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| Another Look at Foreign Holdings of US Securities - Feb. 23, 2005 |
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Summary
In about two weeks, the Federal Reserve will release its latest flow-of-funds material. Nevertheless, in view of what helped spook US markets yesterday, another look at some of the existing data may be in order.
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Scheduled for March 10th is the release of the Federal Reserve's latest flow-of-funds data. The numbers will be current through 12/31/04. Some of the data underpinning the overall compilation are available already, but it is always exceptionally helpful to look at this enormous array of data within the context of the single document, also known as the Federal Reserve's "Z.1" release.
One of the contributors to yesterday's "unsettled" financial markets was word coming from Korea that the Korean central bank was planning to "divaersify" its foreign-exchange holdings. This immediately was interpreted to mean the sale of dollar-denominated assets. Overnight, sources in Korea attempted to tone this down a bit.
A point I've made often in the past is that two ways exist for foreign central banks to injure our domestic financial markets. The more drastic and injurious of the two would be the outright sale of existing holdings of US securities. I've always felt this was not the likely development.
But the second way does not have pleasant implications, either. This would be simply to throttle back on the rate of accumulation of US assets. As an "on-the-margin" event, this certainly would put downward pressure on prices. This is a development I do foresee occurring in the future. Perhaps the initial news coming from Korea yesterday was the proverbial "trial balloon."
At any rate, a rereading of an article I wrote in December might be of help in appreciating the enormity and seriousness of what is going on here. Although the numbers are through 9/30/04, these are more than adequate for the purpose at hand.
The missive was dated 12/13/04, and it was entitled, "The Latest Flow-of-Funds Data: What Happens If/When Foreigners Stop Buying." The easiest way to access it is through the link below:
"The Latest Flow-of-Funds Data...".
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