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.