The December TIC data lifts the curtain that has hidden how the US has financed its deficit
There has been no shortage of bad news coming out of the US today -
— A fall in consumer confidence;
– Flat manufacturing;
– A fall in the Empire state index;
– A UBS report predicting big additional losses in the banks
A not-particularly-good TIC data release hardly even registered. But make no mistake - December capital inflows into the US were on the weak side. Net flows were only $60b, a bit under what the US needs to cover its current account deficit. Net long-term flows were only $45b.
The TIC data (found here) though did at least make one thing clear - in December, there really can be no argument about who financed the US deficit.
Central banks and sovereign funds supplied the US with $52.1b of financing, $35.8b in long-term financing and $16.3b in short-term financing.
Private investors supplied $8.4b (net).
And we already know central banks and sovereign funds supplied the US with even more financing in January than in December.
Talk about a reverse bailout. Emerging market central banks have been far more generous to the US - and emerging market sovereign funds far more generous to US banks, investing without seemingly doing much due diligence - than the US, the G-7 and the IMF were to the emerging world in the 1990s.
(Details follow)
As I constantly note, the pattern of past data revisions suggests that the TIC tends to understate official inflows and overstate private inflows. The June 2006 survey led to very large upward revisions in official holdings and official purchases.
However, in December, there wasn’t much demand for “safe” assets coming from the UK. That tends to be the main source of undercounting (apart from the difficulties capturing SWF equity investment managed by private fund managers), so undercounting of official purchases may be less of an issue in December than in other months.
But for q4 as a whole, I would bet that a reasonable chunk of the $162.3b in private inflows (v $138.7b of official inflows) is actually “hidden” official inflows. The nearly $60b in “private” Treasury purchases and the $20b in private Agency purchases in q4 look a bit suspicious to me - though it is possible I am underestimating the demand from European banks (and various offshore vehicles set up in London) for safe, liquid US assets.
No matter.
In q4 there also was an interesting shift in the composition of official demand though. $12.5 of the $15b in total (recorded) official purchases of equities over the course of calendar 2007 came in December. Both Singapore ($4.7b) and the Gulf ($7.1b) were big buyers of equities. Merrill/ Temasek and Citi/ ADIA? I didn’t see overt evidence of Morgan Stanley/ CIC.
The $15b in total recorded official purchases of US equities no doubt understates the “real” total. But total official demand for equities still is small relative to official demand for long-term bonds ($172b in 2007, another understated total), or for that matter, the increase in central banks short-term holdings ($110b, counting short-term Treasury and Agency securities as well as bonds).
If all central bank reserve growth is channeled toward sovereign wealth funds and they start buying equities on a big scale, it will be a huge shift.
For the year, central banks bought way more long-term Agencies ($120b) than corporate bonds ($51b) or Treasuries ($3b) - though I would caution that these totals are understated. Remember, central banks (counting all of SAMA’s foreign assets) added at least $1200b to their reserves. Way more central bank and sovereign fund money than the roughly $300b now “visible” in the official US data made its way to the US.
In q4 official demand for corporate bonds was comparable to official demand for Agency bonds were around $20b. That is stabilizing. Official demand made up for a lack of private demand. But before we give the world’s central banks too much credit, it is worth noting that they added $69b to their short-term holdings. That is not stabilizing. There is no shortage of private demand for “cash’ and its close equivalents right now.
Who were the big buyers in December -
First China, which added $25.2b to its portfolio ($7.9b short-term, $6.9b Treasuries, $2.6b Agencies, $7.7b of Corporate bonds and only $0.7b of equities). Hong Kong chipped in another $9.3b, including $4.7b of equities - which may reflect indirect Chinese demand.
A formerly Communist country - Russia - chipped in another $12.4b, mostly ($9.5b) short-term Agencies. Russia’s willingness to use of its control over energy supplies as a political lever has made it among the countries whose outward investment has raised the most fears, but - being a cynical type - I also wonder if the absence of any real fee income from its very conservative external portfolio has left it without as many vocal defenders as some other countries.
