Contradictions of the policy of support of $ by the administration of financial flows (2005-2009)
This article examines the inflows and outflows of goods, services, capital income (Interest, Profit, and Dividend), cash flow and unrequited transfers. These flows are essential for determining the strength of the US currency.
Since the 1970s, the US has managed to offset the erosion of its trade balance by developing its financial market. Capital flows entering year after years exceeding the US have been able to keep the dollar’s international role, they have prevented long-term – nearly half a century – the erosion of the value of the US currency.
In a previous post, we drew attention to the effects of the crisis on the value of $. Changes in the external accounts put the US currency at risk in the T-1 and T-2 2009. Six months later, the data published by the FED invite us to qualify this point of view.
In this post, we will examine the underlying elements of the “monetary health” of the US currency. Changes in the balance of payments coverage (A) and the components of financial flows entering the US (B). We will conclude with a review of the specific role of debt issued by agencies and GSEs in the Treasury in the financial coverage of US external accounts. The notion of hedge administration will illustrate the role of the FED and the Treasury in US general policy in the face of the crisis.
That flows are isolated from the Credit policy, orchestrated by the FED, is due to the fact that low credit rates do not make them an active instrument for managing capital inflows in the US. As for the speculators, they only reveal the economic, financial and monetary weaknesses of a country. The dollar is not yet a prey for them.
The data we use are extracted from the public FED Flow of Financial Accounts (Rated FRB FFA) published on March 11, 2010. When we talk about buying GSE assets, it is still for foreign investors to purchase of securitization products from GSE or GSE backed securities (GSEs).
The financial coverage of the US balance of payments.
1 ° Understand the graph data
Foreign income refers to US cash outflows represented by sales of foreign-produced goods and services to the territory (US Imports) plus capital income (Interest, Profit, and Dividend) paid to the United States. outside (US income payment to the rest of the world). Transfers are an integral part of Foreign Income. They are noted A on the legend of the graph.
The foreign outlay to the US synthesizes cash inflows to the US. They represent the sum of sales of goods and services outside the United States, plus income from capital owned outside the United States by US residents. They are marked B on the legend of the graph.
The difference between the two is the balance of payments balance (balance of trade and services balance + balance of income + transfers). This difference corresponds to our chart to the balance of payments deficit + Transfers without counterpart. They are noted AB on the legend of the graph. In the remainder of this post, the balance of payments deficit will always include transfers in its calculation.
On our chart, this balance (in green) is negative continuously since the United States have for years unbalanced external accounts, this imbalance is the consequence of their trade deficit that partially compensates for the positive balance of services and IPD and that transfers without counterpart aggravate.
So long ago the US currency should have collapsed, but the strength of the US is to have built a gigantic global savings pump: their financial system.
The financial coverage of the external accounts in imbalance results from the inflows and outflows that form the Net financial investment of the USA (red). Net financial investment has a long history of rebalancing the US balance of payments deficit, which is why we call it “financial hedging”.
To measure the capacity of the United States to refinance its external deficit in a period of crisis, it suffices to compare the imbalances of the balance of payments (balance of trade and services balance + balance of capital income + transfers) with the net financial investment who refinance it. This refinancing depends on the excess of the dollar outside the US and ultimately the value of the US currency according to the needs of the international market (trade and finance).
Since the beginning of the crisis, the US fiscal balance has deteriorated.
2 ° Analysis of quantitative data
In 2005 and 2006, the balance of payments deficit is still offset by net capital inflows (inflows and outflows). Financial coverage of external deficits is perfectly ensured by net capital flows. A balance of payments deficit of $ 740 billion is balanced by $ 712 billion of financial hedges in 2005. In 2006, $ 798 billion was offset by $ 805 billion in financial hedges. The year 2006 shines is the record year for external deficits and net capital inflows (Input – Output).
As of 2007, the degradation is continuous. The lack of coverage of 64 billion in 2007 is growing in 2008 to 201 billion dollars. The year 2009 is still worrying: despite the weakening of the balance of payments deficit ($ 424bn in 2009), net capital flows still do not ensure the coverage of the balance of payments deficit: missing $ 221 Md. These outflows of dollars, which are not offset by capital inflows, represent a hemorrhage of more than $ 500 billion in three years. That’s enough to weaken the US currency. It’s not enough to make her sink. Erratic dollar exchange rates reflect the slide of the US economy into the cumulative imbalance of its external accounts.
This tri-annual balance sheet should be tempered by taking into account the quarterly data for the year 2009. The quarterly data are expressed as annualized data on the graph.
Coverage defaults are not the result of a continuous deterioration in the contribution of net capital flows in 2009, the insufficient quarters (2009 T-1 and 2009 T-3) alternate with better quarters (2009 T-2 and T-4). Developments in net capital flows do not make it possible to speak of an inexorably weakening trend in the dollar. There is indeed an erosion of the coverage, but the data of the chart allow to consider an improvement of the situation in 2010. The financial market was not the object of the attentive care of the administration Obama and the FED in 2009.