The Big Lie
by Rob Kirby, Kirby Analytics. April 20, 2009
Last Wednesday, April 15, 2009, The United States Treasury published their monthly Treasury International Capital [TIC] System report. What this report captures, broadly, is macro international capital flows in and out of the U.S. capital markets. Because the United States is a debtor nation, running huge fiscal budget deficits as well as massive, seemingly perpetual, current account [trade] deficits, they require massive amounts of foreign capital injections to finance these shortcomings. In recent years the amount of foreign capital REQUIRED by the United States has been conservatively running in the neighborhood of +70 billion per month.
Here is what Gary North had to say about last week’s TIC report:
The Astounding Reversal Continues: Bernanke’s Nightmare
April 16, 2009
Yesterday, the U.S. Treasury released the Treasury International Capital (TIC) report for February 2009. It shows another outflow of capital. “Monthly net TIC flows were negative $97.0 billion. Of this, net foreign private flows were negative $106.3 billion, and net foreign official flows were positive $9.3 billion.”
The figure for January was updated to minus $147b from the previously reported minus $149b.
This is a huge reversal. That is almost a quarter of a trillion dollars in just two months. Foreigners are not bailing out the Treasury any longer. They are pulling out. They are net sellers.
This means that domestic buyers must be found — not just for the gigantic wave of debt already on the books but also for the foreigners who are saying sayonara.
The FED has not budgeted for this. It has pretended that the much-heralded glut of international savings would continue. It’s over. It’s not just over; it’s imploding. We are now seeing a glut of selling.
This will create havoc for the government. The days of wine and roses has ended. The bailouts from outside the country have gone into reverse.
This will put upward pressure on Treasury interest rates. If and when the recovery overcomes fear of other assets, the sell-off of Treasuries by Americans will begin. The Treasury will have to offer higher rates. Goodbye recovery.
Or the FED will have to buy. Goodbye dollar.
Here’s a list of net TIC flows over the past 12 months:
|Net aggregate capital inflows for past 12 months: +179.2b|
...or a woeful average of 14.93 billion per month when simple math tells us 70+ billion per month is required.
Understand folks, Mr. North’s commentary above is limited to January and February of 2009 but a look at these flows over the past year drives the point home:
The collapse of the CRB Index over the same time period supports and confirms that this was the case. The strength that the dollar exhibited last fall was at best a technicality - a stage illusion:
By the way, Mr. North, the title of your quip is entirely inappropriate; it should be titled Mr. Bernanke’s BIG LIE. You see folks; we’ve all been lied to – WHOLESALE.
If we zero in, specifically on January and February 2009, the MASSIVE TIC OUTFLOWS are telling us that hedge fund de-leveraging has run its course. This has necessitated that the Federal Reserve resort to other means to make the U.S. Dollar look strong.
Do any of you really believe that March’s numbers were any better?
Forensic Examination of the Recent Past
The Federal Reserve only publicly disclosed that they had opted for QUANTITATIVE EASING at their FOMC meeting mid March [Wednesday, the 18th], 2009:
Fed Opts for Quantitative Easing in the Face of Somber Economic Outlook
The main question about the outcome of today's FOMC meeting was whether there would be any shift in the Fed position on the outright purchases of longer-term government Treasuries. Today's [March 18, 2009] statement provided the answer that "Yes" it would undertake these purchases to the tune of $300 billion during the next six months…
What hubris; the Federal Reserve has apparently been printing up unaccounted for and undisclosed BIILLIONS [or Trillions, perhaps?] for who-knows-how-long? Based on the data presented above, it's evident that the Fed has been engaged in quantitative easing LONG BEFORE their public acknowledgement of the same. Despite claims to the contrary, the Fed’s actions to date have been elitist, favorable to the banks at the expense of the public and deceptive. So, perhaps it should not come as a surprise to anyone that former Fed Chairman and senior economic advisor to President Obama, Paul Volcker, speaking at a financial markets conference Friday night at Vanderbilt University in Nashville, Tennessee uttered these words,
"For better or worse, we are at a point where the Federal Reserve Act is going to be reviewed."
Ladies and gentlemen, this is a review that is long overdue.
Overseas equity markets began the week on a positive note with Japan’s Nikkei Index adding 17 points to close at 8.924. North American Markets fared poorly with the DOW losing 289.60 to 7,841.70, the NASDAQ off 64.86 to 1,608.21, and the S & P losing 37.20 to close at 832.40. NYMEX crude oil futures fell 4.56 per barrel to finish the day at 45.77.
The benchmark 5 yr. government bond ended the day at 1.80% while the 10 yr. bond finished at 2.84%.
On foreign exchange markets the U.S. Dollar Index added .52 to close at 86.61.
Precious metals advanced with COMEX gold futures ahead by 16.60 to 886.30 per ounce while COMEX silver futures added .18 to end the day at 12.09 per ounce. The XAU Index gained 3.52 to 118.51 and the HUI Index added 11.08 to 286.34.
Wishing you all a good evening and pleasant thoughts!
© 2009 Rob Kirby