A few months back I argued, The old trading mantra; "Don't Fight the Fed" may soon be replaced by; "Don't Fight the SWFs." During the same month I (in hindsight, quite foolishly) predicted The last hurrah for the "strong dollar" policy. Had I placed more emphasis on the former and less on the latter I could have scalped a few $100s on Gold.
While the Fed and Treasury didn't have the firepower to strengthen the US$, foreign interests did, and it was used. The SWFs (shorthand for foreign interests both public and private) are having more of an effect on the US economy than the Fed and Treasury.
As Brad Setser recently noted: Total Treasury purchases over the last 3 months totaled $214 billion. That’s huge.
Combining that inflow with $92 billion in net sales of foreign assets by American investors implies that the “flight to Treasuries” and “deleveraging” combined to provide about $300 billion in net financing to the US. That, in broad terms, allowed the US to run a roughly $175-200b current account deficit and cover a huge outflow from the Agency market.
China is particularly interesting case. SAFE clearly has added to the instability in the credit market over the past few months — and equally clearly contributed to low Treasury yields. That isn’t a criticism — it is just a statement of fact.
At the end of July, China stopped buying Agencies and corporate bonds and started to pile into Treasuries. Over the last three months of data (i.e. the third quarter), the US data indicates that China has bought $81.1 billion in Treasuries ($45 billion short-term) and added $17.4 billion to its bank accounts — that is a flow of nearly $100 billion into the safest US assets China can find. Conversely, China sold $16 billion of Agencies, $1.8 billion of corporate bonds and a bit less than a billion of equity.
In brief, the SWFs (mainly China) supported the US$ through massive purchases of (mainly short term) Treasuries. The corporate and mortgage sectors, however, experienced a capital drain. SWF policy (if one can infer such from the data) is to keep the US public sector afloat while starving the real sector. Right-wing talk radio fears of Obama "socializing" the US are misdirected. It is the SWFs that are driving that change.
Not only are the SWFs socializing the US, they are (with complicity of the Treasury through their choice of short term financing) hanging a Sword of Damocles over the US government's head. The graph below depicts externally held short term (under 1 year) Treasury debt with interest. As of Sept. 2008, I estimate (using Treasury external debt data and recent TIC data) that total as $940B or 6.5% of GDP. I wonder how many strings will attach to our need to roll that over.
While we were electing a new President real control over economic policy, in a sense, has been outsourced.
Thus my call for "nationalizing" the US financial sector. I don't mean the government should buy it (although if that is the only way forward, so be it). I mean we need to regain control over US financial flows. As I've been arguing, a strong US$ that serves as global reserve currency is, in my view, no longer in US interests.
Years ago Warren Buffett warned of the US becoming a "sharecropper society." It seems as if we are rapidly moving in that direction.
Ironically, if current trends continue for long America may become an Empire, but we won't be calling the shots. Niall Ferguson coined the term Chimerica. Viewing that future through a historical lens, the Rome in Washington DC may be led by the Constantinople in Beijing.
To be on the safe side, I've been sending my son to Chinese School for 3 years.
你 好
0 comments:
Post a Comment