The Gulf added $5.4b - with falling Treasury and Agency holdings offsetting a big equity investment.
The Brazil only added $1.2b, with a fall in its short-term holdings offsetting big increases in its long-term Treasury holdings.
Korea increased its short-term holdings by close to $10b (and slightly reduced its long-term holdings). That likely reflects preparation for a new round of funding for its sovereign fund. The Saudi data incidentally also shows a sharp rise in their short-term bank deposits in December - a step that likely augers the imminent creation of a sovereign fund.
The UK added $13.1b despite being a big net seller of Treasuries.
India didn’t really register in the US data in December, despite adding a ton to its reserves.
For all of 2007, there really shouldn’t be much doubt that the BRICs were a huge source of financing for the US:
China’s recorded claims on the US rose by $157.
Brazil’s recorded claims rose by $86.
Russia’s recorded claims rose by $68b.
The Gulf’s recorded claims rose by $41b (less than 2006).
India’s recorded claims rose by less than a billion.
India keeps a lot of its reserves with the BIS, so they don’t appear in the US data. But it also added almost $100b to its reserves in 2007. The available evidence suggests more than a bit of diversification on India’s part.
A graph of the BRICs US holdings is revealing (Graph courtesy of Arpana Pandey of the CFR).
All four of the BRICs added to their reserves in 2007. But the holdings of only 3 of the BRICs rose.
China’s recorded holdings of US debt - counting all its holdings, not just its Treasury holdings — are now about $950b. And that likely is a substantial undercount. If China kept something like 70% of its rising foreign assets in US dollars, its end-2007 holdings should be close to $1230b (the Orange line the following Pandey/ Setser graph).
Remember, the last good data point for China comes back in June 2006. And in June 2006, China had about $700b fewer foreign assets than it does now — according to a very conservative accounting of the growth of China’s foreign assets. The real total could be closer to $800b.
The US data shows only a $200b increase in China’s claims on the US over that time. That either implies that China bought a ton of euros, loonies, pounds and Aussie dollars. Or it implies that the US data is not capturing all of China’s purchases.
My guess is that the US data isn’t capturing all of China’s purchases. We should have a better sense in about six weeks, when the Treasury releases the results of the June 2007 survey.
UPDATE: My take on the TIC data is rather different than the unnamed analysts referenced in Molinski’s Wall Street Journal story, who viewed the TIC data as positive because it showed inflows not outflows and ongoing demand for US equities showed that foreign investors retained confidence in the US. Suffice to say that a country with large deficits has to attract inflows — if the the q3 drought in capital flows was sustained, the US would be in real trouble. And at least to me, the large share of the net inflows coming from the official sector is evidence of a lack of demand for US assets, a lack of demand that turned into pressure on the dollar and prompted an upturn in official intervention.
I would like to know what you think the consequence of all this Chinese investment means for our US future. Do you think that there ulterior motives in this funding, or, do you think that we are presently the best alternative investment for all their surplus cash in an attempt to keep the Yuan subsidized?
I would recommend the testimony i gave to the US China economics and security review commission (links are on my CFR bio page and on the commission web page)
the link can be found here:
http://www.cfr.org/bios/8937/brad_w_setser.html
the bottom line is that I suspect China will be looking for a commercial return, but also to fund projects that support China’s national economic development — and disentangling the two motives will be hard.
I also would recommend Richard MrGregor’s article in thursday’s Financial Times.
You look so young…totally different from what I thought.
This post is interesting, too.
What I have noticed is a dearth of capital infusions from SWFs etc. After China refused to pony up more money for Citigroup, it all seems to have come to a screeching halt.
One thing in your testamony. CIC’s performance is not subject to exchange rate change, which means the loss from FX rate change is not their fault.
What per cent of Chinese exports go to the USA and what per cent go to other nations in Asia and what percent to the EEC?
Sobering numbers.
Strange that the gulf doesn’t register higher, what with the windfall oil prices and all…?
If they bought the dollars, they provided the financing.
And if they bought the dollars, effectively they prevented anybody else from providing the financing.
