Wednesday, May 7, 2008

Sovereign Dependency

The Euro is down and the dollar is up... at least a little bit. So too, the US trade deficit is up. The good news, and the bad news... is that the governments of the world have come riding to the aid of the dollar. If this sounds familiar, that's because it is. But the magnitude of the purchases has grown.

With private investors shy of sending money to the US, the whole of the trade deficit is currently being financed by soveriegn purchases of US securities. Brad Setser lays out the math in his blog.

The US likely needs to attract a net capital inflow of roughly $65b a month to finance its current account deficit.

The increase in the Fed’s custodial holdings for foreign central banks between March 5 and April 2: $69.8b ($29.2 Treasuries, $40.6b Agencies)

The increase in the Fed’s custodial holdings from April 2 to April 30: $66.8b ($40.7b Treasuries, $26.1b Agencies)

Over the last week of April alone, central banks added $27.4b to their US custodial holdings, including $18.7b of Treasuries.

Pick how you want to do the math. $68.3b in average monthly purchases works out to around $820b a year. $17.1b in average weekly purchases (over the last 8 weeks) works out to more like $890b annually. Either way, it is more than enough to finance the (expected) US current account deficit if US investors don’t add to their foreign portfolios and existing foreign investors don’t abandon the US.

1 comment:

Pete Murphy said...

Jesse, I'd be interested in knowing what percentage of America's net worth has been sold off to finance the trade deficit. Do you have a rough idea? I've heard figures ranging from $50 trillion to more than $100 trillion. What happens when that percentage of foreign ownership becomes a significant percentage. Won't American assets become ever more worthless? My fear is what happens when the foreign holders of American assets find that these assets are unmarketable and worthless?

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Pete Murphy
Author, Five Short Blasts