U.S. Capital Flows

March 16, 2009

January capital flows reported by the U.S. Treasury again paint a misleading currency market picture.  Between the end of 2008 and the end of January, the dollar had appreciated 9.0% against the euro and dipped only 0.8% versus the yen.  In contrast, all three net capital flow aggregates produced deficits in the latest month.  The broadest flow, including short- as well as long-term portfolio capital movements and labeled definition #3 below, amounted to a record $148.9 billion with a $158.1 billion private outflow mitigated by a $9.2 billion official capital inflow.  The smaller two aggregated flows comprise only long-term movements.  The narrowest first definition excludes swaps, and the middle definition includes such.  All three definitions imply a weaker balance of payments than in December or last quarter as a whole.  Officials accounted for 45.2% of net foreign purchases of U.S. securities in January, down from an elevated 76.9% last quarter but still above the 25.1% share in 2008 as a whole.  Note in the table below that U.S. buying of foreign securities represents a capital outflow and thus affects the net inflow (shown in the third row) negatively.  The entries in the third row equals the entries in the first row minus those in the second row.

Capital flow data are not a useful forecasting tool.  They are backward-looking and bounce around.  Attempts to understand current market conditions from reported anecdotal evidence of capital flow transactions similarly are fraught with pitfalls.  One cannot command information covering the bulk of trades on a single day.

The U.S. balance of payments, due on Wednesday, is compiled by the Commerce Department, give a more comprehensive snapshot than today’s TIC figures including both the current account and direct investment, but are less timely being a quarterly and delayed release.  The current account holds special significance, nevertheless, because it constitutes a component of aggregate economic demand (i.e. real GDP).  The U.S. goods and services deficit is trending lower and thus requires decreasing net capital inflows to clear the market.  Figures in the table below are expressed in billions of dollars per month.  Traders’ eyes used to glaze over when we economists warned of unsustainable current account trends.  The long-heralded adjustment process is now upon us with a vengeance.

$ billions per month January 4Q08 2008
Fgn Net Buying of U.S. Securities -18.8 -24.7 +34.4
U.S. Net Buying of Fgn Securities +24.2 -27.7 -8.5
Net Inflow, Definition #1 -43.0 +3.0 +42.9
Net Capital Inflow, Definition #2 -60.9 -9.4 +26.5
Net Inflow, Definition #3 -148.9 +140.2 +50.8
Goods & Services Trade Deficit -36.0 -46.8 -56.8

 

Copyright 2009 Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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