http://www.321gold.com/editorials/saville/saville121704.htmlFlow of Funds
There were some interesting statistics in the latest quarterly "Flow of Funds" report issued by the Fed last week. The most interesting, as far as we were concerned, were the data on household net worth and foreign central bank holdings of US financial assets.
According to the above-mentioned report, foreign central bank holdings of US financial assets increased by $315B -- a 40% annualised rate -- during the first 9 months of this year. To put this amount into perspective, it is equivalent to about three-quarters of the total US trade deficit over the period in question.
So, does this mean that the US$ would have been much weaker if not for the yeoman-like efforts of these central banks?
Perhaps not, because although the foreign CBs have soaked up a lot of the dollars associated with the US trade deficit the fact that they have channeled these dollars back into US financial assets -- mostly Treasury and Agency debt -- means that they haven't actually taken any dollars out of circulation. Rather, what they have done is re-cycle a huge pile of dollars and, in the process, dramatically reduce the supply of US bonds. Therefore, they probably haven't done a lot to support the dollar even though this was their goal, but their actions have almost certainly resulted in lower long-term US interest rates and higher US asset prices than would otherwise have been the case. They have, in other words, unwittingly helped to promote US inflation and widen the US current account deficit.
The Flow of Funds report also notes that household net worth rose by $546B during the third quarter of this year; so although some analysts have repeatedly warned that the US consumer was 'tapped out' the reality is that US consumers, as a group, were much LESS closer to being 'tapped out' at the end of the third quarter than they were three months earlier.
In our opinion, those who forecast that a retrenching by US consumers will create problems for the US economy and the US asset markets are putting the cart in front of the horse. To be specific, it is very unlikely that US consumers will cut back on their spending and ramp-up their rate of saving as long as household net worth is increasing at a robust rate. Instead, it is more reasonable to expect that a downturn in asset prices and a consequential reduction in household net worth will LEAD downturns in consumer borrowing and spending.
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