Lots of talk about the dollar's role as a reserve currency.

Less talk about the United States role as the main (net) borrower in the global economy -- and the interest the US has to pay as a result.

thread

1/ US (net) external debt is around 45% of GDP (down a bit from its peak b/c of fast GDP growth and the mark to market losses of foreign bond holders)

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My subtle reframing of the reserve currency debate, in the WSJ --

1/ I may be a bit biased, but I think this is a pretty good chart -- the stock of US Treasuries held by private US investors is still pretty small

* custodial holdings in Belgium and Luxembourg blur the line between foreign private and foreign official

2/

The IMF is totally burying the real lead here with the "excluding China" bit --

The most interesting bit of the External Sector Report is the (not discussed) chart on Chinese gross outflows

1/

https://twitter.com/NGurushina/status/1812858703155998967

It isn't exactly a secret that I think the IMF has made an error by deprioritizing balance of payments based analytic tools and concepts in a range of contexts, including in its analysis of China. Let me see if I can explain why ...

2/

Useful Bloomberg story highlighting how the Saudis are spending beyond their (current) means even with relatively high oil prices

1/

bloomberg.com/news/articles/… I prefer balance of payments based analysis to the standard fiscal analysis (a lot spending can be done off budget via investment funds)

The Saudis now need $200b in export proceeds from oil to cover their imports, broadly defined

2/

China's massive June surplus may get a bit of attention, as it reflects an economy again growing on the back of exports -- at a time when the world is increasingly worried about reliance on Chinese supply

1/ Nominal exports are clearly growing again, after a brief stall tied to the post COVID slump in consumer goods demand. In fact export volumes are growing faster than the nominal chart implies -- they are up 12% or move y/y

2/

A thread on the global current account and the opacity of global capital flows data --

and the problems created by China's debatable current account numbers.

1/ As the chart above shows, the current account surplus of China and the world's 2 big oil exporters has fallen back to earth (thanks in part to the big but suspicious fall in China's reported number). and the remaining surplus isn't flowing directly into US assets.

2/

Choices have consequences -- Kenya (and the IMF) decided not to seek a restructuring that would stretch out payments on Kenya's bonds and Chinese policy banks loans and instead rely only fiscal adjustment (with a bit of bridge funding by the WB) to restore confidence

1/ The $2 billion bond maturing last year (and the LIBOR + 340 bp Railway loan with China Exim) are both real choices. Kenya could have sought agreement to push out that maturity by 5 years at say 5% -- the market expected a restructuring last year ...

2/

For most countries, the "China shock" manifests itself largely through an increase in imports --

Germany is a bit different. It is facing a major shock to its exports -- even before the risk of a Chinese response to the EU's inside the rules CVD case v Chinese EVs

1/ Chinese imports of German cars -- which haven't been growing as a share of Germany's economy, are now falling quickly.

And China is making more of machinery at home as well

2/

Japan's Norinchukin -- the fishers, farmers and foresters cooperative and the one time whale of the CLO market-- is a great financial story.

It is a quasi public institution ... that put the majority of its assets abroad

1/ Norinchukin ("Nochu") has just over $300b in foreign securities (counting investment trusts). I get $310b from its end March 24 disclosure, including $50b or so of CLOs.

And it now plans to sell over $60b of those to curb its (hedging) losses

2/

bloomberg.com/news/articles/…

It actually isn't a conspiracy theory.

The main custodial centers hold more Treasuries than China does directly these days, and they (by definition) are holding the Treasuries for someone else.

1/

https://twitter.com/SomeBitcoinDude/status/1803498767292719408

here is a plot showing the scale of US treasuries now held in the European banking centers (UK, France) and the European custodial centers

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Sometimes I wonder why there isn't a bit more populism in US politics.

Big Pharma (6 major US pharmaceutical companies) literally collective paid no corporate income tax in the US in 2023 ...

1/ This is not an accident -- over time, and especially after the Tax Cuts and Jobs Act, while is falling short in "America first" terms, the big US pharma companies systematically report losing more in the US while making more abroad.

