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

Mar 17
Trump seems serious about introducing a sectoral tariff on pharmaceutical imports --

But there is a better way to bring the trade deficit down: get rid of the pro-offshoring provisions of the Trump-Ryan Tax code

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cfr.org/blog/american-…
There 2017 TCJA clearly failed to bring the pharmaceutical industry back home -- in fact, it encouraged the complete opposite, as imports and the trade deficit in pharmaceuticals soared after the 17 tax reform

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What's more, it was an "America last" tax reform -- firms that produced their drugs outside the US and moved their IP abroad could lower their tax bill. And that's what happened: the typical large US pharma company reports losses in the US and large profits abroad

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Read 5 tweets
Mar 11
The US runs a surplus in manufacturing trade with Canada, so if the goal of the tariffs is to reindustrialize the United States, the trade war with Canada is doubly counter-productive

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Canada is the wrong target, as it is in fact a good market for US manufactures. The best in fact. And raising the price of industrial inputs (like Canada's low carbon aluminum) makes US downstream industry less competitive ...

2/
The US aluminum market (primary aluminum market) now clearly only with imports (US production is a fraction of demand) -- so raising the price of imports raises all prices that aren't locked in with long-term contracts. that's why the original Trump 232 tariff was only 10%

3/
Read 5 tweets
Mar 11
I see that President Trump has said (again) that the only way to get the pharmaceutical industry back to build a tariff wall.

There is a actually another way -- change the provisions of the TCJA that incentivized offshoring.

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I have been baning on about this for a while. That's because it is obvious in the data. Pharma imports were $112b before the TCJA. They are now $260b.
the deficit in pharma has also exploded ...approaching $260b.

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And what's more, we know from the 10-k disclosure of the big pharma companies (top 6) that they collectively reporting losing money in the US (they make large profits abroad) and they didn't set aside anything out of the 2024 earnings to pay their 2024 US corporate tax

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Read 7 tweets
Mar 9
Good thread. A couple of additional thoughts.

A) China's central government has essentially no net debt. Let me repeat that no net debt (its financial assets match its liabilities). It could be doing a lot more to support consumer demand.

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B) Gerard mentions the importance of all components of domestic demand not just consumption. Fair enough. What worries me is that manufacturing investment has held up the investment component of demand, and it is unlikely that it can be sustained at current levels

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Let me put it this way. Five years ago China had an ICE based auto industry that could produce 40m cars, way more than China's own demand. By the end of this year it will have an all new EV industry capable of producing 25m cars -- which took a ton of investment ...

3/
Read 5 tweets
Mar 8
My regular reminder that foreign governors haven't been the marginal buyer of Treasuries for the last decade, and certainly not the last 3 years ...

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Official demand has been extremely flat the last two years -- with Chinese sales offset by other countries purchases. China is adjusted for Euroclear -- and Chinese sales were stronger in 23 and early 24 than in recent months ...

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And unlike in 22 and 23, China is letting its Agency book roll off -- so on net it looks to be reducing its US bond holdings in the US data (subject to the caveat that it may be using custodians other than Euroclear more intensively)

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Read 7 tweets
Mar 6
US import dominance is unchallenged!

Tariff front running seems sure to make the trade deficit great again ... January was a case in point

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Surging imports led the trade deficit (sign reversed) to pop off the page (the annualized run rate is something like $1.8 trillion ... )

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And there an absolutely huge gap between surging imports and sliding exports (a 15 pp gap, which implies an explosive increase in the trade deficit)

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Read 10 tweets

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