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Summary
As recently as the mid-1980s, the United States was a net creditor nation. As of the end of 2005, however, the US was in the hole to others to the tune of more than $5.8 trillion. And this numbing figure continues to expand at an alarming rate! This is one of the horrifying revelations contained in the Federal Reserve's latest flow-of-funds data, released late yesterday morning.
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Introduction
Everyone is aware of how important foreign investment flows have been to the well-being of the US financial markets. In turn, this provides an important insight as to how critical a consideration the dollar's exchange-rate value has been and continues to be in the overall process. What many people may not realize, though, is the enormity of some of the numbers involved.
And as readers will soon see, the enormity and relationship of some of the numbers help explain phenomena like Alan Greenspan's interest-rate "conundrum." I suspect Greenspan knew full well what the cause-and-effect relationships causing the infamous conundrum are. But Uncle Al, being a far more accomplished politician than central banker, wasn't telling!
Yesterday, the Federal Reserved released the latest edition of its "Z.1" publication," "Flow of Funds Accounts of the United States." The most recent data are through the quarter ended 12/31/05, but this certainly is current enough for my big-picture purposes here. A caution, though: you might think twice about proceeding on an empty stomach!
A Look at the Latest Numbers
(Fourth-Quarter/Full-Year 2005)
* As of 12/31/05, foreign investors held a total of $11.154 trillion of US financial assets, up $325 billion from revised holdings of $10.829 trillion as of 9/30. From 12/31/04, the increase was about $1.32 trillion, or 13.4%. (See Table 1 in the Table Appendix at the end of the text.)
* As of 12/31/05, foreign financial liabilities totaled $5.344 trillion, resulting in a net foreign claim against the US of $5.810 trillion. (See Table 1.)
* The 12/31 net foreign claim total was equal to almost 52% of fourth-quarter US real gross domestic product. By comparison, as of the end of 1985, only 20 years earlier, net foreign financial claims were equal to about 1.5% of real GDP.
* The dollar's exchange-rate value put in a major bottom in the spring of 1995, commencing a steep rise into early 2002. Note in Table 1 how the expansion in the growth of foreign holdings of US financial assets paralleled the dollar's rise.
* As Table 1 indicates, the United States, for the first time since World War II years, became a net debtor during 1985.
* Table 2 segregates the classes of capital-market assets that are readily salable by foreigners, or where a significant slowing in the rate of accumulation could (would likely) adversely influence domestic prices. As of 12/31, these totaled $7.688 trillion, a very meaningful 68.9% of total US financial assets held by foreigners.
This illustrates the exposure US markets could have to a decline in the current rate of accumulation, no less a sizable decline in this rate, were it not matched by an equal decline in American demand for these funds (e.g., declines in the federal budget and current-account deficits). Outright net sales by foreigners would create "chaotic" conditions, to put it mildly.
* As of 12/31/05, foreign investors held the following respective percentages of total outstandings of Treasuries, agencies, US corporate bonds and US equities: 47.0%, 14.9%, 29.5% and 15.1%. Combined holdings of Treasuries and agencies were 28.6% of total outstandings.
By comparison, going back to 12/31/94, not long before the dollar put in the major bottom mentioned above, foreigners held the following respective percentages of total outstandings of Treasuries, agencies, US corporate bonds and US equities: 18.3%, 5.7%, 14.0% and 7.0%. At that time, the combined holdings of Treasuries and agencies were 13.4% of total outstandings.
The table below breaks out these percentages as of 12/31/05, 9/30/05, as of the end of 2004, and as of 12/31/94.
Summary: Foreign Holdings of Total Outstandings
-----------------------------------------------------
12/31/05 09/30/05 12/31/04 12/31/94
--------------------------------------
Treasuries 47.0% 45.8% 43.5% 18.3%
Agencies 14.9% 14.3% 12.2% 5.7%
-----------------------------------------------------
Treas. + Agcy. 28.6% 27.7% 25.1% 13.4%
-----------------------------------------------------
Corp. Bonds 29.5% 29.0% 27.1% 14.0%
Corp. Equities 15.1% 14.9% 13.9% 7.0%
-----------------------------------------------------
* As of 12/31/05, the 15 largest foreign holders of US Treasury debt had total holdings of $1.835 trillion, a gain of $90.2 billion or 5.2% from 9/30. These figures include both "official" and "private" holdings, the latter category involving a good deal of activity by investment-management entities, hedge funds in particular. This is especially noticeable in Treasury balances relating to places like "Caribbean Banking Centers." (See Table 3.)
Tables 1 through 3 in the appendix break out foreign holdings of US financial assets as of the end of given periods. These are dollar values outstanding at the end of those periods. Table 4, however, breaks out the net foreign flows into the markets during the periods shown.
