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Tuesday, March 17, 2009

 

january flow of funds "a disaster"


that's brad setser's description of the january TIC release.

we are faced with more and more signals that global trade is continuing to deteriorate amid general repatriation of capital.

Indeed, the real legacy of the crisis has been an enormous contraction in long-term flows, with a corresponding increase in the United States reliance on short-term financing. And also a shift away from risk assets.


setser further highlights the recharacterization of agency debt as risky -- government guarantees be damned, incidentally -- and the near-total shutdown of crossborder equity buying.

The overall result of the crisis hasn’t been a rise in demand for US assets so much as a large contraction in all flows. The impact of the collapse in foreign demand for US risk assets (corporate bonds, equities) though has been offset by a collapse in US demand for foreign assets. I stripped out known official purchases from the data, but no doubt the data still is influenced by the increase in the official sector’s risk appetite in 2006 and 2007.

It may not be financial deglobalization, but it certainly is a major slowdown in financial globalization.


this is important to note -- dollar strength in january has been not a function of demand for dollar assets but of a repatriation of foreign claims (UPDATE: and, of course, dollar swap lines). indeed, there was in january a serious outflow of capital from the united states. setser in the comments:

large capital outflows from a country with a current account deficit are considered something of a potential warning sign among balance of payments geeks.


jesse further commented.

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