Net Drain on US Foreign Reserves

posted by Nima

March 21, 2009 · Posted in Global Economics 

Asia Times’ Julian Delasantellis article US Fed’s move is the bigger problem would be a brilliant piece if he didn’t continuously make the assumption that what caused the US financial crisis was an outgrowth of a lack of government rules and decrees (Please see Credit Expansion Policy and The Business Cycle). That gaffe taken aside, he makes a lot of good observations. In particular:

The first article I ever wrote for Asia Times Online, (US living on borrowed time – and money” March 28, 2006), introduced readers to the US Treasury’s monthly Treasury International Capital (TIC) report, a compendium of how much investment
or short-term capital the US receives from foreign sources every month. Back then, the US was quite the popular parking spot for foreign capital, frequently drawing in over $100 billion a month.

That worm has certainly turned; the US in January, the last month data is available, was actually net drained of foreign capital, to the tune of $150 billion. On his blog at the Council of Foreign Relations, economist Brad Setser interpreted the data this way.

Today’s TIC January data was a disaster. $150 billion in (net) capital outflows (negative $148.9 billion to be precise) cannot sustain even a $40 billion trade deficit.

Obviously, the concern is that those with still the capital to lend to the US, primarily China, seeing the huge increase in US government demand for borrowed funds with its now huge and ever-burgeoning budget deficits being used to finance the economic crisis recovery programs, will fear that the US dollars they use to buy US debt will depreciate in value, devastating the value of their investments.

Previously, China has tried to give messages that slowly pulling out of its dollar positions was exactly what it wanted to do, but America’s cherished habit of ignoring anything that foreigners say to it had it lending a stone-deaf ear to the warnings.

One can only hope that China will act in accordance with its rhetoric. A Chinese withdrawal from additional purchases of US Treasury securites will make the American people wake up to reality and understand the consequences of their government’s policy of inflation. When exactly this will happen is hard to determine. The current deflation may continue to go on for a very long time, in spite of all the Fed’s desperate attempts to reflate.

More on China-US relations in the US Current Account Deficit and in US on the Hook for Chinese Investments.

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3 Responses to “Net Drain on US Foreign Reserves”

  1. LauraB on March 22nd, 2009 2:11 pm

    I don’t look forward to seeing Americans or anyone else around the world suffer from the inflationary policies being pursued by their governments against their wills and despite their increasingly vocal objections.

    OT — Good call on the increasing talk in the media of Special Drawing Rights (SDRs) before the push for a global currency.

    Here are two articles from last week that mentioned SDRs:

    1. U.N. panel says world should ditch dollar
    http://www.reuters.com/article/newsOne/idUSTRE52H2CY20090318?pageNumber=2&virtualBrandChannel=10452&sp=true

    According to this article, the U.N. Commission of Experts on International Financial Reform will recommend to the U.N. on March 25, 2009 that “the world ditch the dollar in favor of a shared basket of currencies.” Under the heading “Good Time”, U.N. panel member Avinash Persaud talks about using something like an expanded SDR as the reserve currency.

    This is the link to the accompanying video of the interview with U.N. panel member Avinash Persaud, who is also chairman of consultants Intelligence Capital and a former currency chief at JPMorgan:
    http://www.reuters.com/news/video?videoId=100494&newsChannel=wtMostRead

    2. China backs talks on dollar as reserve -Russian source
    http://www.reuters.com/article/usDollarRpt/idUSLJ93633020090319

    According to the article, ” The source said the Chinese paper envisaged the International Monetary Fund’s Special Drawing Rights (SDRs) being first assigned a role of a clearing currency on some transactions and then gradually becoming the main global reserve currency.” The article also mentions that the U.N. panel is looking at using expanded SDRs as a new reserve currency.

    The article says that Russia plans on raising the issue at the G-20 meeting on April 2, 2009. According to the article, “The source said that India did not object to the discussion but was not prepared to take the lead. The source said South Korea and South Africa backed the idea, while developed nations were not “allergic” to it.” The Russian Finance Minister told reporters that he thought “it would take up to 30 years to create a new super-currency.”

  2. Nima on March 22nd, 2009 10:26 pm

    Interesting. Thanks for the links. I will post a specific blog on this.

  3. LauraB on March 23rd, 2009 5:35 pm

    It looks like China is going to continue to buy our debt, at least for now:

    Official says China to Continue Buying U.S. Debt http://business.smh.com.au/business/world-business/official-says-china-to-continue-buying-us-debt-20090324-97qw.html

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