Filling in the picture

Two final points: Capital inflow can also take the form of direct investment, i.e., foreigners buying entire companies, shopping centers and office buildings, and other hard assets directly instead of through the medium of a “security.” At some point, the dollar becomes so cheap that these assets are irresistible. That is what happened in the mid-90s — a vast inflow of direct investment, and it can indeed save the dollar even if portfolio inflows continue ever weaker.

Second, we always joke that we know we have a dollar crisis if the U.S. Treasury holds an auction and nobody shows up. That is, when the Fed has to raise interest rates to the point where rates at the long end — which can be influenced by the Fed only indirectly — rise enough to induce the marginal buyer. But so far, foreigners are still taking 30 to 40 percent in the quarterly refunding, and with the U.S. budget deficit and funding requirements falling, we may not see a shortfall for official U.S. government paper by foreign official government entities.

The problem lies with equities and private investors. The only solution to “excessive” outflow is regulation, such as a tax on foreign investment. This is old-fashioned and seems so unlikely in today’s American political environment as to be impossible. That doesn’t mean politicians won’t talk about it. By the time they are talking about it, though, it’s already too late to head it off at the pass, and we will be in full-blown crisis mode.

What are the odds? Nobody knows, because nobody can forecast the capital flow report. One bad report should not, perhaps, be the foundation of a scenario on which to bet serious money. But keep an eye peeled for the mid-March TICS report (for January flows). If it’s bad again, we’d start building a long position in yen.