Saturday, April 16, 2005

The Latest US Treasury/Fed TIC Report

Once again the Caribbean Banking Centers category had the biggest monthly increase in US debt. France had a smaller increase. Other than those two, basically, nobody was increasing their holdings of US debt. Mostly smart moves, but when is a country going to panic and actually start selling US debt? We'll probably have to wait a while for that to happen.

Here are the just released February numbers which are compared to January's numbers:


Anonymous said...

Patrick Chkoreff wrote on dgc-chat a list hosted by :
> On Apr 16, 2005, at 3:14 PM, bob wrote:
>>> 2005 2005
>>> COUNTRY Feb Jan
>>> Japan 702.0 701.0
>>> Mainland China 196.5 195.2
>>> ...
>>> Holy smokes! It's not even close is it? Japan's holdings utterly
>>> swamp China's.
>> Yes. Japan has been refered to by some as the US's 51st state because
>> of how good a job they've been doing keeping US interest rates low,
>> keeping the price of US obligations bid up.
> Huh. OK Bob, so let me see if I have this straight.
> The Japanese spend mountains of US dollars to buy mountains of US
> T-bills. Fact.
> OK, so where did the Japanese get all those dollars?
> Well ... I guess Americans previously spent mountains of dollars buying
> mountains of Japanese goods. I guess Americans sent a WHOLE LOT more
> dollars to the Japanese than the Japanese sent to the Americans. So I
> guess the US should have a huge trade deficit there.
> Does that sound right?

I'm no expert but it sounds right to me.

> OK, so where did the Americans get all those dollars? You know, the
> ones they sent to Japan to get Hondas and Sonys and stuff.
> Well ... I suppose the Fed and member banks issued those mountains of
> dollars in response to new borrowing.

Right. No new borrowing, no new dollars.

Banks create brand new dollar
> deposits when they lend money. The Fed issues brand new dollars when
> they lend money to the US government (i.e. by buying the government's
> T-bills).
> Is that pretty much how it works?

I'd say so.

> So in short, it's all this BORROWING, either from individuals,
> businesses, or the government, that is causing mountains of new dollars
> to be created.
> Am I getting warm? (I don't know, I'm trying to put together a clear
> picture here.)

You're hot.

> But gosh, it seems like with all these Americans borrowing so much,
> creating these mountains of dollars, that interest rates would rise
> through the roof. I would think by now the US government would have to
> be paying, oh I dunno, like 15 - 20% per year to borrow money.

:) One would think that, yes.

> But wait!!! Not to worry! T-bill prices are holding up just fine!
> Why? Because the JAPANESE are buying them!
> Well, isn't that just SPECIAL?!

Shades of the Church Lady.

> So the Japanese just keep producing all this great stuff like Sonys and
> Hondas, taking in mountains of dollars. They can turn around and spend
> SOME of those dollars buying great American products, primarily in the
> information sector I imagine, but frankly, they just don't NEED that
> much from Americans.

To a significant extent what you say is true. But, they are not a
natural resource country so they have to spend a lot to those
in the world who have resources. Their biggest resource was/is their
people. A resource poor economy became, I think, the second largest
economy in the world from after WWII (1945) to about 1990. Say
in 45 years.

So they've got this huge mountain of excess
> dollars just sitting there doing nothing.

Well, lets say that that was more true back in the late '80s.
Back when they thought Rockefeller Center and Pebble Beach
were a good deal while the Americans thought they made a killing.
Their markets and economy topped out about 1990.

> So naturally they've got to INVEST it. So they buy MORE and MORE
> American government debt. And that helps prop up the price of ... the
> T-bills they've been buying all these years! Yay, let's just keep
> throwing more money at T-bills because otherwise ... our T-bills will
> crash!

By 1990 Japan had a lot of savings and little debt, roughly speaking,
so the government thought it could afford to take on debt to "stimulate"
their economy, plus forcing rates down and keeping them there. It
doesn't seem to have accomplished much over 15 years, considering how
much debt the government has taken on (mucho), but they've been getting

The other thing their government has been doing is creating Yen
(think creating debt) to sell, tending to artificially keep the Yen
down, to try to benefit Japanese exporters, getting dollars to buy
US debt in an especially big way which props up the dollar, prices
of US debt and therefor tending to keep rates in the US low. Japan's
relationship with the US has been "special". For more on that read
Gold Warriors.

> And if THAT happens, then we Japanese will find that we've been
> producing Hondas and Sonys for decades and now have NOTHING to show for
> it! So we MUST by all means throw more good money after bad!

They've certainly been throwing good after bad for some time now.
The price is increased debt and rising prices in Japan now or later
or both now and later.

> At some point a bunch of Japanese might suddenly realize that along that
> path lay madness and ruin.

The TIC numbers suggest that is starting to happen now.

> So they'll dump

Ouch. Ouch. Ouch. It's going to hurt if they just stop buying new stuff
let alone dumping. The US has to borrow from the rest of the world
currently at an annual rate of about a trillion bucks a year.

their T-bills and maybe buy
> gold.

I can see central banks a few years from now actually buying gold.

Can't buy American real estate ya know, because it's too
> expensive thanks to low US interest rates.
> But then ... uh oh! T-bill prices start to drop! US interest rates
> start to rise! More nervous Japanese bolt for the exits. Interest
> rates rise more. US real estate prices begin to deflate.
> Finally the Japanese exit the T-bill market in a full-fledged panic.
> Gold soars. US real estate plummets. The US government now has to
> borrow at enormous interest rates. They panic. They start printing
> money, raising taxes, and bringing on all sorts of fresh hell.

Yup, something like that.

> Then, all the savvy Japanese who bailed out of T-bills early and
> secretly bought tons of gold now enter the US real estate market, and
> start buying up everything in sight at dimes on the dollar.

If they're smart they will buy when there is blood in the streets,
but not when it starts flowing for it can flow for years/decades,
but when it is about to stop flowing.

> But I could be wrong.

If so, not by much.


Anonymous said...

Mr. Sinclair has mentioned to look at the TIC data to see if it is declining below the trade deficit figures... How does one go about calculating this ?

Bob said...

The TIC report is in monthly numbers. The Trade and Current account numbers are in monthly numbers. Both are in deficit. The Trade deficit is most of the Current account deficit. So, if the monthly TIC numbers are increasing along with the monthly Trade deficit numbers, the rest of the world is financing the US economy's increasing debt. If the TIC numbers are leveling off and the Trade deficit continues up, the US Treasury is probably giving IOUs to the Fed who in turn is creating USD out of thin air by typing on keys on a computer key pad, and then sending those new USD back over to the US Treasury. The more there is of something, the less valuable it becomes. If the TIC numbers decline relative to the Trade deficit numbers for, say, 3 months in a row, that would probably be a sign for the FX markets to seriously start selling US dollars.