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US Assets & Dollars: Falling in Favor

The US dollar has been steadily and consistently falling against other major floating currencies. The last few months have been as hard on dollars as they might have been on investor nerves. Generally, the prevailing market sentiment has been positive, if thin and prone to wild swings. American markets and pundits have remained upbeat in their self assessment. Our money and indeed world money, is increasingly being bet in the opposite direction. We get a lot of reassurance and markets have soared back up and over their pre-July highs. Attention has not been paid to the data that tell us how people are allocating their wealth between nations. This data is released monthly by the US Treasury Department and is called the Treasury International Capital System. It reveals -- with a 1-2 month lag -- the net US and foreign purchases of US and foreign securities. The data is a good way to check if the money is following the "wisdom." Lately, the money and the "wisdom" have parted course.

The newest numbers are for August 2007. The data reveal something very disturbing and important. The rest of the world sold US assets at a rapid clip across August. The rest of the world sold about $35 billion worth of long term US securities. This number includes all major categories of long term securities and all countries and areas. Across the recent past we have been seen massively and generally increasing foreign net purchases of US securities. Last year, 2006, was a record year as foreign entities purchased a $1trillion in net long-term securities. Net foreign purchasing has risen since 1993 and was rising very rapidly from 2003 until June 2007. In 2003 purchasing was just under $600 billion rising to $876 billion in 2005. This number dramatically turned negative in August.

We have been selling pieces of our firms, future tax receipts, future home mortgage payments and future business profits. Treasuries, the IOUs of the Federal Government, are regularly sold to foreign and domestic institutions and individuals. Economically it would be fair to see government offering of Treasuries as the sale of future tax receipts for cash today. Uncle Sam would gladly pay 520 Tuesdays from now for some hamburgers today! Corporations also sell bonds. They are selling their future ability to pay interest and principle for capital today. Firms issue shares of stock. When these shares pay dividends, firms are offering a fraction of future earnings for capital today. When shares don't offer dividends, they offer -- hopefully -- a chance to monetize the future growth of the firm's earnings. The sale of mortgage backed securities (MBS) represents selling the future mortgage payments of American households.

If you combine the two preceding paragraphs you come up with the following: America has been selling its future household earnings, profits and tax receipts at a rapid and accelerating clip.
Starting in August, the rest of the world's appetite for our future economic health seems to have diminished. Gee whiz, what could possibly explain that? Well all those future revenues are US Dollar revenues and the US dollar has been doing rather poorly of late. This does not help. There seems to be some indication that American homeowners are and will continue to have trouble repaying some of the mortgage borrowing they have done. Thus, the currency in which foreign nationals will be paid is in decline. At the same time the certainty of repayment is in greater question than many had expected. America's future looks less bright to some foreign asset buyers. Here American investors agree with foreign investors. The Net Purchase of foreign securities by Americans has been rising very rapidly since 2004.

Who cares? Everyone who cares about the US dollar, our macroeconomy or the position of the US in the world economy should pay close attention. We are huge net borrowers from the world. Across recent years we have been borrowing between 60%-70% of globally available international funds. We run on debt and selling assets to foreign investors. If that is trending down -- let alone the negative run in August -- it is cause for real concern. One month does not a pattern make. One month worth of numbers like the one's just reported is a call to attention.