Monday, March 24, 2008

Capital on the Runway

Readers of the latest missive from Brad Setser may not realize the full implications of his numbers, so we will do the math here. Brad crunches the latest Treasury International Capital (TIC) survey from our friends at the US Treasury Department, adds some other sources, and comes up with the estimate that central banks and sovereign funds pumped over $100B back into the US financial system during the month of January. He worries about the apparent shift away from agencies — our public creditors are reluctant to prop up our crumbling housing sector — but I worry about the implication for private capital flows.

The most recent estimate for last year’s current account deficit is around $740B. To make things simple, assume it remains the same this year. (Recession at home will push it down; recession abroad, if it begins to happen, and oil prices, if they remain higher, will push it up.) If the January rate of official finance continues, it would stand at more than $1200B for the year. The difference, $460B would represent net private capital outflows from the US. If this isn’t capital flight, it’s at least a pretty substantial exodus. My instincts tell me that a full-bore capital flight is the big risk lurking in the shadows. What is the cutoff point between where we are today and a dollar crisis? The answer is, a rate of private outflow that central banks are unable or unwilling to offset. And how much is that?

We are conducting a global experiment right now to find out.

3 comments: said...


Well, maybe. But a couple of things could have happened, none of which are necessarily all that great either. Basically, it could be that we are heading towards a higher current account deficit this year, which would undermine your story about private capital flows.

Of course, a higher current account deficit is nothing to write home about with joy. It could be because the price of imported oil is up, which it is. The other, possibly scarier thing, which might be a similar alternative to your private capital flight story, might be that our massive and rising foreign indebtedness might finally be showing up as a noticeable negative foreign income flow. This has been the odd thing that has not happened so far, odd given how big our huge our net indebtedness has been for some time. A couple of years ago this weird anomaly was what triggered all the talk about "dark matter," talk that has pretty much disappeared more recently.


Peter Dorman said...

It could certainly go either way, Barkley. The problem is, we have the January trade data to match up but not the January capital flows. All we can do is speculate, but the purpose of extrapolating and annualizing is to make it clear that it is virtually certain that January saw a significant level of net private capital outflow. How much that was we won't know until we get the data, the revisions to the data, the revisions to the revisions, etc. said...

Brad Setser just posted a report on the BOP for Q4 of 2007. He reports that rather than deteriorating, the income flow balance actually improved. Apparently this is due to falling interest rates in the US due to our emerging recession. So, a deterioration of this balance does not explain January numbers, almost certainly.