Jin. The photo is a couple of years old, but it is basically still accurate — I am tho a bit older than I look. And while the CIC is not formally responsible for the exchange rate risk, I will be curious to see if China buys the argument — i.e. if the CIC reports a $ gain but after conversion it is an RMB loss, will the public think great or think “blackstone.”
anonymous — yes, by buying at a price others weren’t willing to buy at, they displaced others. but the question is how big a change in price would be required to generate the needed inflows absent the official bid. my sense is that it would be substantial.
Guest — SWFs seem to be going through PE firms now. See the front page of the FT. But I suspect a few also worry that they bought in a bit too quickly, and will take a bit on round two of the credit crunch.
Brad : title — “tha thas hid” should be that has hidden
Brad,
The American consumer still hasn’t thrown in the towel. That’s good news, even if you don’t cover it.
>>>>
The American consumer still hasn’t thrown in the towel, even if you don’t cover it.
That’s good news.
>>>>
Amy — THANKS
pallj — the gulf relies heavily on outside intemediaries, so only a fraction of its flow shows up in the US data. I personally believe the GCC countries combined to add well over $100b of dollars to their portfolio, and most of that ultimately becomes a claim on the uS in one way or another.
I just hope Obama is on speaking terms with some sound economists that can help him work out a sane money policy. The sooner the better, because how can this not become THE election issue this year. The US economy, the US originated credit allergy on global scale, and then Iraq.
I don’t see Hillary strong on the home stretch, but Obama had better get his s*** together on his proposed economic polices and come up with a credible campaign, with realistic remedies and goals.
Too bad there is a whole year left of the current madness.
http://www.gocomics.com/bensargent/2008/01/20/
http://www.guardian.co.uk/cartoons/stevebell/0,,2245859,00.html
Pallj,
Although I have no idea what “change” means, yes we can:)
Might it be useful to determine how much ‘U.S. subprime’ has been sold to the U.S.’s - 10s of millions? - of NRs/immigrants. Aren’t the unbanked targets for these types of credit products and doesn’t part of the global FX game involve maintaining and building the flow of 100s of $billions of remittances from the U.S.? If the ‘U.S. recession’ is felt more or less by its’ substantial NR/immigrant population, what is the affect on global flows.
Capital Crunch p. 34 “…while nearly every entrepreneur has a difficult time obtaining sufficient financing to start and grow a business, the hurdles are often far higher for immigrant entrepreneurs… Nationwide, only 63% of immigrant household heads have a checking account, compared to 76% of native-born household heads…” http://www.nycfuture.org/images_pdfs/pdfs/IE-final.pdf
significant revenues from new products and strengthening intellectual property portfolios…
“…U.S. patents filed by DuPont scientists have increased 7% since 2006, while U.S. patents granted increased nearly 20% from 2006…” http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/02-15-2008/0004756990&EDATE=
“Emerging market central banks have been far more generous to the US - and emerging market sovereign funds far more generous to US banks, investing without seemingly doing much due diligence - and the US, the G-7 and the IMF were to the emerging world in the 1990s.”
do you really believe this is a valid or instructive comparison? or that any of these flows are ever driven by ‘generousity’, especially when originating from regimes which you refer to as being authoritarian and undemocratic?
this sector doing well too:
“…Democratic candidates are significantly outstripping their Republican counterparts in this contest. The reports indicate that the 2008 elections will be the most lavishly funded in American history, far outstripping the previous record of $1 billion established in 2004. Already, the candidates of the two major parties have raised $582.5 million, as compared to $322.5 million at the same point in the 2004 campaign…” http://www.wsws.org/articles/2008/feb2008/elec-f05.shtml
Anonymous — several of the links above are off-topic.
The comparison between EMs in the 90s and the US today works, in my view, because both ended up relying heavily on other governments (or the int. financial institutions, who are run by other governments) for financing during a period of financial difficulty. a dollar lent from the IMF to the emerging world (with conditions) can be compared to a dollar lent from the emerging world to the US (without conditions). both reflect policy choices — choices that could have been different.
bsetser: the bottom line is that I suspect China will be looking for a commercial return, but also to fund projects that support China’s national economic development — and disentangling the two motives will be hard.
