Foreign debt purchases fall sharply in January...

[Sam Spade]

This is bad news, worse than you might think (the article misses a couple of important things).  Explanation later (if I can find time)...
http://www.marketwatch.com/news/story/Foreign-debt-sales-raise-doubts/story.aspx?guid={74B72564-4864-4785-92FC-4073ACB0C024}&dist=hplatest

Foreign debt purchases fall sharply in January
Offshore banking centers sell Treasuries; central banks sell agencies

By Laura Mandaro, MarketWatch
March 16, 2009

SAN FRANCISCO (MarketWatch) - A big jump in foreign sales of long-term U.S. securities raised concerns Monday that the U.S., in the midst of a massive debt issuance to fund its economic revival plans, may run into trouble getting other countries to finance its deficit.

Foreign purchases of long-term U.S. Treasuries, Fannie Mae and Freddie Mac bonds, corporate debt and stocks -- netted for acquisitions of foreign debt from U.S. residents -- dropped to negative $43 billion in January from positive $34.7 billion in December, said the Treasury Department Monday.

January's sales marked a record low, said currency strategist Michael Woolfolk, and the reasons for the plunge could spell bad news for the U.S. dollar.

"This was a truly awful report, throwing into question the funding of the U.S. current account deficit," said Woolfolk, senior currency strategist at the Bank of New York Mellon, in emailed comments.

Economists anticipate the U.S. current account gap, or the balance of trade with other countries in goods, services and investments, narrowed to a deficit of about $137.5 billion in the fourth quarter. The Commerce Department releases that report Wednesday.

Concerns that U.S. creditors could balk at buying more U.S. debt were thrown into relief last week after China, the biggest holder of U.S. government debt, said it was worried about the safety of its U.S. bonds.

The U.S. is in the midst of raising more than $2 trillion by selling Treasuries, beating past records by a wide margin, according to estimates by big bond dealers.

Importantly, both China and Japan increased their holdings of U.S. Treasuries, though Chinese purchases slowed from their 12-month average in December and January, said RDQ Economics.

Troubles at now nationalized mortgage finance giants Fannie Mae and Freddie Mac prompted foreign investors to flee this category of government debt in the second half of last year, helping drive up yields relative to Treasuries. In response, the Fed in late November said it would start buying those bonds to bring down yields and related mortgage rates.

The continued selling of agency and U.S. corporate bonds suggests a structural problem within the U.S. balance of payments "that could begin to undermine the USD," Woolfolk said.

On Monday, the U.S. dollar fell against the euro and other trading rivals. Analysts attributed the decline to investors buying more risky assets, such as stocks and the British pound, after Fed Chairman Ben Bernanke said he expected the U.S. recession to end this year.

One euro bought more than $1.30 for the first time since February. The dollar index slid 0.1%.

U.S. Treasuries fell on the same news, with yields on the benchmark 10-year gaining 6 basis points to 2.95%. Yields have edged up since the start of the year, but at levels below 3%, they are still historically quite low.

Tax haven sell-off

More broadly, monthly foreign capital flows that include net foreign purchases of long-term securities, short-term U.S. debt such as Treasury bills and banks' liabilities, fell to negative $148.9 billion. That was also a record low, said Woolfolk, and suggests foreigners fled T-bills and banks deposits after plowing their cash into these safe-haven holdings in October and November.

The Treasury's report on capital inflows rarely moves markets because of its considerable lag: Investors won't get February's report until mid-April. But viewed over the long term, it can yield clues on the debt purchases that have been bolstering the dollar and keeping yields on U.S. Treasuries low.

One trend of note was a large volume of sales in tax havens, including Caribbean banking centers and Luxembourg.

Caribbean holdings of U.S. Treasury securities fell $20.9 billion, while holdings in Luxembourg slid $10.2 billion.

"The sales reek of hedge fund selling and quite possibly from investors who were Madoff-ed," said Tony Crescenzi, chief bond market strategist at Miller Tabak & Co., referring to reports of Luxembourg-based hedge funds said to have lost money by investing with fraudulent New York financier Bernard Madoff.

Or, said analysts at RDQ Economics, the sale of Treasuries by Caribbean-based investors may reflect hedge fund money that had been betting that the Fed would by U.S. Treasuries - as it suggested in December it was considering. It has refrained from buying Treasuries on the open market so far. Read more on Fed's plans to buy U.S. Treasuries.

"Once it appeared that the Fed was backing away from such an action, those positions were taken off," they said.

[The Duke]

Buy gold.

