[Euric]

http://biz.yahoo.com/rb/060918/economy.html?.v=2

Interesting article in that it shows the US deficits are not being funded. They are getting only about 50 % of the needed monthly inflow.

How long will it be before the US has to raise interest rates to exceedingly high levels to compensate?

Best thing to do is for the US to start holding euros in reserve, if they haven't started already.

Reuters
Current account gap up, capital inflows fall
Monday 2006-09-18 11:59 ET
By Doug Palmer


WASHINGTON (Reuters) - Surging oil costs helped widen the U.S. current account deficit more than expected in the second quarter and capital flows into the United States in July ebbed, government reports showed on Monday.


The $218.4 billion quarterly current account shortfall was larger than Wall Street forecasts for a deficit of $214 billion, a Commerce Department report showed. The government raised its estimate of the first-quarter current account deficit to $213.2 billion from a previously reported $208.7 billion.

Both reports measure what world financial leaders call 'trade imbalances,' which include the large U.S. trade deficit and capital flows from countries with large trade surpluses to the United States. These officials have warned that a sudden shift in capital flows could endanger the world economy.

The current account, the broadest measure of U.S. trade with the rest of the world, includes both trade in goods and investment flows. The deficit totaled 6.6 percent of gross domestic output, the same as in the first quarter.

A separate Treasury Department report showed net flows of capital to the United States fell to a much smaller-than-expected $32.9 billion in July, less than half of the U.S. trade deficit in that month.

U.S. government bond prices extended losses after the data showed a sharp decline of net inflows into Treasuries. The benchmark 10-year Treasury note's price traded down 9/32 in price for a yield of 4.83 percent. (US10YT=RR).

The dollar briefly fell to session lows against the euro but then retraced most of the losses as dealers quickly turned their focus more on upcoming inflation data on Tuesday and a meeting of the Federal Reserve on Wednesday.

Stocks were little changed as a downgrade of Home Depot Inc. (NYSE:HD - News) offset optimism that Fed policy-makers will continue to hold interest rates steady.

Analysts were expecting net capital inflows into the United States of $70 billion.

CHANGING CONDITIONS

Market conditions have changed significantly since the data for both reports were collected. Oil prices were rising the second quarter and hit a record $78.40 a barrel in July, but have since fallen to about $63 a barrel in New York trading. The Dow Jones industrial average was below 10,700 in mid-July, and has since risen above 11,500.

Alan Ruskin, chief international strategist at RBS Greenwich Capital, said the most interesting feature of the current account report might have been the record $4.1 billion deficit on investment income flows in the second quarter.

"This is going to highlight ... that the U.S. is a net debtor and as such is paying out more income than it is receiving. That has been anticipated for a long time and it is finally coming home to roost," Ruskin said.

The Commerce Department revised its first-quarter estimate of the investment income balance to a deficit of $2.5 billion, from a previously reported surplus of $1.9 billion.

The goods deficit increased to $210.6 billion in the second quarter from $208.0 billion in the first.

Foreign demand for industrial supplies and materials and capital goods pushed U.S. exports to $252.8 billion in the second quarter, from $244.5 billion in the first.

That was overshadowed by the effect of higher oil prices, which boosted imports to $463.4 billion in the second quarter, from $452.5 billion in the first, the Commerce Department said.

The huge current account gap has put downward pressure on the dollar in recent years. The greenback depreciated 3 percent on a trade-weighted average basis against a Group of Seven major currencies in the second quarter, the report said.

In July, private net buying of U.S. assets fell to $31.8 billion, the lowest since May 2005, in what analysts took to be a danger sign for appetite for U.S. assets.

"This is a very disturbing number and clearly we were unable to finance our deficit for the month of July," said Michael Woolfolk, a senior currency strategist at the Bank of New York.

(Additional reporting by Mark Felsenthal)

[Tyler_JC]

All of this and US treasury yields are still off their highs of a few weeks ago.

What gives?

If inflows are falling and the savings rate is essentially 0, why are treasury prices being pushed up?

[Euric]

$this->bbcode_second_pass_quote('Tyler_JC', 'A')ll of this and US treasury yields are still off their highs of a few weeks ago.

What gives?

If inflows are falling and the savings rate is essentially 0, why are treasury prices being pushed up?

[Tyler_JC]

The treasury yields I'm talking about are the 2-year, 5-year, 10-year, and 30-year bonds.

Major yield decline, meaning, major price increase.

Who is bidding up the price of US debt?

[rwwff]

They're betting a depression will do the same as it did in the early 1930's. Solid deflation would make these bonds totally golden. Thats a big if though.

If one were to pick up some gold, and pick up some tbills, you'd be set to thread the needle. Maybe your net yield wouldn't be great if the economy just keeps on keepin on at 3%; but your capital would be preserved; and at either extreme, the gain you make on one could keep you from going under during the rocky parts.

[Euric]

$this->bbcode_second_pass_quote('Tyler_JC', 'T')he treasury yields I'm talking about are the 2-year, 5-year, 10-year, and 30-year bonds.



Major yield decline, meaning, major price increase.

Who is bidding up the price of US debt?