2/

Bloomberg has suggested that the Chinese export surge is driven my Russia -- which isn't quite true.

Take a look at China's exports to a select group of large emerging economies.

They are way up too (Data is for autos and auto parts)

1/x Let's look at some specific countries.

Take Thailand --

it is a big auto parts producer, and a major hub of Japanese auto production.

Huge swing there since 2020 --

2/

Chinese auto export data through May:

Total vehicle exports of 6 million (trailing 12m sum)
Passenger cars just under 5m (trailing 12m sum)

1/ About 2/5ths of the 5m passenger car exports were EVs and plug in hybrids.

3/5ths (3 million) were ICEs.

2/

Sometimes I think the main reason why China allows some imports of pork, beef, chicken parts and some other agricultural goods is to make sure it has easy retaliation targets in industrial trade disputes

1/

bloomberg.com/news/articles/… The main beneficiary of tariffs on EU pork would likely be Brazil (increased its exports significantly), hard to see why China would want to reward the US with more pork exports for even bigger EV tariffs ...

2/

In addition to having questions about whether the IMF made an error in non seeking a reprofiling of Chinese claims and bonds coming due in the Ecuador program period, I have some doubts about the IMF's technical analysis ...

1/ To start, the financing gap table in the actual program lacks any detail. Since when did the IMF stop disaggregating payments due by type and creditor?

(the data is available in Tables 3 & 5 tho more detail on Chinese claims is needed)

2/

Just a reminder -- the current Chinese 15% tariff on imported autos was a unilateral concession China made in the early days of the Trump trade war to try to ward off US tariffs, and split the US and Europe.

1/ The tariff in the glory days of the German export boom to China (before 2017) was actually 25% --

And there is no evidence that China would have lowered this absent U.S. pressure, so Germany ended up getting a gift here out of the Trump tariff threats (which Merkel opposed)

2/

The US has a large fiscal deficit (ask the IMF) and a big stock of public debt.

But the amount of Treasury notes (all coupon paying securities) that the private market needs to absorb is still under 50% of US GDP.

(data excludes Bills, which sell themselves)

1/ Obviously, this is in part a function of heavy bill issuance to meet demand from domestic money market funds (high short-term rates and all).

But it also is a reflection of Fed and foreign official holdings.

2/

Two huge and powerful forces are pushing for further globalization:

1) A flawed US corporate tax code that encourages offshoring (see US pharma imports)
2) China's domestic economic weakness, which has pushed it rely on exports

1/

https://twitter.com/ForeignAffairs/status/1798965048804810834

The thing is neither force is pushing for a particularly healthy form of global integration. My view at least.

And that is often missed in the "deglobalization is happening and it is bad" narrative often used by major financial publications.

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A thread with a detailed, and fair, critique of my argument that Turkey's current fx policy risks encouraging a risky carry trade ...

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https://twitter.com/ibrahimmturhan2/status/1799318936426873053

A couple of observations. the CBRT (and Simsek) have been clear that they want a strong TL. And that they want to bring inflation down, rebuild reserves and bring Turkey's current account deficit down.

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Turkey is playing a dangerous game. The lira is being pushed up in real terms to limit inflation: the crawl has been removed, and TL rates are high, making the carry attractive while inflation continues.

The real appreciation though works against current account adjustment

1/ As Robin Brooks noted, Turkey's exports were weak in April -- and that will push up the current account deficit. And exports have basically been stagnant for the last two years -- which isn't great for a country that really needs current account adjustment.

2/

Good piece by @DSORennie on US-European policy differences towards China even as both sides of the Atlantic converge in their diagnosis of the economic challenge China poses ...

1/ I think policy convergence will come eventually, as least if President Biden is reelected (Trump tariff Europe ... )

Remember that the now forgotten phase one deal was also about reciprocal market access as the solution to US-China trade tensions

2/

economist.com/china/2024/06/…