Prague Twin

Wednesday, October 17, 2007


One of the more important bits of economic data that gets little media attention is the Treasury International Capital System or TICS data. There is a lot of data in the official report, but the most important bit is the "net foreign purchases of long term securities".

But what does that mean? Very simply, that is the amount of U.S. bonds and equities purchased world-wide minus what was bought by Americans. This is important because of the current-account deficit (or trade deficit) which is running at close to $60 billion per month. To fund that deficit, the U.S. must get the same amount per month back in by selling bonds and equities to foreigners. If not, the currency (the dollar) will have to adjust to make up the difference. This is why currency traders watch this monthly release very closely.

So last month, I was slightly concerned that the TICS data came in at under $20 billion. One month's data isn't anything to worry about, but since last year the amount per month has been only marginally meeting the target. So I thought, "well, wait until next month and see if it corrects itself."

I thought it was a misprint when I saw that August's data (released yesterday) was negative $69.3 billion! In my limited experience, I've never seen a negative number here. So what are the implications? Well, this will put more downward pressure on the dollar, which in turn makes dollar denominated assets look less attractive, which in turn means less foreign inflows of cash. Think of it this way, would you purchase bonds in a currency that you expected to lose ground against your own currency?

We've been hearing for years that a weakening dollar may eventually result in foreigners buying less U.S. assets, which will further weaken the dollar and could start a chain reaction amounting to a run on the dollar. A decade ago, a run on the dollar was a fantasy that no one took seriously. Not only is it no longer a fantasy, but we may be seeing the beginning of it.



  • I don't really understand much about the world of finance which is why I like coming to your blog to read this stuff. You break it down into bites I can manage. I have been aware of the weakening dollar. Here is my question(s); do you think the creation of the Euro has adversely affected the US dollar? And what are your thoughts on a so called America's dollar? Would it help or further hinder? Just curious to know your opinion.

    By Anonymous rockync, at 1:16 AM  

  • Hope you're wrong because a "run on the dollar" whatever that is, sure sounds bad.

    By Blogger Roger Fraley, at 1:29 AM  

  • The creation of the Euro has hurt the dollar, but I wouldn't overemphasize that. Many countries are diversifying their assets away from dollars into Euros, but this has less to do with the collective strength of the Euro and more to do with the weakness of the dollar (i.e. twin deficits). Had the Euro not been created, we would probably see more diversification into Pounds or Marks.

    I have no idea what an "America's dollar" is.


    Remember when the Argentinian currency crashed because everyone was selling it all at once? That is what a run is. It happens to third world countries with huge debts, not to first world countries with "strong economies". So, it sure would be interesting.

    By Blogger Praguetwin, at 1:56 AM  

  • FYI - America's Dollar is a loose concept at this moment which would involve a common currency for North and South America. I don't think it is a serious consideration but rather something being bandied about in response to the Euro.

    By Anonymous rockync, at 2:42 AM  

  • rockync, Im with you I do not understand the currency market, I don know that China has been buying our Morgages, but thats about all I know about currency. does't sound good. Im sure we can turn it around.

    By Blogger Tapline, at 7:18 AM  

  • I'm still waiting for the weakened dollar to prompt a rise in exports...hasn't happened yet and manufacturing in this country continues to slide into the dumps.

    By Blogger Frederick, at 7:02 PM  

  • Rocky,

    Yeah, after I thought about it, I figured that must be it. I won't get into the reasons, but my take is this: pipe dream.


    Welcome. I wish it was as simple as turning it around. The Chinese buying our mortgages (and t-bills, and equities) is actually a good thing. If they stop, then we are in trouble.


    Yeah, I keep waiting for the export prices to spike as well. The thing is that it takes time. So many contracts are signed in dollars, the exporters just take the hit until they start losing money. Then the prices come up. Also, China and others' currency are artificially pegged to the dollar, so that helps too. Man, it pays to be the worlds (second) largest economy. But eventually.....

    By Blogger Praguetwin, at 7:26 PM  

  • I am still around. Don't post, because I don't have time. And other reasons! But I am learning a useful language. A return is inevitable.

    By Blogger copy editor, at 2:23 AM  

  • I had held onto the concept that the greenback had a fairly automatic hedge. The collapse of the $US would create a disastrous domino effect.
    My belief was shored up by the fact that China holds a strong interest in $US.
    Well that is in a rational world, with rational leaders. My faith isn't holding quite so strongly at the moment.

    By Blogger Cartledge, at 7:31 AM  

  • CE,

    Great news! Thanks for stopping by! I'll put you back up just in case.


    The China support is a collective rational view. They don't want to dump their assets or stop buying because it will hurt them collectively. However, rational individual self-interest looks to be taking over. Same principle as a bank run. Sure, it would be better if everyone left their money in, but I'm taking MY MONEY out NOW!

    By Blogger Praguetwin, at 10:58 AM  

  • Oil at $89.47. Gold at 768.70 an ounce. Euro is trading at $1.4296. The dollar index sank as low as 77.480, a new record since the index was first compiled in 1973.

    By Blogger reality-based educator, at 11:32 PM  

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