from Follow the Money

Asymmetric financial globalization

December 15, 2005

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Foreign purchases of US debt and equity in October 2005: $110 billion

US purchases of foreign long-term debt and equity in October 2005 (net): $3.5 billion.  Data from the Treasury.

That is a quick snapshot of the world economy.  All money flows to the US (more or less).  And foreigners (including the world's central banks and oil investment funds) are more interested in investing in the US than Americans are in investing abroad.

Net inflows of $107 billion are more than enough to finance a trade deficit of $70 billion.  The relevant number is actually $80 billion, since transfers and interest payments likely imply a monthly current account deficit of about $10 billion more than the trade deficit. 

But $107 billion is also more than $80b.  Some of the purchase of long-term US debt may be financed by US banks, so the net inflow may be a bit less - think US banks financing US hedge funds legally domiciled in the Caribbean for tax purposes.  But it also seemed that there is enough interest in the US to finance a bit of US foreign direct investment as well ...

In October (and September as well) foreign investors even bought enough US equities ($10.5 b) to offset US purchases of foreign equities ($6 b).   It is not so much that US demand for foreign equities fell (it remains solid), but rather than foreign demand for US equities picked up just a bit.   So on net, the US financed itself by selling a bit of equity as well as tons of debt.

And - at least if you believe the US data - foreign central banks only provided about $13 billion of financing, or only about 1/10th of the total.  That is up from the $4-$5 billion of August and September, but it still is well below inflows in 2004.  $10 billion per month implies only $120 billion in total financing from foreign central banks.   That is too low to be believed - but I won't review my arguments here.

The big puzzle: where is all this money coming from?

China's holdings of Treasuries fell in October.   Some of the $4.6 b fall (China $8.8 b sale of short-term paper exceeded its $4.2 b purchases of long-term Treasuries) was offset by $2.0 b in purchases of agencies and $2.8 b in purchases of corporate bonds (including mortgage backed securities).  But net flows to the US (at least judging from the TIC data) were flat at best.

Japan's holdings of Treasuries also fell - though its $6.4 billion in sales of long-term treasuries were offset by significant purchases in agencies and corporate debt.   On net' Japan's holdings of US long-term debt and equities increased by $7.7 billion.  It seems pretty clear that the Bank of Japan is slowing increasing its holdings of agencies.

But $8 billion in financing from Japan and China is no where near enough to cover the US current account deficit ...

OPEC's holdings of Treasuries were up in October, but that only offset its treasury sales earlier in the year.  OPEC Treasury holdings have not increased during the course of 2005.

And overall central bank holdings of Treasuries have not increased during the course of 2005 either.  $1239 b v. in October compares to $1238 b at the end of January, and $1233 b at the end of last year ...  central banks have shifted from bills to bonds, but they have not added to the Treasury holdings.  Some existing holders have shifted to agencies, offsetting some growth in Treasury holdings by central banks in places like China.   Still, global reserve accumulation has not exactly stopped, particularly if you include various official oil investment funds   ... China and many oil exporters have to be doing something with all their new reserves.

Bottom line:  Don't look to the TIC data to figure out who is financing the US.   Too much money - including I suspect funds from many central banks -- flows through London and the world's various offshore financial centers  ...

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