The November TIC data: Matching debtor and creditor side data
The November TIC data has been out since this morning.
The TIC data provides information about the most important way the US is financing its ongoing current account deficit: selling long-term securities to foreigners, or exporting debt. It is important to remember that there are other ways of financing a deficit: borrowing from foreign banks, for example, or attracting net FDI inflows. But since FDI flows have been negative or, at best, close to balanced, and bank flows tend to be small, most of the financing the US needs has come from the sale of long-term securities to foreigners.
What did the November data release tell us?
Above all, that the US is still are not getting net equity financing. Foreign purchases of US stocks surged in November, but remained smaller than US purchases of foreign stocks. There was a small (-1.6 billion) net outflow. Most of the net financing — $82.6 billion of the $81.0 billion total — came from the sale of debt. Sales of Treasuries totaled $32 billion; Agencies, $28 billion and Corporate debt $25.5 billion (US citizens only bought $2.5 billion of foreign debt).
Who was buying was all this debt? The TIC data suggests that private creditors bought roughly twice as much US debt as the world’s central banks — $59 billion v $26.5 billion. One of my major themes is that US data often under reports foreign central bank support for the US debt market (for an explanation of why, see this Higgins and Klitgaard article). If $15 billion of the private purchases of US long-term debt was really foreign central banks in disguise, a rather different picture of November emerges. Private purchases would be roughly equal to central bank purchases: both would be in the $40-45 billion range.
I think that is case. “Real” central bank buying was almost certainly larger than $27 billion in November. The remainder of the post lays out my argument. But a warning is in order: the next section is weedy and data intensive.
1) A small discrepancy, but one that puzzles me: the “Agencies” held by the New York Fed on behalf of other central banks increased by $12.5 billion in November (Compare this release, with this one). The TIC data only registered a $3.5 billion increase. Conversely, the Fed’s custodial holdings of treasuries only grew by $11 billion, while the TIC data showed a $21 billion increase. I see how the TIC data could have a higher number than the change in the Fed’s custodial holdings, but have trouble understanding how it could have a lower one. (Help from readers is always appreciated). My gut tells me central banks bought more than $3.5 billion of the $28 billion in agencies sold to foreigners in November, in part because one very large Asian country whose reserves are increasing very fast is rumored to be quite keen on Agency bonds.
2) The other way to get at official support is to look at “creditor side data,” i.e what happened to our central bank creditors reported reserves in November. The definitive statement of creditor side data comes from the BIS, but with a huge lag — so working off creditor’s side data requires making a number of assumptions. We generally know how much central bank reserves increased in November, but we don’t know whether this increase came from the dollar’s fall v. the euro (which increases the $ value of central banks’ holdings of euros), the purchase of new dollar assets, or the purchase of new euro assets.
But let’s see what we can try to piece together. The reserves of 8 major emerging market central banks (the four Asian NICs, Russia, India, Malaysia and Thailand) increased by $46 billion in November. Some of that came from roughly 5% increase in the dollar value of their reserve holdings, but not all. Malaysia’s reserves went up by $3.5 billion in November alone; for the whole year, currency moves only increased Malaysia’s reserves by $2 billion, and not all of that gain came in November.
We don’t know what happened to China’s reserves in November for sure: the data is still not out on its web page. But we do know that it started November with $543 billion (roughly) and ended December with $610 billion. It is reasonable to think that a decent chunk of that $67 billion increase came in November — indeed, tomorrow’s FT reports that the November increase was $31.5 billion.
That gives us $77.5-78 billion in reserve accumulation in Asia and Russia in November (looking only at the big economies). If China held $150 billion in euros (on the high side of most estimates, but who knows) going into November, valuation gains would have increased its reserves by about $7.5 billion. But at least $24 billion of its reserve increase still came from market intervention.
Let’s assume that the other Asian economies and Russia had a slightly higher stock of euro reserves, and thus enjoyed a slightly bigger valuation gains. Say $9 billion. That leaves $34 billion from market intervention. Put differently, even taking into account the potential for large valuation gains, nine central banks probably added $58 billion to their reserves in November — a lot more than the $28 billion in reported central bank inflows to the US.
What explains the difference? One possible explanation is that the central banks put some of the dollars they were buying in the market into the world’s banking system, and private banks, in turn, used higher deposits from central banks to finance additional purchases of US long-term debt securities (The FT speculates about this possibility). One possible explanation is that central banks bought more US debt than the US data system recorded (likely). And one possible explanation is that central banks were buying euros, not dollars in November …
I seriously doubt central banks used their growing reserves to buy $30 billion in new euro denominated securities and only $28 billion to buy new dollar denominated securities in November. A 50/50 split is a bit implausible, particularly since Asian countries were trying to keep their currencies from appreciating v. the dollar. A 75/25% certainly split is plausible, but that would imply $43.5 billion in net dollar purchases — lots more than the US recorded.
