A Funding Nightmare for the US
The way that the US is planning to fund all of the bailout and stimulus activity is by borrowing the money. As any long-time reader here knows, the rate of US savings has been less than stellar over the past 15 years or so, indicating that borrowing from foreign sources is necessary to plug the gap.
The way we keep an eye on this is by watching something called the Treasury International Capital, or "TIC," report.
What this report from the Treasury Department measures is the aggregate total of money coming into vs. heading out of the US. Money flows in and money flows out. When it comes in, it lands in bank accounts and bond and equity purchases. When it leaves, the various financial assets are sold and the money flows home, wherever that happens to be. All of this is tracked.
Admittedly there are a lot of moving pieces in this measurement, but, roughly speaking, for everything to balance, the amount of money coming in needs to equal the amount of money being borrowed by the US.
If it does not, then the official deficit of the US government will compete with local needs for borrowing while the trade deficit will erode the value of the dollar. If and when both domestic and foreign sources of lending are insufficient for the task, then we'd expect the Federal Reserve to cave in and simply print up the difference.
In fact, this is already being done by several bankrupt countries, including the UK, Switzerland and the US although it goes by the fancy name "quantitative easing."
The most recent TIC report for January 2009 is nothing short of a disaster for US borrowing plans and indicates that some very interesting times are dead ahead. Here's the latest report, with my comments in bold:
Washington —The U.S. Department of the Treasury today released Treasury International Capital (TIC) data for January 2009. The next release, which will report on data for February 2009, is scheduled for April 15, 2009.
Net foreign purchases of long-term securities were negative $43.0 billion. This means that foreigners were selling both long dated bonds and equities.
- Net foreign purchases of long-term U.S. securities were negative $18.8 billion. Of this, net purchases by private foreign investors were negative $10.2 billion, and net purchases by foreign official institutions were negative $8.5 billion.
- U.S. residents purchased a net $24.2 billion of long-term foreign securities.
Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been negative $60.9 billion. Wow! This is by far the most negative reading for this number that I can find in the data series. This means that foreigners, rather than investing in the US, have been taking their money home in a big way.
Foreign holdings of dollar-denominated short-term U.S. securities, including Treasury bills, and other custody liabilities increased $30.9 billion. Foreign holdings of Treasury bills decreased $15.4 billion. This one is a stunner. See the image below for further clarification. This says that foreigners have been net sellers of Treasury bills. This is simply the most unusual data point I can imagine considering that every US auction of Treasury bills in January were "over subscribed." Now I am wondering just where the domestic demand for all that buying came from?
Banks’ own net dollar-denominated liabilities to foreign residents decreased $118.9 billion. I think this means foreigners closing out bank accounts and taking the money home, but I am not entirely sure. I'll have to look into how this number is derived.
Monthly net TIC flows were negative $148.9 billion. Of this, net foreign private flows were negative $158.1 billion, and net foreign official flows were $9.2 billion. This reveals that where private parties were pulling money out of the US, foreign central banks ("official flows") were still propping up the US financial markets. For how much longer, one wonders?
The bottom line here is that where the US needs inflows on the order of $30 billion per month simply to support the trade deficit, it needs a further $100 to $200 billion per month to support the fiscal deficits of the federal government. Instead, January saw a nearly $160 billion outflow. This is a funding disaster. Many a smaller country has seen the utter abandonment and collapse of their currency result from exactly this sort of "financing flight."
But this is just a single bad month. Perhaps it will reverse vigorously next month. Who knows? But we'll be keeping a close eye on it, because if not, this will portend a quite serious change in the global financial picture.
Below is a snapshot of the TIC report. Note that the negative $15 billion in net Treasury bill purchases was composed of a -$44 billion private outflow and a +$29 billion "official" inflow (lines 24 + 25).
Thank goodness that China, et al., not only rolled over all their existing positions but managed to find a way to purchase another $29 billion on to of that. If that ever ends, or reverses, look out below, Mr. Dollar!