Americans must prepare themselves for a massive collapse in the dollar as investors around the world dump their U.S. assets, a former Bank of England policymaker has warned.

LONDON, England - January 6, 2009 - The long-held assumption that U.S. assets - particularly government bonds - are a safe haven will soon be overturned as investors lose their patience with the world's biggest economy, according to Willem Buiter.

Professor Buiter, a former Monetary Policy Committee member who is now at the London School of Economics, said this increasing disenchantment would result in an exodus of foreign cash from the U.S.

The warning comes despite the dollar having strengthened significantly against other major currencies, including sterling and the euro, after hitting historic lows last year. It will reignite fears about the currency's prospects, as well as sparking fears about the sustainability of President-Elect Barack Obama's plans for a Keynesian-style increase in public spending to pull the U.S. out of recession.

Writing on his blog, Prof. Buiter said, "There will, before long (my best guess is between two and five years from now) be a global dumping of U.S. dollar assets, including U.S. government assets. Old habits die hard. The U.S. dollar and U.S. Treasury bills and bonds are still viewed as a safe haven by many. But learning (still) takes place."

He said that the dollar had been kept elevated in recent years by what some called "dark matter" or "American alpha" - an assumption that the U.S. could earn more on its overseas investments than foreign investors could make on their American assets. However, this notion had been gradually dismantled in recent years, before being dealt a fatal blow by the current financial crisis, he said.

"The past eight years of imperial overstretch, hubris and domestic and international abuse of power on the part of the Bush (regime) has left the U.S. materially weakened financially, economically, politically and morally," he said. "Even the most hard-nosed, Guantanamo Bay-indifferent potential foreign investor in the U.S. must recognize that its financial system has collapsed."

He said investors would, rightly, suspect that the U.S. would have to generate major inflation to whittle away its debt and this dollar collapse means that the U.S. has less leeway for major spending plans than politicians realize.