Economic Rebalancing

The global economy is horribly out of balance, with the United States going deeper into debt each year as a result of a huge trade gap. This blog describes the process of global economic rebalancing. If you have any comments or questions about the posts here, please don't hesitate to use the comments section.

Sunday, January 21, 2007

Rebalancing on Hold

As long as foreign central banks are willing to stockpile dollar assets, the rebalancing process is held in check. The US goes futher into debt and the dollar stays up against the Yen.

Here are 2 different graphical views showing an uptick in the custodial accounts managed for the Fed on behalf of foreign official institutions during Q4 of 2006. The first shows average weekly purchases of treasuries and agency debt during the past 12 quarters:

The second shows total holdings over that same period, with a noticable uptick during q4:

If that wasn't enough buying in itself, the Fed also got busy during Q4, after stepping back in Q3:

It's not like the Fed needs to help the banking sector juice the money supply any more than they have already. M2 grew at a 7.8% clip during Q4, and the lone remaining component of M3 (Institutional Money Funds) at a 23.1% annualized rate (showing who the real beneficiaries of recent growth were).

Three unsustainable forces keep the status quo alive for now:

1. Rapid money supply growth is needed to fuel the ponzi scheme that the American financial system has become.

2. Suppresed interest rates, thanks to an explosion in the derivatives markets, keeps the debt service burden from growing too large for the government and indebted companies/individuals.

3. Support for the dollar prevents the Yen carry trade from collapsing in on itself.

All three are worth watching to see when the rebalancing process will be allowed to proceed. Until then, American wealth continues to evaporate.

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