Annex Newsflash 2005-08 March 22, 2005
Foreign Holders of U.S. Securities Increase Their Stakes to Record Levels
Sellout of America - II
Japan, China Lead Major Holders; Top 10 Account for 79%
PHOENIX, Mar 22 - About six months ago, at the height of the presidential campaign, we told you that a wholesale sellout of America was under way (see "Sellout of America," Oct 2004). And we backed it up with a myriad of charts and figures that supported that conclusion.
Well, six months later, things have gone from bad to worse. The just released January 2005 U.S. Treasury statistics show the foreign ownership of our government securities is at an all-time high, with Japan and China leading the Top 10 countries that account for 79% of the $2 trillion total (see the chart).
"America buys more than it sells and spends more than it earns," an Associated Press March 20 reported noted in its lead. "So who bankrolls the shortfalls? Foreign investors. The shortfall on all trade and investment income with the rest of the world swelled to an all-time high of $665.9 billion in 2004, according to the Commerce Department."
If foreign investors were to lose some of their appetite in accumulating dollar-denominated assets at the current rapid rate and unload their holdings, the prices of U.S. stocks and bonds could plunge, the AP said. And, interest rates - including those for mortgages - could soar. The economy could slow, and the nation's vibrant housing market could lose its shine.
Well, one interest rate that is widely expected to rise by another quarter-point is the Fed's interest rate that banks charge each other. It would be the seventh quarter-point increase since the Fed started raising rates last June, when the funds rate stood at a 46-year low of 1%t. The funds rate is currently 2.5% percent (see the chart).
If the Fed does boost rates by a quarter-point, commercial banks' prime lending rate, the benchmark for millions of consumer and business loans, would rise by a quarter-point to 5.75%. Which should strengthen the U.S. dollar and help reduce the soaring deficits, at least in theory (see "The Worst of Both Worlds," Mar 2005).
So far, foreigners have been willing to lend the U.S. money to finance its deficits, Federal Reserve Chairman Alan Greenspan says. The concern is what would happen if that changes.
In recent weeks, a South Korean official and the Japanese prime minister suggested that their countries might want to diversify their foreign holdings into currencies other than the dollar. Their words sent the dollar into a temporary nose dive.
Which raised fresh worries about the appetite of foreign investors to finance our twin deficits. It's what happens when a nation lets foreigners wag its tail.
Net purchases by foreigners of U.S. stocks, corporate bonds, Treasury securities and other investments totaled $92.5 billion in January, a sharp increase from December, the Treasury Department reported. Of that total, $78.2 billion came from private foreign investors, while foreign governments snapped up $14.3 billion worth of securities, the department's data show.
Japan's holdings in January stood at $701.6 billion, down from $711.8 billion in December, according to the Treasury Department.
China's holdings, including Hong Kong's, came to $247 billion in January, virtually flat compared the previous month. Britain's holdings stood at $163 billion in January, also essentially flat relative to December 2004.
The once high-flying dollar has fallen in value over the past three years. In theory, that should narrow the U.S. trade deficit because it makes American exports cheaper and imports to the United States more expensive. But as you saw in "The Worst of Both Worlds" (Mar 2005), that has not been happening.
Higher interest rates in the U.S. would also tend to restrain economic activity, which would diminish Americans' appetite for imports. That could help the trade deficit if overseas demand for U.S.-made goods is stronger. But alas, an ensuing rise in the U.S. dollar would mitigate against it. Again, at least in theory.
So the American people are caught between a rock and a hard place. The only winners in this global Ponzi scheme seem to be the bankers and the multinational companies with offshore production facilities and accounts. The more trade and debt, the the higher the bankers' interest income and the lower the multinationals' cost.
So guess on whose behalf the Bush administration may be driving this losing economic strategy for the American people? Hm... we'll give you only one crack at answering this question.
Happy bargain hunting!
For additional Annex Research reports, check out...
2005 IT: An Upside-Down View (Mar 2005); The Worst of Both Worlds (Mar 2005); IBM PC Sale Okayed (Mar 2005); Octathlon 2005: Accenture Wins (Mar 2005); IBM Global Services: Smaller, Shorter - Better? (Mar 2005); IBM 5-yr Forecast: Quality over Quantity (Mar 2005); Rumor Lifts EDS', Fujitsu's Shares (Mar 2005); Capgemini: Turning the Corner (Feb 2005); IBM Servers to Grow Again (Feb 2005); Carly's Fickle Fans (Feb 2005); CSC: Gearing Down on Purpose (Feb 2005); EDS: Grossly Overpriced Stock (Feb 2005); IBM Historical Update: 2004 Shot in the Arm (Feb 2005); New HeadTurners Series #1 (Feb 2005); IBM: A Crescendo Finale! (Jan 2005); Accenture: Strong Finish, Better Start (Jan 2005); Annex Coverage 2004: IT Services Dominate (Jan 2005)
2004 IT: EDS: The Titanium Stock (and other Wall Street tales) (Dec 2004); IBM PC: Good Riddance (Dec 2004); Fujitsu: Recovery Continues (Nov 2004); IBM Server Renaissance (Nov 2004); HP Hits Home Run (Nov 2004); Capgemini: Revenue, Stock Soars (Nov 2004); EDS: Jordan's Swan Song? (Nov 2004); To Russia with Love and $ (Oct 2004); IBM: Slow Quarter No Longer (Oct 2004); Accenture: Revenues, Profits Up, Stock Down (Oct 2004); Capgemini: A Takeover Target? (Oct 2004); Sellout of America (Oct 2004); Spy Wars (Sep 2004); Outsourcing Boomerang (Sep 2004); EDS to Cut Up to 20,000 More Jobs (Sep 2004); Capgemini Stock Plummets on Unexpected Loss (Sep 2004); HP Savaged by Wall Street (Aug 2004); Moody's Lowers the Boon on EDS (July 2004); HP: Delivering Value Horizontally (June 2004); Accenture: Revving Up a Notch (June 2004); Beware Your CFO! (May 2004); IBM: Changing of the Guard (May 2004); Capgemini: Texas-size Home Run (May 2004); Following the Money (May 2004); EDS: On a Wink and a Prayer (Apr 2004); HPS Wins by a Nose! (Octathlon 2004); Accenture: Burning the Track (Mar 2004); IGS: "Crown Jewel" Restored? (Mar 2004); HP: Still No Cigar (Feb 2004); Cap Gemini: Another, Smaller Loss (Feb 2004); CSC: Good Quarter Gets Boos (Feb 2004); EDS: "Hot Air Jordan" Flaunts Flop as Feat (Feb 2004); IT Industry: Whither Goeth It? (Jan 2004); Cronyism Is Alive and Well at EDS" (Jan 2004)