* During 2005's fourth quarter, foreigners acquired US financial assets at a seasonally adjusted annual rate of $1.034 trillion, down significantly from the $1.636 trillion annual rate during last year's September quarter.
* For all of 2005, foreign investors acquired a net of $1.191 trillion of US financial assets. This was down $116 billion or 8.9% from 2004's record accumulation that totaled $1.307 trillion.
* During 2005, a very sizable 77.3% of US financial-asset acquisition by foreign investors was in highly marketable (thus, highly liquid or "exposed") asset classes. This was a material increase from 62.0% for all of 2004, and it was well above the five-year average of 60.2% for the period running from 2000 through 2004, inclusive.
* During 2005, foreign investors ("official" and "private") acquired a net of $297.9 billion in Treasury debt. In turn this equaled an extraordinarily high 96.9% of the net $307.3 billion the Treasury issued during the year.
* In 2004, foreigners (again, both "official" and "private") took down a net $358.5 billion in Treasury debt, equal to almost 99% of the net $362.5 billion the Treasury issued. The two-year total of foreign purchases was $656.4 billion, or 98.0% of the $669.8 billion issued. During the same two years, the Federal Reserve purchased a net of $77.6 billion of Treasuries for its own portfolio. Thus, during 2004 and 2005, foreigners and the Fed bought a net total of $734.0 billion in Treasuries, equal to almost 110% of net Treasury issuance during the period, thereby significantly blunting upward pressure on open-market Treasury yields!
* Foreigners also absorbed a huge amount of the net issuance of US agency securities during 2005 -- as in much, much more than all of them! Net purchases of $172.2 billion were equal to almost 3.4 times the net issuance of $50.7 billion.
* Thus, combined foreign purchases of Treasuries and agencies during 2005 equaled an enormous 131% of total issuance, $470.1 billion, versus $358.0 billion.
* As for the purchase of US corporate bonds, foreign investors took down a net of $351.1 billion during 2005, 48.8% of total net issuance of $719.8 billion.
* During 2005, net foreign purchases of US equities totaled $86.0 billion. This occurred against the backdrop of a net reduction in outstandings during the year of almost $300 billion.
* During 2004 and 2005 combined, there was a total of $147.9 billion of net foreign purchases of US stocks, versus a net reduction in outstandings of $331.4 billion during these two years.
* During 2000 through 2002, inclusive, which were three years of very poor US stock-market performance overall, foreigners purchased a net of $369.2 billion of US equities. Obviously, this demand from overseas helped materially in cushioning the decline.
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Table Appendix
Table 1.
------------------------------------------
FOREIGNERS' U.S. FINANCIAL
ASSETS/LIABILITIES
(Billions of Dollars, Latest Data
Released 03/09/06 Through 12/31/05)
------------------------------------------
Total Total
Financial Financial
Assets Liabilities Difference
------------------------------------------
2005
12/31 11154.3 5344.4 5809.9
09/30 10828.6 5366.9 5461.7
06/30 10447.7 5603.9 4843.8
03/31 10179.5 5445.5 4734.1
------------------------------------------
As of
12/31
-----
2005 11154.3 5344.4 5809.9
2004 9836.2 5333.5 4502.7
2003 8380.8 4501.1 3879.7
2002 7576.8 4276.2 3300.6
2001 7065.9 3747.0 3318.9
2000 6584.9 3562.3 3022.6
=======================================
1990 1999.5 1419.1 580.4
---------------------------------------
1985 966.7 872.3 94.4
1984 804.5 835.6 -31.1
---------------------------------------
1980 494.2 660.9 -166.7
1970 110.0 146.0 -36.0
1960 38.9 63.4 -24.5
1950 17.4 30.0 -12.6
=======================================
1945 16.3 14.9 1.4
------------------------------------------
Source: "Flow of Funds Accounts
of the United States" (Federal
Reserve "Z.1" release).
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Table 2.
-----------------------------------------------
FOREIGN HOLDINGS OF US FINANCIAL ASSETS
AS OF 12/31/05 (Billions of Dollars
-- Latest Data Released 03/09/06)
-----------------------------------------------
% of
Total
Total US Financial Assets -----
Held by Foreign Investors 11154.3 100.0
===============================================
Credit-Market Instruments# 5383.9 48.3
------ ----
Open Market Paper 149.5
US Govt. Securities 3131.9
Treasury 2198.1
Agency 933.8
US Corporate Bonds 2102.5
-----------------------------------------------
US Corporate Equities 2303.7 20.6
------ ----
Credit-Market Instr.
