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January’s TIC data …

by Brad Setser
March 16, 2009

John Jansen is right; today’s TIC January data was a disaster. $150 billion in (net) capital outflows (-148.9 billion to be precise) cannot sustain even a $40 billion trade deficit.

I also though have learned that the TIC data doesn’t necessarily match the trade deficit on a monthly basis — and on occasion it moves in ways that seem inconsistent with the market. If the big outflow had come in December (a month when the dollar slid) rather than January, the flow data and the market move would fit together. But a big outflow in January is hard to square with the dollar’s January rally.

Long-term inflows in January were weak — with net sales of long-term assets by both private and official investors. But that isn’t news. Setting December (when foreign private investors bought a bunch of US corporate bonds) aside, foreign investors haven’t been buying long-term US assets since the crisis hit.

The swing came from two sources:

1) US investors bought a bunch of foreign bonds. That is a change. US investors had been net sellers of foreign bonds and equities through out the fall.

2) Banks stopped piling into US assets. In October — at the peak of the crisis — private investors abroad bought $64 billion US t-bills and increased their dollar deposits by $196 billion (see line 29 of the TIC data; “change in banks own (net) dollar-denominated liabilities). In January, credit conditions eased a bit, and private investors reduced their t-bill holds by $44 billion and the banks reduced their (net) dollar deposits by $119 billion.

In some deep sense, the $150 billion outflow in January offsets the $273 billion inflow in October. Over time, the TIC flows do tend to converge with the trade balance.

Incidentally China is still buying Treasuries. It bought $12.2 billion in January, including $11.6b in short-term Treasury bills. It also is still selling Agencies — its Agency holdings fell by $3.1 b.

Russia also, interestingly, added to its holdings of short-term Treasury bills. The Gulf reduced its dollar deposits (now at $114.3b, down from a peak of $125.5b in November) whether to support its domestic banks or to cover stretched budgets. The Gulf (and Brazil) also bought a decent number of long-term Treasuries. Most official buying, though, came at the short-end. In aggregate, the official sector sold $1.9 billion of long-term Treasuries while adding $29 billion to its short-term bills.

That continues a broader trend. Over the last 12 months official investors added close to $280 billion to their bill portfolio. Average central bank purchases of bills over the last four months were around $50 billion, roughly enought to have covered the trade deficit in the absence of other capital flows.

Indeed, the real legacy of the crisis has been an enormous contraction in long-term flows, with a corresponding increase in the United States reliance on short-term financing. And also a shift away from risk assets.

One striking fact is that foreign investors now consider Agencies to be a “risky” asset. Over the last 12ms, foreign investors — in this case, primarily central banks, as they were the main foreign buyers of Agency bonds — concluded that the Agencies aren’t a safe long-term store of value.

Another is that demand for US equities has disappeared. Over the last 12 months of data, foreign investors have only purchased $24 billion of US equities. The impact of the fall in foreign demand for US equities though has been offset by an equally sharp fall in US demand for global equities. Indeed, Americans have been net sellers of the rest of the world’s stocks over the last 12 months.

One small aside: I strongly suspect that central banks and sovereign funds are responsible for the upward blip in demand for US equities in the middle of 2007. It wasn’t just SAFE either. There was a lot of pressure on all central banks to increase returns on their dollar reserves back when the dollar was falling. Central banks also wanted to show that there was no need to set up a separate sovereign fund to manage equity investments …

The overall result of the crisis hasn’t been a rise in demand for US assets so much as a large contraction in all flows. The impact of the collapse in foreign demand for US risk assets (corporate bonds, equities) though has been offset by a collapse in US demand for foreign assets. I stripped out known official purchases from the data, but no doubt the data still is influenced by the increase in the official sector’s risk appetite in 2006 and 2007.

It may not be financial deglobalization, but it certainly is a major slowdown in financial globalization.

Krugman believes European economic and financial integration got ahead of European political integration. The same probably can be said of global financial integration.


  • Posted by jonathan

    Probably? Master of understatement?

    How can a global system work if information is hidden by important players, meaning not institutions that skirt reporting requirements but locales that market themselves through secrecy? You’ve described – in summary form – how British laws seem to have obscured important information about the extent to which foreign banks relied on short-term dollar financing and how that may have been a crucial component in literally freezing the credit markets through a dollar shortage when Lehman collapsed.

    On a related (maybe) topic, I’ve been wondering about the costs versus the benefits of these secrecy laws. Example: the Caribbean hosts many institutions and yet they haven’t garnered much in real economic development while even the apparent cost of just the scams run through there seems much higher than any justifiable benefits. Sure, London has prospered through hiding capital flows but at what cost now to Britain and, of course, to the world?

