September 2010 U.S. Treasury Statement and August TIC Flows

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Federal outlays of $279.7 billion and receipts of $245.2 billion added another $34.5 billion to the U.S. federal budget deficit in September…
 

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…bumping the cumulative deficit to $1.294 trillion during the entire fiscal year (which ended on September 30). This deficit was the second largest on record for the United States, coming in slightly below last year’s deficit of $1.416 trillion.
 

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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, net foreign inflows fell back to nearly $39 billion in August (from $63.3 billion in August), which helped pull the most recent three-month average rate up to the $33.0 billion mark. While August’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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Almost $30 billion of August’s net 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) skyrocketed (from $47.3 billion in July to $121.8 billion in August) -- below the $130.8 billion peak of March. The three-month average rate jumped to $73.5 billion. Flows into private equities grew more slowly than in July; nonetheless, the three-month average rose almost to $8 billion in August.
 

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The amount of U.S. public debt held by foreigners continued its march upward in July. The United Kingdom “loaded up” the most ($74 billion), followed by China ($21.7 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 more than 64 percent during the past year and now represent over one-third of total foreign holdings of Treasury debt.
 

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What these charts do not indicate, since they are oriented toward inflows of foreign money, is that the Federal Reserve is now the second largest owner of U.S. Treasuries. The Fed overtook Japan earlier in October, leaving China as the only country with greater ownership of U.S. debt. Since the Fed is “printing” money to buy Treasuries, we believe inflation will become much more of an issue as time progresses.