Foreign savings entering the US and its function of boosting the valuation of financial assets.

But how can the dollar be simultaneously a base for off-shore dollar credit, the second aspect and condition for the existence of the dollar as a hegemonic international currency? The answer to this question is simple: what accumulates in the US, in the form of financial investments, is foreign savings. You just have to understand how this savings works in the US and then understand how it works out of the USA.

Foreign savings entering the US supplement national savings insufficient because of the excessive consumption of US households who save less and less. The equation is simple, the more Americans consume, the more they run trade deficits: they must, therefore, import the savings they need to cover their investments.

Foreign savings add to the savings of US households and businesses. This nationally available savings provides the basis for systemic monetary creation that allows the growing indebtedness of all major players in the economy: households, businesses, public administrations.

This growth in debt, supported by bearish interest rates, supports a monumental valuation of financial assets. This valuation allows their face value to deviate from their issue value. Provided they are held as real counterparties, these valued assets provide the basis for the gap between available savings and the growth of debt and the financial market debt that finances them.

As a result, US national indebtedness can increase and the financial market has sufficient financial resources – partly fictitious – to continue to expand and support the economy by providing credit volumes that exceed the level of government debt. nationally available savings.

Outside the US, off-shore dollar credit can grow steadily for reasons related to how financial globalization works. We need to take a closer look at the dollar inflows and outflows to understand the mechanism that allows the development of off-shore credit in dollars.

Net acquisitions of financial assets resulting from sales and purchases of assets by foreigners in the United States and by Americans outside the United States.

First of all, net acquisitions of financial assets by foreigners are necessarily higher than net acquisitions of financial assets by Americans outside the US, which is the basis for covering the deficit of the balance of payments by the balance of financial flows.

But capital outflows provide a sufficient amount of dollars to return some of the savings that went into the US in the form of dollars. The US market remains a hub of capital.

Admittedly, the financial market absorbs more financial investments than it returns, but the volume of refund provides the monetary base necessary for the expansion of dollar-denominated credit that is made outside the US. For this expansion to respond flexibly to the dollar credit requirements generated outside the US, it is sufficient that off-US dollar credits generated outside the US operate in exactly the same way as investments generated by nationally available savings in the US. Savings consist of US national savings and foreign financial flows.

There is indeed a paradox in the way the credit system works. If the balance of capital entering and leaving the US to vampirize global savings, credit operations made outside the US dollar would have contracted for a long time for lack of dollars in sufficient quantity, the US financial market would indeed play the role global savings trap. This was not the case since capital entering the US is valued like US capital.

Equity and mutual fund purchases – the value of which is pulled up by the stocks that compose them in part – are the best example of this dynamic. Shares and mutual fund shares can be valued with the upward movements of stock exchanges and provide the value counterpart of off-shore loans issued in dollars. The value of shares and mutual fund shares has the particularity of accumulating in the US, this accumulated capital benefits from the general effect of rising stock prices stimulated by the stock market. Equity assets are only the most visible part of this inflation, fixed-yielding assets can be accounted for with the value of their future interests or their transfer value whenever they can be sold with a capital gain. Finance does not lack talented accountants to account for virtual capital gains as the current value.

In a globalized financial economy, it is then enough for foreign holders of the capital present on the American market to include in the cover of credits they grant outside the US the value of assets held in the United States. In a globalized financial economy, the systemic monetary creation that the US practices can simply be exported out of the US because of the cumulative value of capital that has sold in the US. It is still necessary that foreign capital continue to accumulate in the USA.

We must, therefore, not a double paradox: a dollar-dominated world monetary order assumes that trade deficits persist and that foreign capital entering the US is always greater than the capital that comes out of it. It is apparently the world upside down, but this reversal is only the translation of the imbalance of US external accounts that must be corrected by financial mechanisms increasingly paradoxical. Offshore credits issued in dollars can, therefore, use fictitious values in the same way as credits issued in the US.

