July 2010 U.S. Treasury Statement and June TIC Flows: Status Quo -- For Now

Click image for larger version

Federal outlays of $320.6 billion and receipts of $155.5 billion added another $165.0 billion to the U.S. federal budget deficit in July…

Click image for larger version

…bumping the cumulative deficit to just under $1.2 trillion during the first ten months of this fiscal year (which ends on September 30). If the revenue shortfall during the final two months is equivalent to last year, the deficit will total $1.32 trillion -- $280 billion better than the $1.6 trillion assumed in the White House budget.

Click image for larger version

The shortfall between receipts and outlays has to be made up from somewhere, and borrowing from overseas is one of the main ways of accomplishing that. According to the Treasury International Capital (TIC) accounting system, foreign inflows went negative in June (i.e., more money flowed out of the United States than in), which helped pull the most recent three-month average rate down to $19.5 billion per month. That is far below the $70 billion per month typical of the period between January 2002 and August 2007 (the date of the first financial scare).

Click image for larger version

Flows into short-term securities (e.g., Treasury bills) expanded and contracted during the past three months as the markets alternated between desires for safe-haven and riskier investments; on average, monthly flows were negative.

Click image for larger version

Despite rumblings of impending U.S. debt problems, net inflows into long-term public debt (e.g., Treasury bonds) were still safely in positive territory ($51.5 billion) in June -- although well below the $130.8 billion peak of March. Flows into private equities, on the other hand, have been negative during two of the past three months (the first back-to-back outflows since February 2009), causing the three-month average to “head south” in June. One question that occurs to us: Is this a case of public sector debt “crowding out” the private sector?

Click image for larger version

The amount of U.S. public debt held by foreigners broke the $4 trillion dollar mark for the first time in June. China is still the single largest holder, but its net sales of $24 billion (China's largest sale ever) in June put Japan within striking distance of retaking the top spot. China has instead been “loading up” on Japanese government and European bonds. "Diversification should be a basic principle," said Yu Yongding, former adviser to the People's Bank of China, who added that a "top-level Chinese central banker" told him to convey to European policy makers China's confidence in the region's economy and currency. "We didn't sell any European bonds or assets, instead we bought quite a lot."

Sales by OPEC countries were also significant ($12 billion). Japan and the United Kingdom were net buyers ($16.9 and $12.2 billion, respectively) while the “other” countries picked up $55.9 billion.

Click image for larger version

Central banks hold the “lion’s share” of Treasury securities, although the private sector has become a much bigger player during the past several months. T-bills are gradually becoming less attractive to central banks (not surprising given the almost-nonexistent interest being paid on those instruments).

Why should the forest products industry care about this topic? Because borrowing costs (interest rates) will remain relatively low and prices relatively stable as long as the United States can continue attracting foreign investment. If foreigners find more lucrative markets elsewhere (either because of interest rate differentials or because of a sudden loss of faith in the U.S.’s fiscal outlook) the United States will be forced to either pay higher interest rates to attract capital or risk price inflation by “printing” more money (most likely, both).