[○∙◄☻¥tπ[╪AV┼cVê└]

January, huh? I wonder if it had to do with this vote failing:

http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=111&session=1&vote=00005

[Beet]

This is certainly concerning data. It tells us that there was substantial capital flight from the United States in January. The standard story goes like this.

Before the crash, the primary drain on the U.S. capital account was U.S. investors taking their money and investing it abroad where there were unique opportunities. This was far more than offset by foreign purchases of U.S. agency (Fannie, Freddie, GSE) debt, stocks, and corporate bonds. The difference was about $600 billion, roughly equivalent of the U.S. current account deficit for 2007.

During the crash (late 2008), all of these trends went into reverse. Foreign demand for U.S. agency debt, stocks, and corporate bonds dried up (except for a rush into U.S. corporates in December), but at the same time U.S. investors unwound their risky positions overseas and brought their money back home. The net result was that the capital account surplus dried up, but there was no substantial net capital flight, at least not to the tune of $43 billion, the levels seen in January.

In January, U.S. investors "bought a bunch of foreign bonds", in the words of Brad Setser, while demand for U.S. agencies, stocks and corporate bonds remained weak. U.S. investors were behaving like it was 2007 while foreign investors were behaving like it was still late 2008, reflecting a net shift in risk toward foreign assets as being relatively more safe. I suspect the reasons for this have to do with the immediate credit crunch beginning to pass and the underlying fundamentals (the crisis originated in the U.S. for the most part) beginning to 'emerge'. But paradoxically it represents as much (or more) improved demand for foreign assets as decreased demand for U.S. assets.

Note that there was no strong change in demand for U.S. long term treasury bonds and notes in the January report. There was a reduced demand for U.S. short term t-bills, but this was offset by an increase in demand for other short-term U.S. assets.

But the largest component by far was banks, which moved money overseas. The ultimate conclusion of all of this seems to be that there should have been downward pressure on the dollar on January, but this did not occur.

[Sbane]

I have noticed the Dollar has held up pretty well in this crisis. That may be about to change, but will the Euro or Pound hold up any better than the dollar? Things won't be so cheap when I go shopping in India next time.....oh well.

[2952-0-0]

Perhaps in a few months retailers and banks up here will refuse to take US coins at face value...

[Sam Spade]

I have noticed the Dollar has held up pretty well in this crisis. That may be about to change, but will the Euro or Pound hold up any better than the dollar? Things won't be so cheap when I go shopping in India next time.....oh well.

Euro and Pound are screwed worse than we are.  Much worse.

The dollar will hold up fairly well, if not sky some more at the next major crisis point simply because 75% of the world's debt is denominated in dollars.  It's advantageous to be the reserve currency, so long as we are the reserve currency...

[Sbane]

I have noticed the Dollar has held up pretty well in this crisis. That may be about to change, but will the Euro or Pound hold up any better than the dollar? Things won't be so cheap when I go shopping in India next time.....oh well.

Euro and Pound are screwed worse than we are.  Much worse.

The dollar will hold up fairly well, if not sky some more at the next major crisis point simply because 75% of the world's debt is denominated in dollars.  It's advantageous to be the reserve currency, so long as we are the reserve currency...

Yeah that is why I was comparing us to the Pound and Euro. Is there any other currency that would be worthy of becoming the world reserve currency? Maybe there will be one after TSHTF.........

[Sam Spade]

I have noticed the Dollar has held up pretty well in this crisis. That may be about to change, but will the Euro or Pound hold up any better than the dollar? Things won't be so cheap when I go shopping in India next time.....oh well.

Euro and Pound are screwed worse than we are.  Much worse.

The dollar will hold up fairly well, if not sky some more at the next major crisis point simply because 75% of the world's debt is denominated in dollars.  It's advantageous to be the reserve currency, so long as we are the reserve currency...

Yeah that is why I was comparing us to the Pound and Euro. Is there any other currency that would be worthy of becoming the world reserve currency? Maybe there will be one after TSHTF.........

I don't see one out there right now. 

The Yen has a lot of crap in Eastern Europe and Japan is still an export-dependent country without an account surplus (not to mention they have so many problems left from the 1990s) - translation ugly.  If the Chinese could shift away from being export-dependent, maybe, but it would probably still be 20-30 years away (because of the fact that so much of their country is still in deep poverty).

I still believe we may have one more flight to quality in terms of US Treasuries, namely when Euro/GB/Japanese debt is viewed as crap (and therefore we're viewed as *less* crap).  That is, unless, them going down takes us down also, which is possible.

