Unless we're implying stocks are the next primary reserve asset then this doesn't apply to sovereigns - which is what matters when it coems to the topic of de-dollarization. In fact, de-dollarization involves the selling of USTs which will only exacerbate the strengthening of the dollar. So the problem for the US is not the dollar or demand for it's risk assets, but rather it's dwindling demand for it's largest export - US Treasuries which as Michael says essentially funds the country. Sovereigns now own 8T (US NII of -80%/GDP) of them as primary reserve assets and has been losing demand (from nations that produce) because of it's negative real returns, sanctions/account freezing, and ultimately the breaking of the US's petrodollar commitment with the globe since 2008 to keep the "dollar as good as gold". The game is over if nations continue to seek alternative "neutral" reserve assets and begin pricing commodities in non-USD currencies (which is also happening, net settled with not USTs, but gold). The strong dollar furthermore will accelerate this as foreign nations are short 13T of US denominated debt. When the dollar gets stronger, they will liquidate their net 22T of USD assets (8T of which are USTs) to manage their dollar needs. The only way for this to reverse is for Trump/Bessent to focus first on reducing the deficit and debt/GDP.
I agree US federal deficit is a problem and have repeatedly pointed to fiscal projections as the primary difficulty facing US policy makers. UST are merely part of the overall funding the CA deficit which can take any manner of dollar cash/asset combination as settlement. The components of US total balance sheet is fungible. The funding of the CA deficit simply needs to be arranged to accommodate the transactions with foreigners to pay for the trade imbalance in dollars. Treasuries are important metric because they represent the global risk-free rate, but they are not central to trade settlement of US CA. Absent federal deficit, the US may still run a CA deficit. It would be settled by other asset sales. Yes, gold can be used to settle trade, and there are moves to increase 'alternative' flows, but the plumbing is aligned to dollars which remain the easiest mechanism, even for most gold transactions. That doesn't suit everyone, I get that.
Of all the foreign investment into the US in the 12 months to end September 2024, the NET flows were as follows (according to the Treasury's TICS data released 18th November): +$1016 billion into fixed income securities, -$19 billion into US equities. Overwhelmingly, the fixed income inflows went to the US's Treasury Market, thus helping fund the $1.8 trillion bugdet deficit in Fiscal 2024 (also year to end September 2024). That deficit will be over 40% of all deficits worldwide: not bad for a country with 4.2% of the world's population.
Meanwhile the US is running a current account deficit of almost $1 trillion - 62% of all current account deficits worldwide. On the other side you have the rest of the world which by definition funds this deficit (since the US Dollar is broadly stable) with c62% of the world's NET mobile savings derived from their aggregate current account surpluses. But those savings are buying - AGAIN ON A NET BASIS - debt instruments (especially Treasuries) rather than equity instruments.
Am I the only one that thinks these stats jar with the prevailing Ra-Ra narrative? What am I missing?
Debt finance is an recurring flow, equity holdings are effectively one-time flow. And flow itself may not be wholly informative as to how the balance sheet adjusts overall. The US as a whole is engaged in balance sheet accommodation of financial accumulation by the rest of the world. The rise in US equity prices held by foreigners explains ~75% of deterioration in US net investment position since 2005 from rough balance to $22 trillion negative position. The value of foreign equity holdings has increased $7.5trillion in the last 4 years. If equity prices rise, rebalancing by foreigners would be a natural result (including sales). Over the same period, the foreign portfolio holdings of US debt securities has increased 'only' $1.1trillion. So, although the flow seems high into debt, there has been little reported increase in debt holdings and much more in equities. If equity prices rise sharply enough, the financial account pays for the trade deficit without need for debt financing - as long as transactions permit the transfer of cash through various asset classes.
My focus is on flows. Ed Yardeni - in his very accessible charts - shows in his study of TICS data the long term trends of both bond and equity flows: whilst they are volatile, US equities are progressively falling out of favour with foreigners.
Yes, there are 'positive' balance sheet effects of rising stock prices on their residual equity holdings but as any banker or even equity analyst will tell you, in the end it is cash flow that counts the most. Hiding behind balance sheet appreciation when debt levels are rising - indeed soaring: the Federal deficit has risen 4.5x since 2008 even when nominal GDP is up a much lower 1.9x - and the equity base is shrinking can only work for a time.
But if this is a structural trend that endures, it will likely end in tears. My essential point is to ask the question: "For how long can the fact of the US consuming 60%+ of the world's net mobile savings continue, especially when most of the flow of those savings goes into debt to finance a Government deficit unlikely to be paid back and where even the interest on that debt is being progresively more capitalised, with no net flows into equity capital to help build a better furure?"
The fable of the Emperor's New Clothees comes to mind.
