In April 2005, foreigners purchased a net total of 47.4 billion dollars of long-term US Securities. This data is best viewed in comparison to the US trade deficit, which was 58 billion dollars last month, and 57 billion in April. Put another way, the US came up 9.6 billion dollars short in funding its trade deficit in April.
More importantly, it appears some Asian central banks are slowly halting their total amounts held of US Debt. In June 2004, Japan held 666.6 billion in US debt compared to 685 billion in April 2005. That comes out to a net annual increase of 18.4 billion. Over the same period, China increased its holdings of US debt from 194 to 230 billion for a net increase of 36 billion. Korea increased its holdings from 44.5 to 55.9 for a net increase of 11.4 billion. The combined annual increase for these three countries is 65.8 billion, which would finance roughly 1 ¼ months of the US trade deficit.
Most of these countries are most likely purchasing treasuries in transactions called duration swaps rather than accumulating an increasing position of US securities. A duration swap is a method of managing a fixed-income portfolio in a manner that attempts to neutralize interest rate risk. This is s hunch based on personal experience and has no basis in fact.
Earlier this year, the Asian banks announced the formation of the Bellagio Group, a group that comprises most of the US’s large Asian creditors. The group was publicly called a “study group”, but many analysts believe a desire to diversify Asian central bank assets away from the dollar was the real reason for this group’s formation. Since this announcement, several countries have increased their currency swap arrangements, indicating they may be increasing preparedness in case of a currency crunch. The increasing amount of central bank currency swaps adds further strength to the analyst’s opinion about the real underlying reason for this group.
As this is the second month of decreasing foreign purchases (last month was 40.6 billion total) it is now increasingly likely that foreign banks are growing tired of their role as financiers of the US’ spending habits.
Is there any measure of how boycotts of American goods are impacting the trade deficit? I was surprised that other countries didn’t stop financing our debt immediately after we invaded Iraq, but then I realized that they have to do it slowly so that they don’t damage their own economies. Good strategy though, if they can’t stop us militarily they can cripple us economically.
Is there any historical precedence for the reduction of debt purchases?
My limited knowledge of this area would say that we have not been extended debt wise to this level before. It seems to me that a continued decline in foreign acquisitions could trigger a weakness in our ability to repay debt. Further it seems that an overall weakening of our ability to pay would increase the amount of interest we would have to pay to debt holders. It seems like a continuing downward spiral and the speed of occurence escalates with each downward step.
I read your diaries all the time bonddad and appreciate the info. Sometimes I’m just not sure what to say in a comment.
The main reason I write about economics is to help Dems with this area of knowledge. If you have a question, please ask. I guarantee you someone else would benefit as well.
You are exactly right regarding your statements. If people stop financing our economy, we will have to offer them more interest to entice them to buy US debt.
I’m waiting for your review of the new study of Business Bankrupcy.
Sorry — been swamped under a bunch of other things. Frankly, I don’t know when I will get to it.
As always, you make complicated market effects understandable. Now, how does this impact the value of the dollar? Will the effect be immediate — in the next month or so — or will it take longer?
The dollar dropped .8% versus the Euro and .2% versus the Yen today. However, the dollar has rallied versus both currencies for a bit, so this could also be a technical sell-off
Are my Fannie’s & Freddie’s safe long-term?
I think I hear fiddling from the White House.
What’s the precedent? How does this compare with prior months, cycles? Does it mean less $$ available to finance our economy or (Bush forbid) alt tech or innovative areas?
So at the extreme this means we need to pay more for someone to take our debt. This means increased interest rates. Increased interest rates threaten housing prices. Threatening housing prices means threatening solvency for many Americans. It will certainly end the cheap credit that funds the consumer spending.
At the other extreme it means nothing.
Economics – gotta love it………
redwagon
rolling along
Last month the figure was in a similar range, although I forget the exact number. The first two months of the year the total foreign number was very strong.
There is no precedent for this type of situation.
The crucial question is when the world comes off the dollar standard for oil – because that allows the US to print money.
Some have said that the whole Iraq debacle came about because they (Iraq) were intent on quoting oil in Euros in 2002. Russia and China have both talked about it also.
It is the end for USA if that happens. The whole soft underbelly of the military-industrial complex is exposed if it happens.
The only card Bush & Co have to play is ‘we’re taking the rest of the world down with us, if we go’.
One of the keys will be the Norwegian State Oil Company StatOil decides to start using another currency or, more likely, a basket of currencies.
The downside will be a sharp reduction in economic activity in the US and the rest of the world.
The upside will be greater accessibility to lutkefisk, haukarl, herring in wine sauce, and honey ales. mmm-MMM!
Aptitlig!
(so what if it’s in Swedish?)
Well, we might not have to raise interest rates.
We could always print more money. I hear this quite a bit out of my friends at Deutche Bank. The idea is to let it out slowly and through various subsidiaries in ways that the market wouldn’t panic. You could buy yourself a year or two if you don’t let out more than about $.5bln month. That wouldn’t be hard to hide at all.
Of course, when people figure out we’re dumping dollars out, we’ll have to pay even harder when the time comes. When has that deterred anyone in this administration?
You mean long enough to get them to the next election?