Whatever - time for a little doomsdaying.  Regardless of the end game I'm talking about above, we're probably in the middle (it still maybe the beginning, who knows) of the last great bubble of this cycle - the *government finance* bubble.  The person who picks out what will arise as a result of when this one goes *boom* (because it will go boom, and it will be uglier than any other, and it will destroy any further attempts to keep the other bubbles going) could well be the next *king*.  Enjoy...

[2952-0-0]

So would it be a good idea to buy a lot of US Government CDS at this stage, even though the underwriters would be broke long before they have to pay them out?

[Sam Spade]

So would it be a good idea to buy a lot of US Government CDS at this stage, even though the underwriters would be broke long before they have to pay them out?

Something like that.  I really don't understand the rationale behind buying CDS on US debt anyways.  If the US government ever defaults, somehow I don't see you getting paid out.  But what do I know...

[opebo]

Haha, no danger of the dollar losing its position.  All those factors are strengthened by the 'crisis'.  Debt issuance isn't really a problem as the money can just be printed - in other words if the treasury would like to issue 2 trillion in t-bills ad only 1.5 trillion get 'sold', the fed just prints the other 500 billion.  The net effect will either be a stimulus (if inflation does not occur, which is likely), or a 'taking' of the 'money' which was withheld in the orginal sale (if inflation occurs, which is unlikely).

Remember debt, currency, and all economic action is only relative - a socially created phenomenon.  No one is independent of the dollar, the Fed, or the 'global economy'.  Thus there is no way out.  We are all ruled in precise detail by the State, which in global capitalism really means the Fed.

[Gustaf]

Haha, no danger of the dollar losing its position.  All those factors are strengthened by the 'crisis'.  Debt issuance isn't really a problem as the money can just be printed - in other words if the treasury would like to issue 2 trillion in t-bills ad only 1.5 trillion get 'sold', the fed just prints the other 500 billion.  The net effect will either be a stimulus (if inflation does not occur, which is likely), or a 'taking' of the 'money' which was withheld in the orginal sale (if inflation occurs, which is unlikely).

Remember debt, currency, and all economic action is only relative - a socially created phenomenon.  No one is independent of the dollar, the Fed, or the 'global economy'.  Thus there is no way out.  We are all ruled in precise detail by the State, which in global capitalism really means the Fed.

Are you aware that you know nothing of economics or is that another area where you have deluded yourself into thinking that you are thinking?

[opebo]

Are you aware that you know nothing of economics or is that another area where you have deluded yourself into thinking that you are thinking?

You have not bothered to refute anything I have said, so I will have to assume that I continue to be, as usual, correct.

[Gustaf]

Are you aware that you know nothing of economics or is that another area where you have deluded yourself into thinking that you are thinking?

You have not bothered to refute anything I have said, so I will have to assume that I continue to be, as usual, correct.

Why would I bother with that when we both know that you are incapable of rational discourse? You simply resort to insults and sticking your head in the sand when you are proven wrong. I am not really interested in bringing that about. If you want to delude yourself in yet another field, that's up to you, I was merely interested in whether you were aware of it or not.

[opebo]

Why would I bother with that when we both know that you are incapable of rational discourse? You simply resort to insults and sticking your head in the sand when you are proven wrong. I am not really interested in bringing that about. If you want to delude yourself in yet another field, that's up to you, I was merely interested in whether you were aware of it or not.

You poor Scandinavian marshmallow, the Fed just did precisely as I recommend.  Lacking, as we do, any form of refutation of my asertions we can assume that I am correct, and, as a side issue, you don't like me.  I'll have to struggle on anyway..

[© tweed]

what happens if the US Govt runs a deficit but nobody buys all of the debt?

or does this question maybe not make any sense?  (like asking, what existed prior to the Big Bang?)

[Sam Spade]

what happens if the US Govt runs a deficit but nobody buys all of the debt?

or does this question maybe not make any sense?  (like asking, what existed prior to the Big Bang?)

If debt is not being bought, the US has to either buy back its own debt (kinda of like what I talked about today), withdraw the offering OR (most likely) raise the yield (i.e. interest rate) to entice buyers to buy.

Note that any rise in interest rates affects not just current debt, but it also affects the interest on the debt already out there.  Interest rate gets too high - deficit must go away (and you can't cut the interest on the previous debt).  Imagine what happens at that point.

[Swing low, sweet chariot. Comin' for to carry me home.]

of course foreign debt purchases are falling off, our trade gap has narrowed dramatically.  that is what was financing the debt purchases

[jokerman]

Come on world, just finance this recovery, and we'll end our irresponsible ways.

[opebo]

Come on world, just finance this recovery, and we'll end our irresponsible ways.

No, actually they are the irresponsible ones - saving too much, engaging in inadequate consumption.