We Americans were running trade deficits of approximately $60 billion a month until just recently but that has now fallen into the high $30+ billion. This is money that must be financed by international capital. In other words, as your dollars flow to China and other parts of the worlds, an equal amount of dollars must flow back. If they do not flow back by us selling goods, then we run a deficit. This deficit must be financed otherwise we would drain all the capital.
We track this flow of funds in a monthly report called the TIC data. It was HUGELY negative for the month of January.
Treasury International Capital (TIC) Data for January
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.
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.
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.
Banks’ own net dollar-denominated liabilities to foreign residents decreased $118.9 billion.
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.
Complete data is available on the Treasury website at www.treas.gov/tic.
Negative flows of $148.9 is of great concern (to put it mildly). Last year we ran negative TIC data for a few months (first time in a very long time), but not on this scale, and the negative months are coming more frequently.
If we run negative TIC flows for long, demand for our debts will not be high enough to keep interest rates low. This may force Bernanke into “quantitative easing” or the buying of our own debts. That is just printing, it is a false economic concept (to say the least) and has never worked for any extended time period in history.
This morning TLT and other bonds and treasuries dropped on the news. TLT is sitting right on that old line in the sand, right at the 101 level. Should we break this area, it will be a sign that government support to bonds is being overwhelmed. Each time we’ve been in this region over the past couple of months, a rally has ensued.
There is definitely negative underlying pressure in foreign capital flows. Should this continue for long, you will see the pressure in the bonds markets (as we already are), and eventually that will translate into higher rates and then into the economy itself.