NEWS AND COMMENTARY October 3, 2000 Foreigners Sold Net $6.07 Billion U.S. Treasury Securities in July By Dow Jones Business News Exodus of Foreign Capital Beginning ... Weiss comments WASHINGTON -- Foreign investors continued to dump U.S. Treasury securities in July, selling a net $6.07 billion in the month, according to the Treasury Department. The selling in July marked the third straight month of net sales by foreign investors. In June, overseas investors sold $17.93 billion of Treasury bonds, notes and bills, while in May they sold $7.02 billion. In the July figures, the vast majority of the sales came from individual investors, who unloaded $5.11 billion in securities. Foreign central banks sold $639 million in Treasury debt in July. International and regional financial institutions sold $315 million. The country with the largest holdings in U.S. debt continued to be Japan, at $337.7 billion, up from $336.9 billion in June. The United Kingdom remained in second in terms of holdings, at $220.2 billion, down from $225.2 billion. Total foreign holdings of Treasury bills, notes and bonds fell to $1.240 trillion in July from $1.245 trillion in June. Sales of government bonds by foreigners represent an outflow of capital from the U.S., while purchases represent an inflow. Many analysts have pointed to the continued willingness among overseas investors to invest in U.S. securities of all types as one reason why the U.S. has been able to run a large chronic trade deficit. We told you before what the consequences of a full-scale departure of foreign investment would mean for the U.S. dollar. As foreign investors abandon the U.S. stock and bond markets in favor of returning their capital to their homelands, the dollar will weaken and the trade deficit will bury the U.S. economy. It seems as though the exodus has already begun in Treasuries. And, as the stock market continues to struggle, it won't be long before foreigners start selling off stocks, too. Overseas investment in the U.S. economy is the one reason that the widening U.S. trade deficit hasn't triggered high inflation. It also enables U.S. consumers to continue on a spending spree without regard for personal savings. However, as foreign capital leaves the U.S. bond market, a glut of dollars will be released, weakening the dollar and triggering higher inflation. And though a weaker dollar should shrink the trade deficit, it will be too late -- the U.S. will hurdle into recession as Americans struggle to pay higher prices for essential items and pay off incurred debt at higher interest rates.

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