All this only from looking at data from 9 of the world’s central banks, and only one big oil-exporter (Russia). Obviously, other oil exporters were adding to their reserves too … as were some Latin countries.
My bottom line: either the world’s central banks are buying a lot more euros than anyone thinks, or the US TIC data underreported “real” central bank support for the US in November.
The amount of support for the dollar that potentially came from Asia in q4 should not be underestimated. China’s reserves increased by an increasible $95 billion inq4. $10 billion of that probably was from valuation gains, maybe more. But that still leaves $80-85 billion in reserve financing for the world from China alone — over $25 billion a month, and $300 billion on an annualized basis. Few questions matter more for the global flow of funds that what what the PBOC does with its reserves.
One final note: I don’t mean to imply that ALL private purchases of long-term debt securities are really coming from central banks in drag, or from private banks playing around with a surge in central bank deposits. The reported Treasury holdings of Germany, Ireland, Belgium, Spain, Australia and Canada all went up in November — clearly there are some private purchases (There was also a surprisingly large fall in bonds held in the Caribbean and a surge in bonds held in the UK — something was going on with the data. Maybe some Caribbean holdings were reassigned to Europe.)
This data suggests that the US got funding in November, in some sense, from two sources: from private Europeans and Canadians who thought their currencies had already moved so far against the dollar that the next move in the dollar would be up, and from the central banks of countries who are still working hard to keep their currencies from rising against the dollar in the first place. And if — as I think is plausible — the US received $45 billion from foreign central banks, both directly and indirectly, then foreign central banks are financing about 3/4s of the (large) US trade deficit. Talk about vendor financing.
Terrific column. Here you are teaching a “philosopher” how to analyze the data.
You are going to suffer from myopia if you obsessively stare at data on the trade deficit and capital accounts. As today’s WSJ points out, in the glory days (1978), the US current account deficit was only 1% of GDP (6% now) and net foreign assets were plus 7% of GDP versus -25% today. So, everything must have been groovy in 1978 and a downer now. I don’t think so.
Name a modern economy you admire that has “trade surplused” its way to the big leagues. Japan is the only example, and it is not a shiny one. As Sharon Stone answered critics who said she slept her way to the top, “You can only f*** your way to the middle.” Likewise, you can only export your way to the middle. In the case of the OPEC nations or Russia, you can’t even do that.
Economic success is not a matter of savings and exports. Excessive savings are a sign of pessimism, and turning up at the global market with low value-added items may get you a trade surplus, but what’s that good for if all you can think to do with it is lend it back to importers (the US) at 1.6% real interest rates with currency risk?
If positive trade balances were determinative of economic success, Saudi Arabia, Japan, Russia and the Asian Tigers would be kicking sand in the faces of featherweights like the US and UK.
I’ll take our position over theirs any day.
bill — we agree on one thing. it does not do much good to export low value items to run a massive surplus if the best use of the surplus you can find is lending to US for 4.2 nominal and currency risk … of course, Asia might not be able to export so much without lending so much to the US at cheap rates either.
Excessive savings are perhaps a sign of pessimism. But would you seriously argue that current US savings rates are a sign of deep seated economic strength? That it is a good idea to rely on foreigners to finance so much of our investment? That it is our long run economic health to rely on optimism, large net external borrowing and our capacity to run up our net external indebtedness to unprecedented levels for a major economy to finance current levels of investment?
I may suffer from myopia, but I think I can still see far enough ahead to see warning signs. 6% of GDP and growing current account deficits and a 10% of GDP export base don’t strike me as a good combination. Trade deficits may be an indicator of strong current growth (as well as low savings), but large trade deficits and rapidly rising external debt can also be a leading indicator of future trouble. See: Mexico, 1994; Thailand, 1996; Argentina 1999 on (though its Argentina’s current account deficit stemmed more from income payments than a on going trade deficit, at least after its recession started).
Are we sure that central banks mark their reserve holdings to market each month? I had the impression that this was a much more irregular occurence. What about the interest receipts? Sorry to add more uncertainty rather than clarity. Lovely article though – thanks.
if interest receipts are saved and in effect reinvested, they should show up as part of the increase in the overall stock of central bank reserve assets. The accounting is a bit complex: interest income is part of the current account, so in this case, current external income from the central banks interest receipts are being used to help finance the builup of external assets.
