There are always lots of interesting correlations in the economics data. I just saw someone on twitter post the first pic of the stock market valuation and it triggered in my mind the trade deficit graph. So I looked it up and sure enough there is almost a perfect correlation between the two.
I wonder if it has to do with the fact that foreigners are by definition "saving" their USD earnings (if they werent saving there wouldnt be a trade deficit in the first place) to the tune of hundreds of billions of dollars each year, so the stock of foreign USD savings grows enormously each year. What to do with all that money? As should be know by now (as QE demonstrated) there are only a few places to park USD savings:
Real businesses
TSY Cds
Bank deposits
State and municipal bonds
Corporate bonds
Stock Markets
Notice how Im ignoring exchanges into other currencies as an option as that doesnt change the USD environment.
Im uncertain of the Real Business category since Im not clear on how real investment is accounted for in the national accounts. Is that part of the capital account and as such wouldnt be reflected in the trade balance data? Please help explain if someone has the knowledge.
Either way, with hundreds of billions in additional USD savings each year and only these options for how to save that money, Should it be any surprise that the stock market value correlates with the flows of additional investable savings each year?
Just something to think about. However, one needs to explain the correlation split at the end of the graph (present day) as the stock market has gone up while the trade deficit has remained flat as a % of GDP. Nothing comes to mind right now,
P.S. we shouldnt expect to see as much, if any, correlation between the trade deficit and Bond valuations as they are all dependent on the benchmark TSY CD rates which as we know are explicitly set by the monopolist Fed\Tsy nexus.
there are only a few places to park USD savings
ReplyDeleteOffshore accounts, before taxes are assessed.
noah-
ReplyDeletethat brings up an interesting question. Are US DOllar bank deposits in foreign countries included in the FRED monetary aggregate figures aka M2, M1?.
Auburn here is something I am confused about:
ReplyDeleteLast year US ran about a 500b current account deficit but if you look here:
http://ticdata.treasury.gov/Publish/mfh.txt
Total foreign holdings of UST securities went down....
So where did the USD balances that the foreigners accrued thru trade go?
Thats why I asked about the monetary aggregate figures. So maybe foreigners are simply holding their dollars in foreign bank accounts and thats why it doesnt show up? Or maybe they invested in the equities markets instead of GOvt Cds?
ReplyDeleteAlso this is interesting:
ReplyDeletehttps://fred.stlouisfed.org/graph/?g=d3qz
They don't include USD balances held in the TGA as Reserve Balances... so Fed doesn't have to pay IOR on the TGA...
I wonder if Foreign Holdings are treated the same....
Maybe Treasury/Fed has foreign accounts that dont account as Reserves like the US's TGA...
ReplyDeleteBut I would think that would only apply to Foreign Official USD balances only...
Foreign firms would probably have to keep their USD balances either in a US bank account or short term UST securities account....
shows you how abstract the Sectoral Balances Equation really is...
With IOR now at 1.0% overnight and 1-mo. USTs at 0.70% (minus broker-dealer spread...) there seems there would be a financial incentive to keep your USDs in Reserve Accounts vice UST Securities...
ReplyDeleteHere are the asked yields the shortest are still below 0.5%:
http://online.wsj.com/mdc/public/page/2_3020-treasury.html?mod=mdc_bnd_pglnk#treasuryB
If Apple Computer has $100B and they could get to the IOR of 1% overnight they could make $1B which would be 500M more that using short term UST securities... maybe could just buy some small bank for a few $M and run it with 4 people...
Yeah that's funny about the TGA reserves basically disappearing from the aggregates. Why so.different an accounting procedure from tsy CDs? CD accounts owned by the fed are still counted in the "debt" aggregates but not reserves in base aggregates? Wonder what the logic is there?
ReplyDeleteAs a matter of convention, the entries in the TGA do not appear in any of the monetary aggregates, and the cb, being a bank, is empowered to create its own liabilities by making up deposit accounts. Thus, "the government neither has nor doesn't have money. It is the scorekeeper."
ReplyDeleteWarren Mosler argues that since Treasury liabilities held as "CDS" at the cb are exchangeable with cb liabilities in deposit accounts without altering the total amount of non-government net financial assets the tsys should be counted along with reserve balances in the monetary base.
The Treasury uses TT&L accounts to keep reserve balances in the monetary base in conjunction with the cb is managing monetary policy (interest rate targeting) when the cb is not paying IOR and doesn't choose to set the rate to zero. The entries in the TT&L accounts are held as deposits at banks and are recorded in the banks' deposit accounts at the cb. When the funds are shifted to the Treasury account, banks reserve balances are reduced and the TGA is marked up. Since the TGA doesn't count toward any monetary aggregate, money is "destroyed" in doing so. This is comparable to M1 being reduced in repayment of bank loans as customer deposit accounts are reduced without being credited to another monetary aggregate.
Since it is pretty much necessary to work through the accounting to understand this, as well as understand now money is an artifact of a legal institution, very few people are able to follow this.
Here are a couple of interesting posts on this.
Federal Treasury finances: a functional perspective
Creation and destruction of bank credit money