"Central banks were the main source of financing for the US deficit all along." [1]
We have quietly achieved another historic milestone in this story. To put it starkly, the blue line in Chart 1 of Brad Setser’s Oct 16th blog post has just plunged below the x-axis for the very first time.
UPDATE: Twist is on the job working her chart magic. Here’s Doom’s first cut at what Setser’s chart extended to the present now looks like. Note that twist is using Doom-standard yellow for treasuries and red for agencies. The long-term back-and-forth between the two types of paper as the dominant contributor to cenbank buying becomes obvious. Also, the historic collapse of the Agency Debt purchasing helps to explain why Paulson has suddenly developed an insatiable appetite for GSE paper, when just months ago the very idea was unspeakable. Will that treasuries bottle-rocket trend stabilize instead of collapsing like it did around 2004/2005? Stay tuned for the next exciting episode of our historical financial crisis.
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According to The NY Fed’s weekly figures on net foreign central bank holdings (as compiled by Housing Doom) of Agency debt going back to February 9, 2000, this is the first time on record that the cenbanks have ever collectively had a net sell-off of agencies over a 52 week period.
Agency Debt holdings as of December 26, 2007: $831.694 billion
Agency Debt holdings as of December 25, 2008: $818.992 billion
Net central bank purchase of Agency Debt (52 weeks): -12.702 billion
Because there had been a mild sell-off of agencies between Dec 26, 2007 and Jan 2, 2008, the estimated sell-off of Agency Debt for the calendar year 2008 to now is a bit lower than that, about -$11.398 billion.
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[1]: "The collapse of financial globalization …", by Brad Setser, Council on Foreign Relations, December 29, 2008.
At this point, I don’t really think that there can be much doubt that the enormous increase in central bank reserves over the last five years was central to the process that allowed the US to run large current account deficits during a period when private demand — that is private inflows net of private outflows — for US financial assets wasn’t there. At least not on the scale needed to finance the United States big deficits.
In my judgment, the US housing bubble — and the associated rise in private consumption as households borrowed against the rising value of their home — wouldn’t have been able to grow for as long as it did without this inflow from the rest of the world. … [I would interpret this as supporting my old contention that cenbank MBS purchases have been financing the war; e.g. on May 12, 2007 I wrote: "It’s easy to see that, among other things, central bank appetite (mostly East Asian) for F&F’s conforming mortgage paper has been underwriting the Iraq and Afghanistan wars since mid-April."]
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John, can you explain, in simple terms, the differences between “Agency” and “Treasury” debt?
NVMike:
Federal Agency Securities Market (Agency Debt)
Federal agency debt is issued by various government-sponsored enterprises (GSEs) which were created by Congress to fund loans to borrowers such as homeowners, farmers and students.
Federal Treasuries Market (Treasury Debt)
The U.S. Treasury issues three types of securities: bills, which have a maturity of less than 1 year; notes, which have a maturity of 2 to 10 years; and bonds, which have a maturity of greater than 10 years.
In other words, the Central Banks of the world are as scared of the US housing collapse as us retail investors. This is the ‘flight to safety’ to T-Bills that most institutional and retail investors are doing as well.
Nobody wants Fannie or Freddie’s notes.
More here.
http://www.investinginbonds.com/marketataglance.asp?catid=31
NVmike -
I don’t know
I expect to post on this sometime today, and there may be a simple explanation somewhere in the mess. It’s a very important point.
… but Yossarian’s comment (note the timestamps are in the same minute) looks like a good start
‘flight to safety’ to T-Bills? Like the gubmint is a safe place to invest.
Muni Bond Sales Drying Up as States Face $42 Billion Shortfall “The combination of the worst financial crisis since World War II and the collapse of the $330 billion auction-rate debt market will leave 41 states and the District of Columbia with shortfalls just as financing sources diminish.”
Atlantic City Bleeds as Would-Be Gamblers Pay Bills “Through November, the state collected $338 million in Atlantic City tax revenue, down from $364 million and $384 million, respectively, in the first 11 months of 2007 and 2006.”
NY Not Mailing Personal Income Tax Forms “In these tough economic times, the State must take must make all efforts to reduce spending…”
China Jan-Nov tax revenue… “Growth rates of value-added tax and enterprise income tax eased, while growth of other tax revenue declined sharply or turned negative.”
Mass. may face another $1 billion in budget cuts “Governor Deval Patrick said this afternoon that he was preparing for up to $1 billion in additional mid-year budget cuts, raising the specter of possible reductions in local aid to municipalities and additional layoffs of state employees.”
Revenue Slump Prompts Calls for Tax, Financial System Overhaul “Negative tax revenue growth has occurred since October.”
Nearly 14,000 businesses ‘seeking tax delays’ “The Times reports that 10,000 businesses, partnerships and sole traders have been given more time to pay tax worth nearly £170 million, while just under 4,000 organisations, which owe a total of £271 million, have had their cases referred for further consideration.”
Our spirits are low, but alcohol still selling “The latest figures for the five months ending Nov. 30 show that the excise tax fell $756,000 short of the $30.7 million that the state expected to earn from it.”
Beware the ‘charitisation’ of government “The downturn may cause an accelerated shift towards charities delivering government services, says Nick Seddon…”
Philadelphia’s Mummers Save 109-Year Strut From City Budget Ax “Private donors contributed $180,000 at the last minute to save tomorrow’s parade, after the city cut funding for the 109- year-old tradition to help plug a $1 billion budget gap.”
Bratticus:
Most of what you’ve posted is related to city or state debt / notes. It’s true that the Municipal bond market has had numerous failures this past year, with more coming.
But Agency and Treasury debt are Federal, and generally operate on different principles.
I think that the ‘flight to safety’ to Treasuries is temporary, as well.
But what the bond market is saying (in the story above – more or less), is that even FCBs (Foreign Central Banks) are afraid of any US debt that has anything to do with housing.
What happens if Federal Treasuries are unsafe?
That is a subject for another story.