$33b a month doesn’t cut it …
The TIC laid an egg. $33b in net logn-term capital inflows isn't anywhere near enough to finance the US current account deficit. The monthly US current account deficit is now in the $75-80b range. Remember, the July trade deficit of $68b, and transfers and income payments added another $8b a month to that deficit in q2.
And foreigners — of all sorts — seem to have lost interest in US Treasuries. That may have changed in August (note the rally), but there is no doubt that net foreign purchases of Treasuries were weak in the first half of the year (there was a lot of demand for Agencies).
Net long-term flows used to be well in excess of the United States current account deficit. No more. Net flows were around $855b over the past 12 months. That was enough to cover the US current account deficit over the past four quarters ($838.1b), bot only just. That level of flows isn't sufficient to cover a sustained $218b current account deficit (the q2 total). That would take $872b in net flows. And the current account deficit is likely to continue to trend up — the july trade deficit wasn't small, and net interest payments will only rise.
As Wachovia's charts show, net long-term flows into the US seem to have trended down this year. Indeed, it is utterly unclear how the US financed its q2 current account deficit. Net flows were around $154b — well short of $218b. Errors provided $65b in financing!
Update: the market seems to have taken the TIC data in stride. I guess folks who positioned themselves for a repeat of the April G-7 were disappointed by the current statement. And perhaps disappointed that China isn't showing much leg in advance of Paulson's trip …
That said, $33b a month isn't much for a country that needs about a trillion a year. David Bloom of HSBC is the anti-Jen. I liked his quote in the Evans-Pritchard article in the Telegraph.
David Bloom, global head of currency strategy at HSBC, said: "It is the US that we are worried about as the housing market turns down. The US needs nearly one trillion dollars of foreign money each year just to stand still. If people around the rest of the world start keeping their money at home for any reason, the dollar will face a serious decline and we think it will kick in later this year.
"The risk has moved from the outskirts to the heart of the system, and it's now pressing on the very aorta of capitalism."
Hat tip, Pinnacle.
That is why I am a bit surprised that the market shrugged off the weak data for July. Sure, the Treasury market's rebound in August suggests some uptick in foreign demand. But average inflows in the TIC data of a bit over $50b a month over the last four months hardly suggest robust demand for US debt.
More on the TIC and the current account data release in a bit.
I do not think there is an error, simply the us treasure department diminished its reserves whether gold o currencies to fill the gap
Back after a while … Ladakh is a great place.
I don’t think the housing bust is going to do good to the external financing need of the USA. How much of the US external financing was housing related ?
I would not invest in any US assets right now.
So much for the 1st quarter positive balance on the income account…
First quarter revision: “the balance on income was revised to a deficit of $2.5 billion from a surplus of $1.9 billion.”
“The deficit on income increased to $4.1 billion in the second quarter from $2.5 billion in the first.”
The data gods giveth, and the data gods taketh away…
Dr. Setser: No comment on the apparently futile G-7 shindig that might be responsible for more of this “Special FX”?
I keep harping on this theme, but it boggles me so: OK, the TICS shows a big shortfall, and yet the dollar has pushed the euro below 1.27 and the yen above 118. Call me an antiquarian, but my understanding of economics is that you can only go into deficit spending if there’s someone willing to give you more to spend. Go figure. In this mad environment, I soon expect bond prices and yields to move in tandem.
Brad,
FYI.. An interesting piece
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2006/09/12/cctrade12.xml
Ha Ha Ha Ha, good one Emmanuel. Bond prices and yields could move in tandem……..sideways!
Looking forward to some answers about the financing of the deficit.
I am also wondering who is buying US assets given the downside risk on the US dollar.
And about US inflation being under control (from Danske Bank):
The inflation report was actually not as soft at it seemed at first glance, as the exact core inflation figure was 0.243% m/m (in fact very close to a rounded figure of 0.3% m/m). The subcomponents of core CPI reveal that rent-of-shelter inflation, which has been boosting core inflation in recent months, slowed significantly from 0.5% m/m to 0.25% m/m in August. This might indicate that rent-of-shelter inflation is about to take a temporary breather. While our 12-month model indicates that this index should head significantly higher within the coming year, our 3-month model suggests that we could be facing some softer months in this component (see charts below). In contrast, inflation in the remaining components picked up significantly in August. Core goods inflation jumped from -0.15% m/m to 0.21% m/m, while services ex. rent-ofshelter increased from 0.1 % m/m to 0.26% m/m. Hence, there are no signs of inflation easing in these components.
So much for inflation fighting.
The Dane
Mike — don’t give up. the net income surplus from higher payments on US FDI abroad than foreign FDi in the US remains strong — i call it tax avoidance (it largely reflects low reported returns on foreign FDI in the US), but it is still a big part of the US data. and it looks like the pharmas and software cos reporting earnings in ireland are once again holding those funds offshore, waiting for the next HIA. lots of reinvested earnings once again.
emmanuel … well, the markets don’t make much sense to me right now. i commented on the G-7 over the weekend (in the post “too much to read”). The communique didn’t say anything new — and didn’t single out the yen. But trichet certainly tried to talk up the yen (v. the euro) after the meeting, to know obvious effect.
i cannot see why Paulson’s reiteration of the strong dollar is the US interest mattered — what else is he going to say? But it does seem likely that folks who were betting on the yen (whether b/c of an expectation that the G-7 would say something or as a proxy for the Yuan) are unwinding their yen positive positions as the G-7 didn’t trigger a yen move and Paulson and Zhou have dampened down expectations for any big yuan move around Paulson’s trip. At least that is all I can think of …
The TIC data really is crappy — average flows over the past four months are only in the $50b range — not enough. there also were not net FDI inflows or net bank inflows in the q2 data. so the source of financing for the US right now really is a mystery … but the TIC data also looks backward, and the treasury rally in august/ early sept. suggests that flows to support the treasury market reemerged subsequent to July.
pinnacle — thx, interesting. have been meaning to write about the return of the em carry trade/ cap inflows to high beta EMs for some time. BRL, TRY, IDR you name it. everyone piled back in after may/ june. feels like positions are highly correlated as well. suspect the leveraged money is all on the same side of this trade …
and the DJIA is not all that far from its 52 week high, and the NYSE still cranking out a healthy list of new highs and relatively few lows – on days when the average is down, flat and up…
And looking at that Telegraph article: “…The Moscow bourse, which has risen 1,800pc since 1999 to boast a market worth of more than $950bn, now shows early signs of breaking down…”
And: “…In his comments, Putin zeroed in on the worst features of Russia’s post-Soviet economy that is rampant with corruption… “We are witnessing the laundering of billions of roubles every month as well as transfers of vast funds abroad,”…” http://www.washingtonpost.com/wp-dyn/content/article/2006/09/15/AR2006091500516.html?nav=rss_business/industries
Where in the world will the money go?
This is not good news at all. Every American should be running to their banks and buying as many euros as they can. At least when the dollar collapses and the hyperinflation sets in, those with euros will be able to buy bread to eat.
The end of the American dream is now within sight.
Guest Re: Russia asked:
“Where in the world will the money go?”
Verbier. Aspen. London. Antibes. Paris. Vancouver. Miami. New York. Costa Esmerelda. Luxembourg. Cyprus. Malta. Channel Islands. BVI. Cayman. Bermuda. Geneva. Lugano. Zurich. Zug.