. This is a huge over simplification and misses issues such as availability of other assets, capital losses on the dollar during the transition, potential reaction by the US, etc.

Two points standout: First, countries hold US dollar assets because it serves their needs as much as ours. They can not pull out without losing the benefit that made them invest in the first place. Second, ME Oil producers are a tiny fraction of US dollar reserve holders.