Tuesday, January 18, 2005

The central banks of the world have spoken: the dollar will not falter.

This has to be the interpretation of the November Treasury International Capital (TIC) report from the US Treasury released today. In November, official net purchases of US long-term securities jumped to $27.9bn after averaging just $16.1bn/mo. over the previous three months. Their purchase of treasuries shot up to $21bn (avg. $14bn in Aug-Oct) and of agency bonds up to $3.5bn (avg. $1.3bn in Aug-Oct). They even stepped into buying US equities to the tune of $1.5bn, the largest monthly purchase in nearly ten years.

But that's not all. Private capital (and central banks disguising their purchases) also gobbled up US securities in November. Overall net private purchases soared from $50.5bn in October to $71.8bn in November. The biggest gainer was equities; foreign capital bought $13.0bn of them in November, the biggest monthly purchase since January. No wonder the US stock market has been booming!

American capital continued fleeing the country, with net purchases of foreign securities hitting $18.7bn, continuing the ominous trend begun in October. However, because of the massive inflows, the net long-term flows figure for the month skyrocketed to $81.0bn. With figures like this, now a $60.3bn trade deficit for November looks like small potatoes. The US could have financed a deficit one-third higher!

For the twelve months through November, net long-term capital flows into the US stand at $827.8bn. The trade deficit over the same period is a "mere" $561.3bn. At this rate, the US could have "afforded" a current account deficit of 7% of GDP for 2004.

I say let's go for it in 2005! Don't let nothin' hold us back!

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