I am wondering how elevated returns on oil sales may come into play here. What do oil exporters do with (unexpectedly)high returns, on dollar denominated sales? If they do buy US debt, is there a way to measure and analyse this effect?
Most have missed the fact that the TIC numbers were restated back to at least the beginning of 2003. Here is an example of the restatement for Treasuries ownership only. I had thought they only did a major restatement like this in a Series change generally at midyear but I could be incorrect.
http://jessel.100megsfree3.com/TicRestatement.png
jesse — thx.
pall. good, good question. there has been an increase the current account surplus of the oil exporters, but it is hard — I am still working on it — to find out exactly how it is being used. the “OPEC” line in the TIC data has not moved much, but that does not tell you much either — there are other ways to buy treasuries, or the OPEC countries may be buying other US assets.
in general terms, the oil exporters generally have current account surpluses well in excess of their reserve accumulation, which implies net private capital outflows — i.e. these countries private citizens (including, no doubt, their ruling families, are building up their offshore savings). but i don’t have a good source on their assets/ investments of choice; help is always appreciated.
A decent share of Russia’s oil windfall is showing up in their reserves, and it is probably safe to assume that Russia is buying more euros and fewer dollars at the margins for its reserve assets than the global norm.
Two comments-
1. The TIC data and the Fed custody account data don’t agree for several reasons. First of all the TIC data is only longer term (over 1 year) securities. Second if a foriegn central bank moves holdings from elsewhere in United States into the Fed custody account, it counts as an increase in the Fed data but not the TIC data.
2. The Treasury does an annual survey in order to “recalibrate” their TIC data. Compiling the data from this survey takes months. This usually results in the TIC data being rebased in June. If you go back and look at the data, you will see that the Treasury reports two numbers for June. Just from a brief look, it doesn’t seem like the rebasing had a huge impact on the numbers.
Brad, I agree that the US trade balance is out of line and must come down. I do not agree that our budget deficit is the culprit. If we pursued your recommendation to restore Clinton-era high-bracket tax rates, economic growth would slow marginally, national savings would increase marginally (government savings would increase and private savings would decrease because a significant amount of the extra tax revenues would have been saved by high-earners), and the trade deficit would hardly budge. China would still be the low-cost producer of the items on Walmart’s shelves, and demand for those items would be untouched by the tax hikes.
http://web.mit.edu/krugman/www/jpage.html
Paul Krugman has been deeply critical of economists for ignoring the slow slow growth economy of Japan these 12 years. The world’s second largest economy grew far below potential through this time and has been a drag on world development. The problem of a paucity of consumption in Japan is partly our problem, for Japan might import more from America, partly a world problem. Then, I wonder whether we can learn anything from the plight of Japan? Paul Krugman’s ideas on Japan seem correct to me, but they are not heeded. Why?
Fun fact in Bloomberg News Headline: “Housing Starts in the US Increase 11%, Capping Best Year Since 1978″ That’s right, housing starts have only now regained their 1978 level of 2.0 million and are still well below 1972’s peak level of 2.4 million units. It would not appear that as an economy, we are steering a disproportionate amount of our savings into housing.
82.2 million barrels a day at $ 20 a barrel higher than “normal”. That’s about 49 billion a month.
Hmmmm…..
http://www.nytimes.com/2005/01/19/international/asia/19letter.html
The Japan-China Stew: Sweet and Sour
By NORIMITSU ONISHI
TOKYO – Like many Japanese businessmen these days, but particularly as co-chairman of the 21st Century Committee for Japan-China Friendship, Yotaro Kobayashi is worried about the state of affairs between Asia’s two most powerful nations.
On one hand, since the committee was formed in October 2003 under an agreement between the countries, Mr. Kobayashi, 71, who is also chairman of Fuji Xerox, has watched political relations fall to their lowest point in years. On the other hand, economic ties have continued to deepen, and China’s rise has kept buoying up the Japanese economy.
A better and more updated source for China’s foreign exchange data is from State Administration of Foreign Exchange
http://www.safe.gov.cn/Statistics/Reserve_data_04.htm
Well, if you plugged the November number into the old data spreadsheet (including October) you got 80 billion versus 32 billion reported.
I understand it might not be significant per se if the slope of change remained the same, but in point of fact it did not, AND if you are using the numbers for macro modeling a 50 Billion delta on a nominal number of about 600 Billion is not pocket change.
Foreign central bank support on the dollar and interest rates is reaching a tipping point.
Ian. Thx. the increase in the stock of notes in this http://www.treas.gov/tic/mfh.txt matches the headline TIC report, but it also shows a $4 billion fall in holdings of bills — i.e. some bills were traded for longer term notes, so the overall stock of CB holdings only increased $17 b.
so your explanation for the surge in the Fed’s reported holdings of agencies on behalf of central banks was that some already purchased agencies were moved into the fed’s custodial accounts?
