Brad Setser Profile picture
Mar 16 11 tweets 4 min read Read on X
One fact about the global economy should not be subject to debate any more -- the US is more than meeting global demand for reserve assets (a significant change from 2002 to 2014 ... )

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And since China has had a policy of limiting its Treasury holdings (and shifting fx reserves over to the SCBs and policy banks) since around 2010, China's share of the Treasury market has shrunk radically ...

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The split is imprecise (Treasuries held by central banks in offshore custodians count as "private") but there is no real doubt that the role of official investors in the market has shrunk -- and there has been a big increase in private US holdings ...

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The stock in private domestic hands still is absolutely huge (it is around 50% of GDP) but it is up ~ 20 pp of GDP compared to the pre-COVID era, and a lot of that increase has been funded by US money market funds, either directly or indirectly (via repo)

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These structural shifts help explain why the Treasury issued a lot of bills in 2022 and 2023 -- that was where the demand was ...

Note issuance actually picked up significantly over the course of 2024 ...

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Note issuance is now running at just under 5% of US GDP -- a level consistent with a stable bill share if the fiscal deficit is around 6% of GDP. Counting QT, the market absorbed note supply equal to the fiscal deficit last year ...

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Foreign demand for notes has been stable at around 1.5 pp of GDP/ $450b -- a decent number absolutely and relative to history, but modest v total supply.

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Increased note (coupon paying Treasuries, bills are sold at a discount to pay) issuance has been facilitated by gigantic fall off in mortgage issuance (Fed tightening clearly impacted the secondary market in housing)

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And shifting from the flow of funds data to the Bertaut Judson monthly flow data, the bulk of foreign demand for Treasury coupons does look to be from true private holders. b/c China shifted to bills at the margins, my estimates imply its note holdings fell modestly in 2024

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Bottom line -- the increase in the stock of Treasuries in the market since the start of the pandemic has largely been absorbed domestically ... a point that is well known among actual market participants (who like to point that there are more price sensitive buyers)

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& absent a very elastic definition of reserve demand that includes private holdings abroad, it no longer is really accurate to say the US external deficit reflects excess global demand for reserve assets. That was the case imo from 03 to 13 -- but the world has changed

/end

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More from @Brad_Setser

Jul 2
I liked Trump's term one trade policy a lot better than Trump's current trade policy.

Back then, the bulk of the tariff increase was on goods from China.

Now, not so much

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Gearing up for the May trade data release

In April, tariff revenue was around $20b, equally split between China and the rest of the world.

During Trump's first term the increase in monthly tariff revenue (to $5/6b) was essentially from tariffs on China going from $1b to $4b

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Tariff revenue from countries other than China, for future reference ...

Taiwan so far has gotten off relatively lightly, largely b/c of the semiconductor exclusion from the reciprocal/ base tariffs (expected future 232 sector)

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Read 4 tweets
Jun 30
Sure seems like the world woke up to the fact that it was enormously overweight US assets (and thus the dollar) on "Liberation" day.

1/
Foreign demand for US bonds was a bit too strong in 2023 and 2024; it has pushed the dollar up to untenable levels.

But there is a some risk of a real reversal now

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Not sure that Trump's comments over the weekend about the future path of US rates (and issuing bills until he installs a compliant Fed chair) will increase global appetite for US bonds

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Read 7 tweets
Jun 30
Just a reminder that Saudi Arabia runs a current account deficit these days -- and its break even oil price (for the balance of payments) is around $90 a barrel ...

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The latest balance of payments data only runs though q1 -- but the difference between the oil price and Saudi's breakeven implies a much larger deficit in q2 than in the past few quarters

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Saudi external asset accumulation over the last 4 quarters has been financed by debt, not out of its oil proceeds

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Read 6 tweets
Jun 27
One of the surprises of the first half of the year was that China held the yuan stable even in the face of significant new US tariffs.

China's q1 BoP data helps explain why -- China was in a quite strong underlying position

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in the past few quarters, China's reported current account surplus jumped up to $150b a quarter (it is still understated, I think it is really ~ $200b a quarter) and the state banks have added $50-100b a quarter to their foreign assets.

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The balance of payments signal from China's state bank flows (plus PBOC flows) isn't as strongly as in 2020 and 2021, but it has been pretty consistent ...

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Read 5 tweets
Jun 26
Not sure the issue will come to a head on July 9th (it is always possible to provide more time for the negotiations) but have long thought that the "232" sectors would be the hardest part of the negotiations with the EU (and other allies)

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Pharma frankly should be easy -- as the US trade deficit in pharmaceuticals is made in America, as it stems from a flawed US tax policy. But that isn't how the Trump administration sees it ... and the real negotiations probably cannot start before the US case.

2/
And with autos, the Trump administration's push for a quick deal with the UK set a baseline (10% tariff and tariff rate quota for 2024 export levels) that all the big auto exporters now needs to match ...

3/
Read 6 tweets
Jun 24
It is way too early to write any assessment of the full impact of President Trump's turn toward tariffs as a core tool of US economic policy.

But there is no doubt that immediate impact was ... well ... a much bigger external deficit.

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The swing in goods trade tied to tariff front running was bigger than any swing during the pandemic (admittedly, it was very concentrated in pharma and precious metals)

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Some of the impact of tariff front running will dissipate with time -- but there are more subtle signs of deterioration in the underlying balance. The investment income balance for example remains in a deficit (a big structural shift that is offsetting the oil swing)

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Read 5 tweets

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