One problem is disentangling the two motives is that from the point of view of the PRC leadership, these two motives are consistent with each other. Ever since, Deng Xiaoping established the principle that “to get rich is glorious”, Beijing has generally believed that commercial returns and national economic development are consistent with each other.
Also, I don’t think that CIC will be the only mechanism for PRC investment. CIC will be the “make a healthy return in order to fund the pension system” organization, but there are many other channels that the PRC can use for external investment (namely the China Exim Bank). The size of CIC was set up because $200 billion is about the limit that you can manage a single fund, so I think that any further foreign investments by the PRC won’t be to expand CIC but rather creating and funding other organizations.
The role of the China Development Bank is interesting. Originally the CDB was the funding arm of Chinese local governments. CDB would issue bonds and lend this money to local governments. The trouble with this mechanism is that it doesn’t address the basic problem that coastal regions have a lot of money and interior regions do not, and so the government has decided to get rid of this mechanism and fund local infrastructure directly from the national treasury which will then be funded by taxes or government bonds.
This means that the original purpose for CDB no longer exists, so the decision was made to turn CDB into a commercial bank. Because CDB has a lot of expertise in bond issuance, the game is trying to make a profit from this expertise.
Something that is important to think about is that you can’t think in terms of “financial institution A” buying “financial institution B” when thinking about these deals. Every company has its own goals, strengths, weaknesses, corporate culture, expertise, history, and when trying to figure out if a deal makes sense or not you have to look at the details of the companies.
Running an investment bank is very much like running a dating service.
There is one big difference between EM and the current situation. Emerging markets are tiny, and so the amount of investment from the developing world turned out to be huge in comparison with local capital.
In comparison with local capital, the amounts are quite small. A trillion dollars of Chinese investment is a very small fraction of the total amount of investment in the US.
Personally, I see this investment as a much needed “rebalancing” of global economic and political power between the developed world and the developing world.
One reason the volume of deals have gone down is that there was a rapid need for capital on the part of US banks, and also all of the good deals are already taken.
Looking at the deals that have been made, I don’t think that there has been a lack of due diligence. All of the deals that have been announced make some commercial sense to me, and it’s not been a case of people buying random stakes in companies.
In the case of Morgan-Stanley, CIC did something that removed “Blackstone” risk. Technically CIC did not buy MS stock, they bought bonds paying fixed interest that would convert to MS stock at some point in the future. This means that if Morgan Stanley’s stock price dropped suddenly, this wouldn’t be immediately reflected in CIC’s portfolio value, and hence no Blackstone-style screaming. The risk in all of this is that if Morgan-Stanley stock drops and stays low, then you are going to have a sudden hit in five years time, but this means that the discussion is going to be about where MS stock is in five years rather than what it was yesterday.
In regards to CIC, it’s been extraordinarily transparent, and there are two pressures for this. One is that it reduces political objections in the US. If the details of the Morgan-Stanley deal weren’t released you’d have all sorts of conspiracy theories on Lou Dobbs. The other pressure is that the main purpose of CIC is to clean up the pension mess in provincial and local funds, particularly the big scandal in Shanghai. Part of the reason that CIC is letting everyone know what it is doing is so that it lets the State Council know what it is doing.
What the State Council doesn’t want is for CIC to turn into a political fiefdom out of its effective control, and having CIC announce what it is doing to the world keeps that from happening. It wouldn’t surprise me at all of the first time someone on the State Council knew that CDB and Citigroup were talking with each other was when they read it in the Wall Street Journal.
2fish — if china invests about $400b a year in the us, the amount of investment it is financing is about equal to the amount of “investment” that FDI finances in China, relative to each countries GDP (around 3%). that strikes me as a significant share of all new investment in the US — and in some ways a more significant share than the foreign share of new investment in China, as the US is a low investment economy and cHina a high investment economy.
and yes, i know that China currently still buys mostly bonds and thus only indirectly finances a high level of investment v savings than otherwise would be possible rather than directly financing the investment as foreign investors do in China, and I also know that the inflows in China don’t finance a higher level of investment than China could finance out of its own savings, and in some macro sense end up adding to its reserves.
