US Inflation Warning

Financial Crisis

Although economists were expecting a $23 billion inflow of capital due to foreign purchases of all US securities, recent Treasury International Capital data showed there was a net outflow of $31.2 billion.

This means that foreign investors are less willing to subsidize the US economy in general.  An important subset of this total is the market for US Treasuries and T-Bills since the market for this debt sets the interest rate benchmark for all other debt.

China is the single largest foreign holder of US Treasury debt – to the tune of $776 Billion out of a total of $3.4 Trillion and China reduced this holding by approx $25 B from May to June 2009. Interestingly  Russia, the 7th largest holder of US Treasuries, has also reduced its holdings by $20 B since March.  Maybe the commies aren’t so dumb when it comes to economics after all.

As China’s appetite for U.S. Treasuries wanes the yield for U.S. Treasuries will have to go up. This will suck more money out of the economy just as the Fed is trying to pump it up to prevent further economic collapse.   The other alternative is for the US to devalue its currency either overtly (not likely) or with the help of inflation (far more politically expedient).

This is bad news for the Canadian high tech and manfacturing sectors that depend heavily on a low Canadian dollar.  A devaluation of the USD means a higher Cdn dollar and also the illusion of higher prices for oil, resources, and gold which are normally denomiated in USD.

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