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

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U.S. fiscal year 2011 started out with federal outlays of $286.4 billion and receipts of $146.0 billion in October, resulting in a $140.4 billion federal budget deficit.
 

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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 jumped to nearly $81.7 billion in September (from $11.2 billion in August), which helped pull the most recent three-month average rate up to the $57.6 billion mark. While September’s increase is encouraging, the three-month average is still 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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In September foreigners sold $24.9 billion more of short-term securities (e.g., Treasury bills) than they bought, dropping the three-month average net inflows for that category to just shy of $6.0 billion.
 

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At the same time, however, they purchased more ($91.4 billion) long-term debt. Net inflows into long-term public debt (e.g., Treasury bonds) rose by another $70.1 billion in September (down from $121.8 billion in August), bringing the three-month average rate to $79.7 billion. Flows into private equities grew by $21.3 billion in September, bringing the three-month average to $20.9 billion.
 

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The amount of U.S. public debt held by foreigners continued its march upward in September. Japan purchased the most ($28.4 billion), followed by China ($15.1 billion); the Caribbean banking centers shed $15 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 68 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 “monetizing” that debt (i.e., “printing” money to buy Treasuries), we believe inflation could become much more of an issue as time progresses.