“Anonymous - several of the links above are off-topic. The comparison between EMs in the 90s and the US today works…”
i disagree. the links point to a few of many big differences which indicate why the comparison is invalid
…along with the characterization
Anonymous — what part of the characterization is invalid? That the US doesn’t get financing from emerging market governments?
a link on dupont’s patents and immigrant entrepeneurs certainly isn’t a refutation of the capital flows data.
You can argue that emerging markets finance the US to support their exports — per BW2 — though even there you can argue that right now EMs are providing more financing to the uS even though their exprots to the US are growing less slowly, so the bang for the buck is falling. Tis hard to argue that they do so for the financial return. and the US supported IMF lending b/c it worried about the global impact of a collapse in eM asset prices/ demand and so forth back in the 90s.
there certainly is an enormous difference between the form eM support for the US is taking now (unconditional purchases of bonds on the open market) and the form US support for EMs took in the 90s (conditional loans through the IMF mostly). it isn’t as if the US couldn’t have gone out and bought government of argentina dollar (or peso bonds — though that would have led to really big losses) back in 99 or 00 or early 01, helping argentina out at the time. Indeed, the uS could have resisted pressure for the $ to appreciate at the time by building up its reserves and then investing in EM bonds to earn more income. The US though opted not to do that.
Anonymous, remember that by definition “generosity” does not exist in economics, so the use of that word must be ironic, right?
**Running an investment bank is very much like running a dating service.**
I loved that one!
Yes! it was ironic. tho it meant to capture a broader truth, namely that emerging market central banks are lending to the us on terms that likely imply they will take losses, which is, in some sense generous, even if it done to avoid broader economic disruption.
I suspect i-banking has better margins than a dating service, but i don’t really know … tho i guess a dating service also is at risk of getting stuck holding a bunch of subprime product.
Movie Guy: “The American consumer still hasn’t thrown in the towel. That’s good news, even if you don’t cover it.”
“The consumer” is millions of people who do not change spending habits either because they cannot do so overnight or they figure that it will not make a difference anyway. A few at a time are forced to change spending habits, when their credit cards are canceled or they their application for an extension to their homeowners credit line is turned down or their houses are repossessed .
The cost of living in America is high for a working family. Too many people live in the exburbs and maintain large houses, lawns, and three cars. Their kids are driven to ballet lessons or to the movies. It is an idyllic picture, but the problem is that (pick your percentage) of those who have adopted this lifestyle cannot really afford it.
I bet that the emerging markets governments will be less generous when they realize what is leally happening.
The US consumer has thrown in the towel.
That is the bad news.
Thanks for keeping this series on TIC data running. I am getting more and more nervous as the proportion of US federal deficit financed from foreign official sources grows ever larger. That is the sort of concentration risk which can presage a sudden and violent collapse of a market. Should there be a policy change - even perhaps a military action - which causes substantial upset among our creditors (e.g., a strike on Iran which would anger China and Russia), there could be a buyers strike on Treasuries. That would throw the US economy into chaos very quickly.
I think your Third World lending comparison very apt. Just as it was unwise for Argentina and Venezuela to become hugely dependent on bank loans in the late 1970s for their deficit spending, it is unwise for the US to be hugely dependent on Chinese and Russian sovereign loans (what is effectively happening with Treasury purchases) today.
just as bloggers seeking multiple relationships tend to load up with subprime content. economic porn sells, or we must assume it does as there seems to be quite a bit of it trafficked in the public domain.
there’s nothing to argue brad. your characterization of the u.s. economy is fundamentally flawed.
Yeah, we’re dependent and we make stuff up. We are the Blanche Dubois of planet earth. So what is it that gets Stanley upset? I think not Iran. The first overt act of war on Iran would be a blockade without UN permission. We’re almost done isolating Iran to get set for it. Once Russia has been bought off (we might have to sell out the Kosovar ‘Albanians’ too), China would have to go out on a limb to resist. They seldom do. So you need at least one more straw to break the camel’s back, like instability in Pakistan. Monday’s elections would make a dandy catalyst.
anonymous — Assertion is not the same as argument. What specific parts of my characterization of the US are flawed?