Pall. Opec production is about 30 mbd, and about 1/2 that, 15 mbd, comes from the Arabophone gulf (including Saudi arabia but not for the moment Iraq). At current oil prices, they enjoy a substantial revenue flow. these revenues are not going (at least not consistently) into official reserves …
Bill (of the first comment),
I know an economy that lost global leadership because it became uncompetitive, and had to run down its foreign assets in order to finance its chosen rates of consumption: The UK at the beginning of the 20th century.
They’re doing all right. Didn’t quite disappear from the map, but sterling is no longer the world’s reserve currency: the prize went to the largest external creditor of the time, which happened to be the US.
http://www.roubiniglobal.com/archives/2005/01/index.html#000163
Housing Market Bubbles and the Fed: The Higher They Blow, The Harder They Crash…or Why We May Need Houdini after Greenspan…
While Greg Ip wrote a very fine front page analysis of the risks of a dollar crash in the WSJ today (and thanks for the citations of my work with Brad Setser on financial crises), an even finer article by him on the risks of a bursting of housing bubbles made it only to page 2 of the paper (I guess the informal rule is that you cannot have more than one article per journalist in the front page). And his timely analysis was matched by another good WSJ piece by Agnes Crane in the Credit Market section on how the risk of a bursting of the housing bubble may affect US monetary policy (i.e. whether Greenspan & Co. may not tighten as much as is needed if there are risks to the housing markets from higher interest rates).
s- I agree with your observation about the UK, but I think the losses they suffered to their capital base–human, financial and physical– from fighting two World War may have had more to do with their dowgraded status than current account deficits and low savings rates.
Given that the US yield curve is steeper than the Euo and JGB yield curves, it is attractive for European and Japanese investors to purchase US fixed income securities and hedge the associated dollar exposure back into euros and yen. The yield pick up on a 3 or 6 mth rolling basis is an annualized 50 basis points–a meaningful amount in todays low yield environment. The point here is that foreginers could be buying a lot of US securities on a hedged, and not on an unhedged basis. Thus it has no FX impact.
Mike. good point. who is selling the hedge, and taking the dollar exposure the european/ japanese investors do not want?
When Asian central banks buy, they take the dollar exposure. Am curious who is taking the ultimate dollar exposure on the private side.
http://www.j-bradford-delong.net/movable_type/2005-3_archives/000195.html#comments
Am I a Secret Austrian?
I can only plead that my Austrian tendencies are small and (usually) under control. Most of the time I’m a straightforward Keynesian aggregate-demand guy: i.e., get the level of aggregate demand right and most other problems will go away. But the U.S. fiscal deficit, its reflection in the balance of trade, and the… interesting policies of Asian central banks produce problems that cannot be analyzed as either too much or too little aggregate demand. The Austrian theoretical framework thus seems to be the only tool at hand. And when all you have is a hammer…
Mike- The trade you describe exposes the buyer to price changes on the Treasuries purchased. If ten year Treasury yields increase during holding period, investor loses from price depreciation. It’s much cleaner for a foreign buyer who likes the carry in US interest rates, but not the currency exposure, to buy futures or interest rate swaps. In any case, buyer is taking a long position in US bonds, an example of private foreign buyers supporting low US interest rates.
http://www.j-bradford-delong.net/movable_type/2005-3_archives/000195.html#comments
Am I a Secret Austrian?
Though I have read Tyler Cowen’s point several times, I am not sure what to make of them. Is federal debt of not concern even in an economy with low levels of household saving? Is foreign debt of no consequence? What am I missing?
Japanese investors have been heavy buyers of hedged US fixed income securities. Although Anne is correct that they take on US price risk, the fact that Asian central bank buying is placing an effective cap on US long-term rates takes out some of the risk of that trade. Asian intervention’s impact on the US bond market goes way beyond the direct flow impact. It has altered the behavior of all investors in the US market from those who are involved in curve flatteners to US banks’ securities investments to US investors who have moved into spread products. For the moment their intervention has removed perceived price risk in US long term securities, which is a dangerous thing as we learned back in 1998.
mike — good point, my sense too. My standard question though: who supplies the hedge and takes the dollar risk the Japanese do not want?
I guess the forward market is so deep that it cannot be identified who is taking the other side. If it is the banks then they will lay the risk on to someone else. Ig Japanese investors are buying dollars spot and selling dollars forward then it might be the case that corporates are selling dollars spot and buying dollars forward as part of their trading operations. No one need have an outright position.
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