In flow terms equities may show declining favour, but in value terms equity (portfolio holdings) have grown faster than debt since early 2000s. See Table 1 here:
Alternatively, and more up to date (to Q3 2024) see BEA table1.2 "U.S. Net International Investment Position at the End of the Period, Expanded Detail" - which has slightly different numbers but in same ball park.
Granted. But what happens next year? Will foreigners still use their flows so willingly to offset the US's $1 trillion current account deficit and in the process will this 'kindness of foreign strasngers' still underwrite c40% of new debt issuance? In the wake of a trade war, this question must be asked.
By 'equity base' above, I am looking at the US from a foreigner's perspective. In this regard, the national gearing is debt to GDP, the latter being the 'equity base'. And this, as the CBO has tracked and is forecasting, is going inexorably higher: so relatively, the US's "equity base" is shrinking..
I should also add the annual interest bill is now in excess of $1 trillion thus breaking Niall Ferguson's rule: "Any great power that spends more on debt service (interest payments on the national debt) than on defense will not stay great for very long. True of Hapsburg Spain, true of ancien régime France, true of the Ottoman Empire, true of the British Empire, this law is about to be put to the test by the US..."
Yes, the deficit is a problem and one I've pointed to as in need of urgent attention. However, it is not the only metric to judge US gearing. The entire financial balance sheet of the US has been expanding - with equity values rising faster as a % of GDP than debt. This expanding balance sheet (debt and equity) is driven in large part by the US role as global investment destination of first resort - in contravention to conventional trade economics. It is the flip side of mercantilism by surplus countries such as China and Germany (and others). The inclusion of other gearing measures doesn't make things safer, it makes them more prone to volatility. However, to look at Debt/GDP as the baseline fundamentally misses what else is happening.
Unfortunately the US Government cannot use the value of stocks on Wall Street to pay down national debt - as could perhaps Norway with the world's largest sovereign wealth fund or the Swiss National Bank, both with theirs significant share portfolios. Is not the value of Wall Street ringfenced from being appled to the Federal Government's $36 trillion+ national debt (or $220 trillion+ including off-balance sheet items)? I sense foreign investors - especially official ones - are increasingly wary and weary of the US's fiscal incontinence, just as they are with France and the UK, though the latter two are closer to denouement.
I buy the first half of Rudi Dornbusch's Law: “Crises take longer to arrive than you can possibly imagine..." But then I also buy the second half: "... but when they do come, they happen faster than you can possibly imagine.”
Unless we're implying stocks are the next primary reserve asset then this doesn't apply to sovereigns - which is what matters when it coems to the topic of de-dollarization. In fact, de-dollarization involves the selling of USTs which will only exacerbate the strengthening of the dollar. So the problem for the US is not the dollar or demand for it's risk assets, but rather it's dwindling demand for it's largest export - US Treasuries which as Michael says essentially funds the country. Sovereigns now own 8T (US NII of -80%/GDP) of them as primary reserve assets and has been losing demand (from nations that produce) because of it's negative real returns, sanctions/account freezing, and ultimately the breaking of the US's petrodollar commitment with the globe since 2008 to keep the "dollar as good as gold". The game is over if nations continue to seek alternative "neutral" reserve assets and begin pricing commodities in non-USD currencies (which is also happening, net settled with not USTs, but gold). The strong dollar furthermore will accelerate this as foreign nations are short 13T of US denominated debt. When the dollar gets stronger, they will liquidate their net 22T of USD assets (8T of which are USTs) to manage their dollar needs. The only way for this to reverse is for Trump/Bessent to focus first on reducing the deficit and debt/GDP.
I agree US federal deficit is a problem and have repeatedly pointed to fiscal projections as the primary difficulty facing US policy makers. UST are merely part of the overall funding the CA deficit which can take any manner of dollar cash/asset combination as settlement. The components of US total balance sheet is fungible. The funding of the CA deficit simply needs to be arranged to accommodate the transactions with foreigners to pay for the trade imbalance in dollars. Treasuries are important metric because they represent the global risk-free rate, but they are not central to trade settlement of US CA. Absent federal deficit, the US may still run a CA deficit. It would be settled by other asset sales. Yes, gold can be used to settle trade, and there are moves to increase 'alternative' flows, but the plumbing is aligned to dollars which remain the easiest mechanism, even for most gold transactions. That doesn't suit everyone, I get that.
Of all the foreign investment into the US in the 12 months to end September 2024, the NET flows were as follows (according to the Treasury's TICS data released 18th November): +$1016 billion into fixed income securities, -$19 billion into US equities. Overwhelmingly, the fixed income inflows went to the US's Treasury Market, thus helping fund the $1.8 trillion bugdet deficit in Fiscal 2024 (also year to end September 2024). That deficit will be over 40% of all deficits worldwide: not bad for a country with 4.2% of the world's population.
