from Follow the Money

$33b a month doesn’t cut it …

September 18, 2006

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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. 

 

 

 

 

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