The US borrows almost $3B per day from foreigners to fund our Trade deficit and to support our government deficits. Since US households don’t save to provide the source of credit for our other lending, including home mortgages, it is crucial for foreigners to continue to recycle their trade surpluses back as investment in our financial assets of Treasuries, Agencies, stocks and bonds. To see in detail what is happening to the cross-border flows, I closely watch the weekly reports from the Federal Reserve on the investments made by foreigners through the Fed, and the more comprehensive monthly Treasury International Capital (TIC) System reports. There are some signs of slowing by foreigners. What follows is an update to previous articles where I explain my methodology in more detail. They can be found in the KitcoCasey.com archives.
On June 15 we got a new report from our Treasury on how much long term investment foreigners made in the US. They have slowed overall cross-border flows from a record $91 B into the US 3 months ago, to a still-large $47 B in the most recent month of April.
This morning’s quarterly Current Account was reported as a negative $195.1 B for Q1 2005. That divided by 3 is $65B per month. That is bigger than the April cross-border flow of $47 B. The chart below shows the cross border flow, its variability and lower level:
This is consistent with slowing of Custody holdings at the Fed:
Looking at just the Treasury Data, the total foreign purchases were only $14 B where they had been running $30B per month, which was the second lowest level in the last year.
No individual country purchases stood out on a monthly basis, but on the year-to-date basis, the Caribbean and London money center banks dominate purchases.
This modest slowing of supply of credit, along with the slowing of Fannie and Freddie, have been made up by expanding credit from US financial institutions of banks and Asset Backed Securities Issuers. I would think the slowing by foreigners would create more pressure for higher rates than we have seen. That the total cross-border capital inflow is below our trade deficit would be a problem if it continued for several months. The high volatility says that we would need more periods before we could be sure that this is a serious problem.
Copyright Bud Conrad, June, 2005