+ Corp. Equities 7687.6 68.9
====== ====
-----------------------------------------------
Detail of US Government Securities
-----------------------------------------------
Treasury 2198.1
Official 1344.3
Private 853.8
Agency 933.8
Official 337.3
Private 596.5
------
3131.9
======
-----------------------------------------------
Source: "Flow of Funds Accounts of the United
States" (Federal Reserve "Z.1" release.) #For
the purpose of this analysis, the category
"Loans to US Corporate Business" has been ex-
cluded. As of 12/31/05, this category had tot-
al outstandings of $191.8 billion.
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Table 3.
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15 LARGEST FOREIGN HOLDERS OF U.S.
TREASURY DEBT AS OF 12/31/05, VS. THE
SAME COUNTRIES' HOLDINGS AS OF 09/30/05
(Amounts in Billions of $s)*
------------------------------------------------
12/31 09/30
Country 2005 2005 Change
------------------------------------------------
( 1) Japan 685.0 687.3 -2.3
( 2) Mainland China 256.7 252.2 4.5
( 3) United Kingdom 234.4 183.1 51.3
( 4) Caribbean Bank-
ing Centers@ 111.2 100.9 10.3
( 5) Taiwan 71.1 71.8 -0.7
( 6) Germany 67.0 63.5 3.5
( 7) OPEC 66.7 54.6 12.1
( 8) Korea 66.5 61.7 4.8
( 9) Canada 53.2 47.7 5.5
(10) Hong Kong 44.0 48.2 -4.2
(11) Luxembourg 39.9 41.3 -1.4
(12) Mexico 37.9 35.0 2.9
(13) Norway 37.0 33.4 3.6
(14) Switzerland 36.6 37.5 -0.9
(15) Brazil 27.4 26.2 1.2
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Total 1834.6 1744.4 90.2
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*Estimated end-of-period foreign
holdings of US Treasury marketable
and nonmarketable bills, bonds and
notes based on Treasury Foreign
Portfolio Investment Survey bench-
marks and on monthly data reported
under the Treasury International
Capital (TIC) reporting system.
Totals comprise both official and
private holdings. Data subject to
revision. @Includes Bahamas, Ber-
muda, Cayman Islands, Netherlands
Antilles, and Panama.
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Table 4.
--------------------------------------------------------
NET ACQUISITION OF U.S. FINANCIAL ASSETS
BY FOREIGN INVESTORS -- 2000 TO 2005
(Billions of Dollar)
--------------------------------------------------------
Years Ended December 31
-------------------------------------
2000 2001 2002 2003 2004 2005
----- ----- ----- ----- ------ ------
Net Acquisition
of Finan. Assets 963.0 657.7 767.8 842.5 1307.1 1191.3
================= ===== ===== ===== ===== ====== ======
Credit-Market
Instruments
----------------
Open-Mkt. Paper 4.3 -2.6 10.3 7.0 30.6 14.2
Treasury Sec. -70.5 10.5 138.9 288.9 358.5 297.9
Agency Sec. 141.9 103.7 112.3 6.5 104.8 172.2
Corp. Bonds 168.4 195.4 151.0 230.0 254.4 351.1
----- ----- ----- ----- ------ ------
Subtotal 244.1 307.0 412.5 532.4 748.3 835.4
----- ----- ----- ----- ------ ------
Corp. Equities 193.6 121.5 54.1 35.0 61.9 86.0
----- ----- ----- ----- ------ ------
Total 437.7 428.5 466.6 567.4 810.2 921.4
===== ===== ===== ===== ====== ======
Above/Net Acquis. 45.5% 65.2% 60.8% 67.3% 62.0% 77.3%
----- ----- ----- ----- ------ -----
MEMO ITEM@
----------------
Loans to Corp-
orate Business -2.2 -1.6 10.1 -0.8 6.3 60.6
--------------------------------------------------------
DISTRIBUTION OF TREASURY/AGENCY ACQUISITIONS
--------------------------------------------------------
Treasury Securities
--------------------------------------------------------
Official -5.2 33.7 60.5 184.9 272.7 83.8
Private -65.3 -23.2 78.4 104.0 85.8 214.1
---- ---- ----- ----- ----- -----
Total -70.5 10.5 138.9 288.9 358.5 297.9
--------------------------------------------------------
Agency Securities
--------------------------------------------------------
Official 40.9 20.9 30.5 39.9 38.5 98.2
Private 101.0 82.8 81.8 -33.4 66.3 74.0
----- ----- ----- ---- ----- -----
Total 141.9 103.7 112.3 6.5 104.8 172.2
--------------------------------------------------------
*Source: "Flow of Funds Accounts of the United
States" (Federal Reserve "Z.1" release). @Although
"Loans to Corporate Business" are classified by the
Federal Reserve as "Capital Market Instruments,"
they have been excluded for the purpose of this
examination, since they lack the liquidity of the
other categories.
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