The core of the post above — apart from the links to a set of objectively bad recent data — was a set of numbers derived directly from the TIC data release showing the increase in the BRICs claims on the US. I assumed those were mostly government claims, tis true — but given the data on emerging market reserve growth I have posted in the past and the overall breakdown between private and official flows in the December monthly data — that seems like a reasonable assumption.
Incidentally, I would hardly expect an extremely wonky, data-driven post on the TIC release — particularly one populated with two graphs that are 100% data based — to be described as “subprime” content. Boring maybe …
Some good news for those hoping transparency will help combat official disinformation campaigns:
Economic Indicators Continued by Shadow Government Statistics.
The Department of Commerce (DOC) has decided to discontinue its economic indicators service economicindicators.gov (effective March 1st) “due to budgetary constraints.” Shadow Government Statistics is pleased to announce that it will provide — at no charge to the public — a continuation of the basic link service heretofore provided by the DOC’s Economics and Statistics Administration.
The existing government service provides links to the Web pages and recent releases of the Bureau of Economic Analysis and the U.S. Census Bureau. We eventually plan to extend the service to other government or quasi-government reporting agencies, including the Bureau of Labor Statistics, the U.S. Treasury and the Federal Reserve, as well as to provide links to other major economic data providers. We plan for the new service to be operational by Wednesday, February 20, 2008.
I am gob-smacked.
This is not a hoax of some kind, LB?? anyone?
Anonymous on 2008-02-16 23:26:03 - The US consumer has thrown in the towel. That is the bad news.
You don’t what the hell you’re talking about.
now the Brits have formally announced they will nationalize Northern Rock, which seemed to be in the cards anyway. This should ease some of the panic in GB, help some with consumer confidence over there.
http://www.nytimes.com/aponline/business/AP-Britain-Northern-Rock.html?_r=1&oref=slogin
“I would hardly expect an extremely wonky, data-driven post on the TIC release…” etc.
i most certainly did not say that
although i don’t see why anyone should assume that “100% data based” content is subprime free - even if it isn’t tarted up with the expectation of scoring a few extra hits.
A UBS Investment Research report says that while it would be wrong to write off the U.S. dollar as the global reserve currency, its roughly 90-year iron grip on that position is loosening. “The use of the U.S. dollar as an international reserve currency is in decline,” said UBS economist Paul Donovan.
“The market share of the dollar in international transactions is likely to decline over the coming months and years, but only persistent policy error - or considerable fiscal strain - is likely to cause the dollar to lose reserve currency status entirely.”
The UBS report maintains that the gradual slide of the U.S. dollar is being driven not by the world’s central banks, but by the private sector, as individual companies increasingly abandon the greenback as their international currency of choice.
“The private sector’s use of reserves is more important than official, central bank reserves - anything up to 20 times the significance, depending on interpretation,” Mr. Donovan said. “There is evidence that the move away from the dollar as a private-sector reserve currency has been accelerating since 2000.”
“…Although the euro has generally been touted as the greenback’s replacement, the benefits “of reserve status are likely to be shared with a wider range of alternative currencies,” he said.” http://www.globeinvestor.com/servlet/story/RTGAM.20080213.wglobaldollar0213/GIStory/
‘State will not bail out UBS - Swiss finance minister Merz’: http://money.cnn.com/news/newsfeeds/articles/newstex/AFX-0013-22839654.htm
BARACK OBAMA Top Contributors: http://opensecrets.org/pres08/contrib.asp?id=N00009638&cycle=2008
Nationalizing Northern Rock is good news? In a pig’s eye. The news is that the market could not find a buyer for the assets at the price that would not set off another series of big writedowns. Sir Branson, a cup of Northern Rock for ye?
