August 2010 U.S. Treasury Statement and July TIC Flows: Short-term Debt Popular Again

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Federal outlays of $254.5 billion and receipts of $164.0 billion added another $90.5 billion to the U.S. federal budget deficit in August…

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…bumping the cumulative deficit to just under $1.3 trillion during the first 11 months of this fiscal year (which ends on September 30).

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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 jumped by nearly $64 billion in July (i.e., more money flowed into the United States than out), which helped pull the most recent three-month average rate up to $25.2 billion per month. While July’s increase is encouraging, the three-month average 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).

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Nearly two-thirds of inflows went into short-term securities (e.g., Treasury bills).

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Net inflows into long-term public debt (e.g., Treasury bonds) were still safely in positive territory ($47.3 billion) in July -- although well below the $130.8 billion peak of March. Flows into private equities, on the other hand, for the first time in three months, causing the three-month average to flatten in July.

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The amount of U.S. public debt held by foreigners continued its march upward in July. Japan and the United Kingdom “loaded up” the most ($17.4 and $12.1 billion, respectively), while China ($3.0 billion) was beaten out by Brazil ($3.8 billion). Only the Caribbean Banks were net sellers (-$14.5 billion).

Central banks hold the “lion’s share” of Treasury securities, although the private sector has become much more active during the past several months. Private holdings have increased by 59 percent during the past year and now represent nearly one-third of total foreign holdings of Treasury debt.

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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 attractive 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).