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Impact of declining US capital
inflows
By Hussain Khan
TOKYO
- The wide range of declining currency inflows into
numerous types of US financial assets makes it almost
certain that the dollar, beset by global security
concerns, trade-war anxiety and the crushing weight of
the twin US current-account and fiscal deficits, is
heading for a serious plunge against other currencies.
The declining inflows, if they were to continue
beyond the current month, would ripple ominously across
the globe. A substantially cheaper dollar means serious
trouble for the export-led economies that have
traditionally depended on the United States as importer
of last resort, making their goods more expensive. It is
already causing a feeding frenzy in the shark-like world
of currency traders, who have the ability to wreck
entire economies through currency speculation.
The latest US Treasury Department figures,
released on Wednesday, show that net capital inflows
into the country fell precipitously, from about US$50
billion (42 billion euros) in August to $4.2 billion in
September, the lowest since the near-collapse and
bailout of the Long Term Capital Management hedge fund
rattled markets in 1998.
The new data are
raising fears that the US may have difficulty funding
its current-account deficit, which ran at about $46
billion a month in the first half of the year and is
expected to reach $550 billion by year-end. The fiscal
deficit reached $374 billion in the fiscal year ended in
October, by far the largest in US history, although
off-budget expenditures could carry that as high as $450
billion.
With crucial foreign investor
confidence waning, foreign purchases of US Treasury
bonds have fallen to their lowest level on a monthly
basis since February. The Treasury report said
foreigners bought a net $5.6 billion of treasuries in
September, down from $25.1 billion in August.
Foreigners engaged in net selling of "agency"
debt sold by the quasi-governmental agencies Freddie Mac
(Federal Home Loan Mortgage Corp) and Fannie Mae
(Federal National Mortgage Association), both of which
package and sell domestic home mortgages of various
kinds, for the first time since October 1998, getting
rid of a net $3.2 billion after buying $8.9 billion the
previous month. The lack of interest in bonds was not
replaced by buying of equities. Private accounts and
central banks sold some $6.3 billion of equities.
Japanese buying of US assets remains
particularly strong, with some net $20 billion of debt
and equity purchases. However, Japanese buying is
occurring only because Japan has no alternative to
keeping its massive dollar reserves in some form of US
assets. These reserves are increasing day by day because
of Japan's massive intervention in the currency markets
to sell trillions of yen and buy dollars to stem the
tide of yen appreciation.
Economists noted that
the bulk of the selling came from private accounts and
hedge funds, not central banks.
Favorable US
growth differentials now appear sufficient to put only a
temporary brake on the dollar's slide, with the focus
shifting toward the impact of strong US growth on the
country's current-account deficit. Forecasts point to
the deficit's reaching 6 percent or even 7 percent of
gross domestic product next year. The deficit could
narrow if the United States were to grow more slowly
than its trading partners, thus dampening consumers'
appetites for imported goods. But, ahead of the 2004 US
presidential election, with the administration and the
US Federal Reserve reluctant to intervene, this seems
highly unlikely.
Although foreigners have been
financing the current-account deficit for more than a
decade, the necessity for exorbitant inflows is finally
catching up with the United States. The deteriorating
trend in net US portfolio inflows suggests a growing
reluctance by foreign private investors to shoulder this
burden. Currency traders seized on September's sharp
deterioration in capital flows, pushing the dollar to a
record low against the euro. However, the trend has been
clear for months. It is not particularly a pretty sight,
and it is not particularly reassuring for the global
financial system.
(Copyright 2003 Asia Times
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