Wednesday, October 17, 2007

Foreigners Dumped U.S. Assets in August

Foreign investors fled from U.S. assets in August as a meltdown in the U.S. subprime mortgage market triggered a global credit crunch, Treasury Department data showed on Tuesday.
Net sales of long-term securities such as bonds, notes and equities -- a more closely watched gauge of foreign demand -- hit $69.3 billion, also a record. The last time this measure turned negative was in August 1998, the month when Russia defaulted on its sovereign debt, sparking a global crisis.

Economists had expected net foreign purchases of long-term securities of $60 billion, according to a Reuters poll.

"Investors seem to be moving money outside of the U.S., which leads us to believe they are planning for a continual U.S. dollar decline," said Mark Meadows, currency strategist at Tempus Consulting in Washington.

"What they are saying," he added, "is they are not going to receive as much in return as it will cost them to hold dollars."

The net sales of $163 billion, which includes short-term securities such as Treasury bills, beat a prior record outflow of $42.3 billion in March 2001.

U.S. capital markets would have needed to attract nearly $58 billion of inflows in order to cover the August trade deficit.

"The diminished foreign appetite for long-term U.S. financial assets is alarming, and will weigh heavily on the dollar," said Tu Packard, chief economist at Moody's in West Chester, Penn.
What will happen if the United States can not attract foreign investors in order to cover the HUGE deficits run up by this administration? You can either print money to pay the bonds being redeemed which would lead to a further devaluing of the dollar or you would need to raise interest rates enough to make U.S. debt attractive again to foreigners. Either option will be bad for the U.S. economy.

This is what happens when you believe that deficits don't matter. Will Americans realize that this disastrous economic policy is actually the fault of this administration or will they blame it on the next administration. Only time will tell but I think people understand that the huge surpluses left by the Clinton administration were squandered by Bush as he presided over a huge redistribution of wealth from the middle and lower classes to the rich.

That is Republican economic policy in a nutshell. Give it all to the rich and the rest of us will be patient while we wait for "the trickle down effect". The Bush administration is a failure on absolutely every level.

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