[NTBKtrader]

It sounds like the golden question is when does panic set in? Capital inflows are half of what they were, thats a pretty smart drop, and far from what they need to be. If that isn't a blip and continues the snap couldn't be far off I would think.

The only solution likely in the fed's arsenal that I can think of is rapidly raising rates and monetizing the debt as much as possible. Both would be disastrous for the economy.

Other possibilities are rapidly rising exports or declining imports, especially oil prices, very unlikely.

The only modern parrallel I can think of is Argentina

What would the revaluation of China's yuan have on the current accoun and how much effect would there be? Less imports from China and possibly more US exports to China.


... I'm actually intellectually afraid to use my brain and follow the logical steps especially when my brain is already fried from work. lol

[NTBKtrader]

According to news reports China's trade surplus reached $95.7 billion through the first eight months of the year with the US. Which means it will be about $140 billion by the end of the year. The deficit in trade, which accounted for most of the total current-account imbalance, widened to $193.8 billion in the 2nd quarter.

It appears to me if we force China to revalue it's yuan/unpeg it's currency then our current account balance would have a large possibility of being greatly improved.

[Euric]

$this->bbcode_second_pass_quote('NTBKtrader', 'I')t sounds like the golden question is when does panic set in? Capital inflows are half of what they were, thats a pretty smart drop, and far from what they need to be. If that isn't a blip and continues the snap couldn't be far off I would think.

[Euric]

$this->bbcode_second_pass_quote('rwwff', 'T')hey're betting a depression will do the same as it did in the early 1930's. Solid deflation would make these bonds totally golden. Thats a big if though.

If one were to pick up some gold, and pick up some tbills, you'd be set to thread the needle. Maybe your net yield wouldn't be great if the economy just keeps on keepin on at 3%; but your capital would be preserved; and at either extreme, the gain you make on one could keep you from going under during the rocky parts.

[emersonbiggins]

Hyperinflation would have the appreciable side affect of continuing to prop up the real estate racket a little while longer, as long as no one is really paying attention...

[MrBill]

$this->bbcode_second_pass_quote('Tyler_JC', 'T')he treasury yields I'm talking about are the 2-year, 5-year, 10-year, and 30-year bonds.

Major yield decline, meaning, major price increase.

Who is bidding up the price of US debt?

[DantesPeak]

I agree pretty much with Mr. Bill, except to qualify that I don't think central banks like China have an unlimited ability to fix the dollar's exchange value within a narrow range. This is not because lack of trying, but the sheer magnitude of the current account deficit - which keeps growing and growing.

The relatively stable US dollar implies that we have not quite yet reached the absolute limit of current deficit financing by foreigners, but that limit might only be slightly higher than what they are financing now.

The trend is ominous - now the current account is grwoing just due to interest payments on prior US debt to foreigners. This is a good reason why the Fed will be very slow about cutting rates in the future.



$this->bbcode_second_pass_quote('', 'U').S. Foreign Debt
Shows Its Teeth
As Rates Climb

Net Payments Remain Small
But Pose Long-Term Threat
To Nation's Living Standards
By MARK WHITEHOUSE
September 25, 2006; Page A1

Over the past several years, Americans and their government enjoyed one of the best deals in international finance: They borrowed trillions of dollars from abroad to buy flat-panel TVs, build homes and fight wars, but as those borrowings mounted, the nation's payments on its net foreign debt barely budged.

Now, however, the easy money is coming to an end. As interest rates rise, America's debt payments are starting to climb -- so much so that for the first time in at least 90 years, the U.S. is paying noticeably more to its foreign creditors than it receives from its investments abroad. The gap reached $2.5 billion in the second quarter of 2006. In effect, the U.S. made a quarterly debt payment of about $22 for each American household, a turnaround from the $31 in net investment income per household it received a year earlier.

If the trend persists, it could also raise concerns about the nation's creditworthiness, putting pressure on the U.S. currency. "It's an additional challenge for the dollar," says Jim O'Neill, chief economist at Goldman Sachs in London. "Economists have been warning about this for so long that people have gotten bored, but now we're starting to see the deterioration."

Since the end of 2001, when the current economic expansion began, the nation's consumption, investment and other outlays have exceeded income by a cumulative $2.9 trillion -- the largest gap on record. That current-account deficit contributes directly to the nation's total foreign debt, the value of all the U.S. stocks, bonds, real estate, businesses and other assets owned by non-U.S. residents. As of the end of 2005, total U.S. foreign debt stood at $13.6 trillion -- or about $119,000 per household. Net foreign debt, which excluded the $11.1 trillion value of U.S.-owned foreign assets, was $2.5 trillion.

[Bewildebeest]

I've heard many people recommend T-bills as a good safe haven, in addition to gold. Why not choose foreign currency instead, to protect against a collapsing dollar? Which should be safer in the next 2-3 years, T-bills or foreign currency (via ETF or bank CD)?

[MrBill]

DankesPeak
$this->bbcode_second_pass_quote('', 'I') agree pretty much with Mr. Bill, except to qualify that I don't think central banks like China have an unlimited ability to fix the dollar's exchange value within a narrow range. This is not because lack of trying, but the sheer magnitude of the current account deficit - which keeps growing and growing.