For the dollar to remain the major international currency and credit, it is, therefore, necessary for the US trade deficit to widen and simultaneously that the inflows and outflows of financial flows remain unbalanced. Without this imbalance, foreign capital would accumulate too little in the US to provide the basis for off-shore credit issued in dollars.

We will give a very brief comment on the latest budget data released by the Treasury. The reference period is the fiscal year 2010.

The annual budget deficit stands at $ 1291 billion, or $ 259 billion less than the deficit anticipated by the US Treasury. The US has therefore reduced the budget squeeze because of an increased risk of sovereign debt.

This reduction is reflected in the US fiscal deficit. While the fiscal deficit was expected at $ 1850 billion, it is only $ 1652 billion, or $ 198 billion less than expected.

It will be necessary to wait for the publication of the December Treasury Bulletin to determine why the fall in budget expenditures is not reflected in the growth of the financial debt. One can think that the Treasury, borrowing for the sub-federal administrations off budget, had to abound the caisses of American territorial authorities in difficulty. This is the most likely hypothesis.

If we focus on the budget deficit – integrating the expenditure of ministries, agencies, and social insurances – it appears that they are 1.78 points of GDP (Reference point of GDP in 2010 T2 = 14575: 100 = 145 source BEA T. 1.1.5 GDP) which was not injected during the 2010 fiscal year. Can the slowdown in the recovery find its explanation in this fall?

The fall of the credit injection did not happen anytime. As our chart shows, since the beginning of 2010, budget deficits have fallen. The cumulative effect of this slowdown was in T-2 2010 a marked drop in growth.

The thesis of a recovery on credit seems to indicate an extreme sensitivity of GDP growth to the downward trend in the budget deficit. We can anticipate the poor performance of the GDP of the T-3 2010 by considering the quarterly developments in spending.

The 2009 T-3 deficit was $ 383 billion and the 2010 T-1 deficit was $ 327 billion.

The 2010 T-2 deficit was $ 286 billion and the 2010 T-3 deficit was $ 289 billion.
It is therefore likely that the GDP performance of the 2010 T-3 should be close to that of the 2010 T-2.
We will refrain from giving a figure, but we can consider that a GDP above 2% would indicate that there is a small endogenous growth engine.

It will be necessary to wait for the publication of the GDP of the end of October and its consolidation during the two following months to check if the growth is always entirely on credit or if there is a draft of recovery.

For the moment we remain in a position established for a year. The recovery is fictitious because it replaces private indebtedness with public debt. If the crisis is a depression, we continue to think that the federal state has spent too much and not enough. Too much because it has degraded US sovereign debt, not enough because the level of public deficits is insufficient to get the country out of a depression.

The drama of the USA is that they no longer have the resources and the international financial credit to raise their budget and/or financial deficit to 20 points of GDP for 2 to 3 consecutive years. This was not the case during World War II when the US really came out of the depression. The product of their weakness seems to be the country’s commitment in a Japanese-style scenario: low-interest rates, rising public debt, poor growth.

So there remains the solution of the monetization of the debt. It is a temptation that starts to inspire the reflections of the FED, but not yet its policy. Contrary to alarmist rumors about a Fed willing to monetize the public debt with astronomical sums, the policy pursued by the FED aims to combat the risk of deflation by injecting liquidity covered by deposit-taking institutions (Bank, Credit Union and savings bank) who find their account. With a credit in full contraction, the supply of credits to the Fed – so-called excess reserves – to the insignificant advantage for the financial sector of contributing to the financing of the Treasury without running the risk of buying a sovereign debt whose objective observers know that it becomes more fragile every day.

This fragility is revealed in the FED’s purchase of treasury bills, but also in the guarantee of debt consolidation and issuance of treasury bills under satisfactory conditions. That this guarantee can be an admission of weakness does not seem to have had too much impact on investors. But financial distrust sets in slowly and always manifests itself as a sudden reversal. The markets are sheep.

The US entangled in a crisis, which no one sees the end, find themselves having to assume the insoluble effects of the rise for 30 years of imbalances. And when the imbalances produce their effects, the situation returns, insoluble contradictions appear, and the crisis lasts …