I am going to post this addendum every time I write anything. Stop beating the sub-prime straw man. Enough already. Ask Mr.Macklowe if he bought a subprime portfolio, or ask Centro. The overpricing of assets is pervasive through, residential RE, commercial RE, US equities, Euro equities, BRIC equities. The Fed wanted to play monopoly money the last seven years and the monopoly money found a home wherever it could. So get off sub prime’s back. Either assets are going to written down and dollar appreciates, or assets will continue on the helicpoter ride ever upward, and the dollar gets kicked off from a mile up in the sky.
Why did my post just go up under guest? I always post under my nom de plume.
I am not quite sure I understand how UBS came up with their estimate that private sector demand for reserve currencies is 20X more important than official demand.
Take China — i know the data there quite well. Private onshore Chinese dollar holdings are falling. and while the data on offshore deposits by China is aggregated to include private and public there hasn’t been a big buildup of dollar bank deposits. so a big increase in Chinese trade with the world, denominated in dollars, hasn’t led to an obvious increase in the stock of Chinese private liquid dollar holdings, even though a lot of china’s trade is invoiced in dollars.
conversely, there has been a huge buildup in the stock of official claims — i.e. fx reserves.
I am also not a big fan of comparing the increase in reserves to turnover — the assumption is that since turnover is so large, the official sector has no impact. I would put the argument the other way — namely, all the private sector activitiy produces a small increase in net private holdings of US assets, and thus little financing. Absent the buildup of official claims, the US would need to adjust — b/c at the end of the day, financing the deficit (and us capital outflows) requires a buildup of claims on the us, with someone actually holding the claims.
if anyone can find the section of the UBS report that explains the 20x argument, do share –
paul.donovan@ubs.com
sorry - it’s paul.donovan@ubs.com if you don’t already know him
not sure how the previous address got chopped…
and as it got chopped again, paul dot donovan at ubs dot com
For the anon wondering why the gulf didn’t figure as much, Qatar has stepped up to credit suisse and projects investment to the tune of 15b in western banks, or so the tagline said in business news.That probably triggered even more paranoia in the west. wonder what other nefarious intentions are being attributed to SWFs?
twofish, if investment banking is a dating service, would that make SIVs one night stands? Ooh, talk about consequences.
Re UBS report -
It must be based on turnover, given the evidence on net financing from official sources.
Interesting that there are diametrically opposed views on the relative importance of turnover versus net flows.
Does the velocity of the demand for dollars (turnover in trade invoicing) support the dollar, or does the permanence of the demand for dollars (official net financing) support the dollar?
It’s a weird debate.
The trade turnover demand nets to zero, ex net financing.
But net financing demand for dollars arguably nets to zero in a similar way, if you consider the dollars that are effectively supplied by the US in settlement of its current account deficit.
Viewed in this way, with both modes in macro balance for the demand and supply of dollars, arguably the higher velocity demand via trade turnover is more impactful on the dollar.
No, Guest, you don’t know what you are talking about. What I tell is fact. Accept or move on.
I don’t think there is any thing automatic that assures the financing needed for the trade deficit would be available absent the net buildup of official claims — in my view, absent that buildup, there would be a smaller deficit to match the reduced availability of financing.
Brad - This is another informative post. As to your last comment, since the current account balance is merely the other side of the coin from the capital account, anyone would have trouble disagreeing that official inflows are a large driver of the trade deficit. Without the official inflows, interest rates here would climb to attract other capital, but the dollar would also rise to curb imports and spur exports, so the trade deficit would surely be smaller. Official capital flows are just the modern-day component of the old policy of devaluing the currency to spur exports and export unemployment. I wonder how long the rest of the world is going to put up with this policy on the part of China. I have long suspected that a halt to the official interventions would not come from foreign governments losing interest in U.S. debt, but U.S. politicians responding to U.S. unemployment. One thing I wonder about is why more official flows don’t end up going into equities. Why do foreign governments give up the equity premium, especially when it looks like they mean to keep the assets for the long haul?
Sorry to be so naive, but what happens when the US dollar collapses and we go into default with all of our creditors. What does the US use for collateral on our debts– our public trust lands– our national parks– our national forests. Surely not just our “good word” or “good faith”!! Does anyone out there know?