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!

This is a companion discussion topic for the original entry at https://peakprosperity.com/a-funding-nightmare-for-the-us-2/

Chris,

Thank you for the continuing education, and for this clear explanation of another puzzle piece.

Cat

Thank you for the information Dr. Martenson. This is the type of analysis that you can only find here. I truly value your services. My subscription is worth every penny!
Jeff

I have a question about the tension between deflation and hyperinflation. I understand the argumant for hyperinflation that you have described here, but isn’t that more than offset by the massive defaults that are occuring? In other words, as consumers, corporations, and eventually governments default on their debts, doesn’t that money just disappear, thereby reducing total money supply and increasing deflationary pressures?

I quickly scanned some of the previous reports at the Treasury and see a lot of variation from month to month, so looking at 12 month averages might smooth that out. I’d like to see the data charted, if that’s available somewhere. There were big inflows in Sept and Oct 08; maybe this net outflow is partially to offset that. Still, Jan 09 looks like a huge sudden drop in foreign investment just when the US wants to borrow more than ever. Where’s the money going if not here? What motivates foreign central banks to prop us up when private investors are not?

The transition will be painful, but shutting off easy credit to the US might be the best thing for us in the long term to learn to live within our means.

 

On top of that, it looks like the non-borrowed assets of the

AGGREGATE RESERVES OF DEPOSITORY INSTITUTIONS AND THE MONETARY BASE are going south again
http://www.federalreserve.gov/releases/h3/Current/

I found a chart (without aggregates) here:

http://forex.fxdd.com/21756/economic-statistics/us-tic-data-for-january-is-released

greg_michalowski_fxdd_fxtrading01544

It also reveals (confirms) foreigners are moving from long-term to short-term.

AFAIK, this reveals (confirms) loss of confidence for ability to get paid.

http://www.atimes.com/atimes/China_Business/KC18Cb01.html

[quote]DOLLAR CRISIS IN THE MAKING, Part 3
China inoculates itself against dollar collapse
By W Joseph Stroupe
This article concludes a three-part report.

As for China’s purchases of Treasuries over the most recent three months (October - December of 2008), note this statement from Setser:

And over the past three months, almost all the growth in China's Treasury portfolio has come from its rapidly growing holdings of short-term bills not from purchases of longer-term notes.
Setser goes on to make the point that China's central bank is unquestionably divesting itself of the comparatively less-safe assets such as agency debt

in favor of very short-dated Treasuries. The best estimates of the total exposure of China’s central bank to dollar-denominated assets of all kinds is about 70%, or somewhere between $1.5 trillion and $1.7 trillion depending upon whether you use the $2.2 trillion figure or the $2.4 trillion figure for the total sum of China’s reserves.
That uncomfortably high level of exposure to the dollar is what has been causing concern to flare in China most recently. A much more desirable figure, from China’s standpoint, of its total exposure to the dollar would be 50% or less of its total reserves. A reserve composition of 50% dollars to 50% everything else is much safer because an excessive decline in the value of the dollar would tend to be offset by corresponding increases against the dollar in the value of the non-dollar assets comprising the rest of the reserves.
In order to get to that more desirable composition fairly quickly over the next several months, China would have to somehow divest itself of as much as $450 billion of its existing dollar-denominated assets, not purchase a significant amount of new dollar-denominated assets, and accomplish all this without triggering a global dollar panic. That’s a very tall order indeed - but it is not by any means impossible.[/quote]

I don’t want this to come across as me seeking investment advice, but it would seem that if we’re pretty sure the US Gov’t is going to have more and more problems selling Treasuries, that means yields are going to have to go a lot higher. This would push Treasury prices down; there’s also some funds setup that let you buy ‘short’ Treasuries, like TBT & PST. If yields can pretty much only go higher these seem like solid investments.

Hello MSauer:
I’ll give you my take, but I have no crystal ball and I would listen to every opinion out there.
I think they will use QE to print money to pay debt. Even if they, or another govt. didn’t then it’s dollar would be a reflection of insolvent and it’s dollar would be like a Zimbabwe dollar - worthless and require many of them to buy a loaf of bread.
I really hate the term inflation and deflation unless they are applied to the amount of currency in circulation. Inflate a currency, in my book, means make a lot of dollars. Make a lot of anything and it becomes worthless so you need a lot of them to exchange them for something. Going BK and or defaulting is another-way to make something worthless.
That is my simpleton approach. I have done the what if domino falling exercise over and over and over. I see no way out. I see massive hyperinflation and another depression as the only corrective action. There is no consumerism and I doubt we will ever see it like it was until people forget how stupid it was.
Take care

"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?"

I assume the domestic demand came from further mutual fund managers moving their funds reserves into treasuries for the short term to ride out the stock market drop. I think that as they start moving out on the risk curve to corporate bonds or preferreds, domestic demand for treasuries will plunge.

Obviously, foreign private demand has already plunged, leaving simply foreign central banks to prop up the treasuries. However, there is no way they can do this to the tune of $125+ Billion per month. These central banks will help avert the global financial disaster (which they have been doing), but will not fund US specific socialist programs, in my opinion.

At the end of the day, the remaining demand is coming and can come from only one place: The US Fed buying their own auctioned notes. I have read where they plan to do exactly that, and they may have already begun, which could have assisted these auctions being oversubscribed. As this becomes a larger percentage of the demand, I expect investors, foreign central banks, etc., will see through this, and T-bill interest rates will skyrocket and/or the US$ will start a final downward spiral.

Seems to me the yields will need to go higher to attract more investors or the Fed will print money and monetize the debt, supressing interest rates but risking high inflation down the road. The link fujisan posted above indicates 30 year Treasury yields rose significantly in January 2009.

Just curious, what happened Jul-Sep (esp Aug) 2007?

I think China just realised that it will not get its existing debts paid by the USA unless it loans them a whole lot more.

Reminds me of what my primary school teacher told us about banking: If you owe the bank a million pounds, the bank owns you. If you owe the bank a thousand million pounds, you own the bank.

So would you all say that it is pretty safe to say that if (when) this trend continues this is some new cracks to head as big warnings for things to come?

In defaults debt disappears, money does not. So defaults are not deflationary.

Well if you default and money doesn’t disappear then what about thecurrent mortgage crisis. In many cases this money only exist due to
debt, eg. money that is repaid in the future (or money that doesn’t
exist yet). If I owe $800,000 on my house and I default then my house
goes into foreclosure. After foreclosure proceedings the bank ends up
selling my house for $500,000, isn’t $300,000 destroyed? ( assuming the reality that banks lent out more money than they had due to low reserve requirements.)

The bank would lose $300K to whoever originally sold you the house. The money doesn’t disappear.

Thank you Davos and Woupiestek,

But one of the core teachings I took from the crash course was that money was created, in fact then multiplied, when debt was created. Why would it not be destroyed when debt was erased?

I think there is at least a reasonable chance that before we experience hyperinflation, we will experience a perhaps prolonged period of deflation. During that period cash will be king as it’s purchasing power increases, as has been happening for the last 4-6 months. In addition, the reduced demand for goods causes downward pressure on prices, which I know is not the same as deflation, but certainly dries up demand for the credit expansion our leaders are so anxious to stimulate.

They pour trillions into the money bucket, but it’s leaking out the bottom faster than they can pour it in.

Yes, no, maybe so?

I like looking at the breakdown of who are the Major Foreign Holders Of US Treasury Securities, and the monthly changes:

http://www.treas.gov/tic/mfh.txt

  • Ernie.