  • Posted by john jansen


    great piece.



  • Posted by MakeMeTreasurySecretary

    Great reporting and analysis, as usual, Dr. Setser.

    But why the gloomy “TIC January data was a disaster” statement? Disaster is when a building collapses or when a drought burns the crops. To be sure, money flows matter to the economy and they matter to individuals (some win and some lose with every move). But money flowing out of a country that does not really have any productive use for it (30% of the capacity being underutilized) is not a “disaster” in any objective sense of the word. I might call it “interesting”, “exciting”, or even “rational”.

  • Posted by bsetser

    make me treasury secretary — i guess I am a prisoner to my training; large capital outflows from a country with a current account deficit are considered something of a potential warning sign among balance of payments geeks.

    Jonathan — my friend Dr. Roubini prefers overstatement; I like understatement. Glad you noticed.

  • Posted by Pascal

    I can’t get it. How could $150bn. net outflow exist? Does not net capital outflow require current account surplus?
    What offsets this outlflow?

  • Posted by Indian Investor

    @Pascal: As I’ve discussed several times before at this blog, trade surplus and deficit isn’t directly connected with capital flows. A trade deficit can weaken the currency, and there can be a capital outflow in addition. Trade flows affect the exchange rate, and a central bank intervention to peg the exchange rate will lead to global capital flows associated with trade flows. Brad Setser doesn’t accept this reasoning, though, so you just have to keep wondering,I guess.

  • Posted by DJC

    Economist Marc Faber, “US Treasury bond market is a disaster waiting to happen”.

    The Federal Reserve has no option but to start buying Treasurys as the government’s needs for financing are huge, but the government bond market is a disaster in the making, Marc Faber, editor and publisher of The Gloom, Boom & Doom Report, told CNBC.

    The yield on the 30-year Treasurys touched a low of 2.51 percent last year in December but now it is back up at 3.77 percent, he said.

    “Yields have already backed up pretty substantially and I tell you, I think the US government bond market is a disaster waiting to happen for the simple reason that the requirements of the government to cover its fiscal deficit will be very, very high,” Faber said.

    “The Federal Reserve will have to buy Treasurys, otherwise yields will go up substantially,” he said, adding that as their reserves were dwindling, foreign investors were likely to scale down their purchases.

    “So we’ll go into high inflation rates one day from the money printing,” Faber said.

    The stock market is likely to continue its bounce at least for a while, but the outlook is bleak, he added.

    “I think we may still have a rally (in the S&P) until about the end of April and probably then a total collapse in the second half of the year sometimes, when it becomes clear that the economy is a total disaster,” Faber said.

  • Posted by Pascal

    @Indian Investor: Something has to balance this net outflow. Can’t be the trade balance that is for sure. Maybe foreign direct investment? Or is this $150bn only long term flows? Why are then T-bills and bank deposits counted? Are not they short term?

  • Posted by Jesse

    I suspect that when the BIS releases its data for this time period that we will see that the eurodollar short squeeze was strong in January which accounted for the anomalous dollar strength.

    It is important to look at the DX components and not the aggregate when analyzing these things.

    This is significant because it tends to highlight the underlying weakness of this dollar rally, and a likely reversion to the mean which may be quite impressive.

  • Posted by Curious

    Dear Brad,
    There was a lot of buzz recently regarding Chinese IP recovery in Feb 09.
    But can it be that all this production is just for the sake of production, all going into inventory – and the massive pick up in Chinese loans is just financing this working capital/inventory accumulation?
    Maybe they decided – what the hell, we will produce in order to keep employment numbers from complete collpase, we will store all these finished goods somewhere for the time being and hopefully will sell later? That would be a disastrous scenario. Is there any way to confirm or disconfirm this hypothesis- in the balance of payments data maybe? Would be very intresting to hear your views.

    Thank you!

  • Posted by TA

    Can you make the TIC numbers for the 4th quarter (oct. nov, dec.) line up even roughly with the FRB 4th Q flow of funds report? I can’t.

  • Posted by don

    From the BoP identity, the current account and capital flows must balance each instant. The trade data imply that there are still net inflows of capital. These are not ‘needed’ and indeed are counterproductive in our current excess savings mode. In fact, a reversal of these flows would provide a nice fiscal stimulus.
    In the near future, I suspect we will see if China decides to keep the yuan fixed, or to depreciate it. I think without depreciation or truly massive fiscal stimulus, their economy will suffer badly.