from Follow the Money

Disappearing Finacing — $45-50b in long-term flows is not enough

June 15, 2006

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The US needs -- in my judgement -- $75-80b in long-term inflows a month to finance its current account deficit.   That assumes that bank flows cancel out, and that US firms invest as much abroad as foreign firms invest in the US, so FDI is not a big source of net financing.

We now know why the dollar slumped in April.  Private flows to the US dried up.   The latest TIC data shows private inflows into US long-term debt (and the US stock market) of only $37.2b.    Since US investors bought $11.9b in foreign securities, the net flow from private investors (including official inflows that show up as private flows) was only around $25b.    Not enough.

Central banks bought $21.3b in long-term securities, bringing total inflows to $46.7b.

But a quick scan of the rest of the data the Treasury released suggests that central banks reduced their holdings of short-term Treasuries by nearly $18b in April.  Those flows don't show up in the headline TIC number.  That significantly reduces net financing from central banks -- selling a T-bill to buy a Treasury bond doesn't help finance the US deficit.  Total official holdings of Treasuries (recorded holdings that is) actually fell in April.

 

The goods news, if there is good news, is that net financing of only $3b or so from the world's central banks in April makes no sense.   Reserves were sky-rocketing.    Russia alone added $20b to its reserves (more like $15b if you adjust for valuation changes), China hasn't released its April increase by it should be well over $20b and lots of others chipped in as well.   I suspect total reserve accumulation after adjusting for valuation was around $75b in April.  That is a lot of money that had to go somewhere.  And unless everyone followed Russia's lead and was buying euros to lower the percentage of dollars in their portfolio, I would bet a bit more than $3b made its way back to the US.

The other good news: I doubt American investors bought $10b or so of foreign equities in May.  If Americans stop investing abroad, the US has less need to borrow from abroad. 

 UPDATE: China bought $10.3 b in long-term US debt in April (thank you, PBoC), but reduced its holdings of short-term Treasuries by $2b, for net inflows of around $8.3b (plus some purchases of foreign bonds held by Americans -- maybe PIMCO is selling its emerging market bonds to the PBoC ... ).  Russia bought $1.8b of long-term securities and $3.95b of short-term securities (mostly short-term Agencies), for net inflows of around $5.8b.    

We don't know China's reserve increase for April, but if it is in the $20b range (valuation-adjusted), less than 50% of China's reserve growth showed up in the US data.  And with Russian reserves growing by something like $15b on valuation adjusted basis, net inflows of $5.8b aren't that impressive.   But they are higher than in q1 -- which suggests that perhaps Russia had competed its shift toward the euro and pound by March.  Just a guess.

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