TIC flows have averaged $57.3 billion per month since January 2005. This latest estimate of $2.4 trillion for 2009 means that Treasury sales will have to increase more than 300% to foreigners to cover the gap or this shortfall will have to be made up through domestic sales.
What does this mean for traders and investors? First, this is inflationary because if history is any guide, the government will print more money and employ more helicopters from which to throw it into the economy, a methodology euphemistically labeled “quantitative easing.” The next all-too predictable development will be strong upward pressure on interest rates as U.S. Treasury investors demand higher returns to offset their losses due to increasing inflation.
Comments: There is going to be extensive arguments about what will happen next: inflation or deflation. I argue that the world will necessarily need to have inflation. In fact, this is probably the best outcome. The alternative is massive deflation a la Japan 1990.
The truth of the matter is that my argument will not be known to be right or wrong right now. The best thing to do is to monitor what the market is telling us. Watch TLT - this ETF tracks the 30-year U.S. Treasury.