Meanwhile the US is running a current account deficit of almost $1 trillion - 62% of all current account deficits worldwide. On the other side you have the rest of the world which by definition funds this deficit (since the US Dollar is broadly stable) with c62% of the world's NET mobile savings derived from their aggregate current account surpluses. But those savings are buying - AGAIN ON A NET BASIS - debt instruments (especially Treasuries) rather than equity instruments.
Am I the only one that thinks these stats jar with the prevailing Ra-Ra narrative? What am I missing?
Debt finance is an recurring flow, equity holdings are effectively one-time flow. And flow itself may not be wholly informative as to how the balance sheet adjusts overall. The US as a whole is engaged in balance sheet accommodation of financial accumulation by the rest of the world. The rise in US equity prices held by foreigners explains ~75% of deterioration in US net investment position since 2005 from rough balance to $22 trillion negative position. The value of foreign equity holdings has increased $7.5trillion in the last 4 years. If equity prices rise, rebalancing by foreigners would be a natural result (including sales). Over the same period, the foreign portfolio holdings of US debt securities has increased 'only' $1.1trillion. So, although the flow seems high into debt, there has been little reported increase in debt holdings and much more in equities. If equity prices rise sharply enough, the financial account pays for the trade deficit without need for debt financing - as long as transactions permit the transfer of cash through various asset classes.
My focus is on flows. Ed Yardeni - in his very accessible charts - shows in his study of TICS data the long term trends of both bond and equity flows: whilst they are volatile, US equities are progressively falling out of favour with foreigners.
Yes, there are 'positive' balance sheet effects of rising stock prices on their residual equity holdings but as any banker or even equity analyst will tell you, in the end it is cash flow that counts the most. Hiding behind balance sheet appreciation when debt levels are rising - indeed soaring: the Federal deficit has risen 4.5x since 2008 even when nominal GDP is up a much lower 1.9x - and the equity base is shrinking can only work for a time.
But if this is a structural trend that endures, it will likely end in tears. My essential point is to ask the question: "For how long can the fact of the US consuming 60%+ of the world's net mobile savings continue, especially when most of the flow of those savings goes into debt to finance a Government deficit unlikely to be paid back and where even the interest on that debt is being progresively more capitalised, with no net flows into equity capital to help build a better furure?"
The fable of the Emperor's New Clothees comes to mind.
In flow terms equities may show declining favour, but in value terms equity (portfolio holdings) have grown faster than debt since early 2000s. See Table 1 here:
https://ticdata.treasury.gov/resource-center/data-chart-center/tic/Documents/shla2023r.pdf
Alternatively, and more up to date (to Q3 2024) see BEA table1.2 "U.S. Net International Investment Position at the End of the Period, Expanded Detail" - which has slightly different numbers but in same ball park.
Granted. But what happens next year? Will foreigners still use their flows so willingly to offset the US's $1 trillion current account deficit and in the process will this 'kindness of foreign strasngers' still underwrite c40% of new debt issuance? In the wake of a trade war, this question must be asked.
By 'equity base' above, I am looking at the US from a foreigner's perspective. In this regard, the national gearing is debt to GDP, the latter being the 'equity base'. And this, as the CBO has tracked and is forecasting, is going inexorably higher: so relatively, the US's "equity base" is shrinking..
I should also add the annual interest bill is now in excess of $1 trillion thus breaking Niall Ferguson's rule: "Any great power that spends more on debt service (interest payments on the national debt) than on defense will not stay great for very long. True of Hapsburg Spain, true of ancien régime France, true of the Ottoman Empire, true of the British Empire, this law is about to be put to the test by the US..."
Yes, the deficit is a problem and one I've pointed to as in need of urgent attention. However, it is not the only metric to judge US gearing. The entire financial balance sheet of the US has been expanding - with equity values rising faster as a % of GDP than debt. This expanding balance sheet (debt and equity) is driven in large part by the US role as global investment destination of first resort - in contravention to conventional trade economics. It is the flip side of mercantilism by surplus countries such as China and Germany (and others). The inclusion of other gearing measures doesn't make things safer, it makes them more prone to volatility. However, to look at Debt/GDP as the baseline fundamentally misses what else is happening.
Unfortunately the US Government cannot use the value of stocks on Wall Street to pay down national debt - as could perhaps Norway with the world's largest sovereign wealth fund or the Swiss National Bank, both with theirs significant share portfolios. Is not the value of Wall Street ringfenced from being appled to the Federal Government's $36 trillion+ national debt (or $220 trillion+ including off-balance sheet items)? I sense foreign investors - especially official ones - are increasingly wary and weary of the US's fiscal incontinence, just as they are with France and the UK, though the latter two are closer to denouement.
I buy the first half of Rudi Dornbusch's Law: “Crises take longer to arrive than you can possibly imagine..." But then I also buy the second half: "... but when they do come, they happen faster than you can possibly imagine.”