August 15, 2007 (LPAC)--The U.S. Treasury Department's figures for net capital flows into the United States in June, released today, show serious implications for the future of the current international banking crisis, and what it will mean for the United States economy. Foreign purchases of U.S. corporate paper of all kinds dropped very sharply in June, even before the U.S. mortgage bubble really melted down, with all the securities backed by mortgages becoming unsaleable and choking up banks and hedge funds. It pulled down the overall flow of capital into the United States to about $58 billion for that month, "barely enough to cover the U.S. trade deficit."

Clearly, during the last few years of $1 trillion-plus annual investment subsidy for the United States economy from the rest of the world, a huge portion of that flow has gone into the "toxic waste" of the mortgage bubble--subprime mortgage-backed securities, their derivatives like CDOs, and the speculative debt paper of hedge funds and private equity funds.

In June, these huge flows of purchases of U.S. corporate bonds and securities collapsed by two-thirds, from $68.6 billion net in May to $22.2 billion net in June (purchases of stocks also fell sharply). Thus, despite the very large foreign purchases of long-term U.S. Treasury and agency (Fannie Mae, Freddie Mac) bonds in that month, the total net inflow of capital to the American economy dropped from $107.3 billion in May to $58.8 billion in June.

This drop will have continued further in July. The sheer size of this "debt speculation subsidy," before the bubble burst, indicates why the U.S. mortgage meltdown has now become a European and Asian banking crisis. These banks, were buying and financing the toxic waste of the asset-backed loan and securities markets built up on Alan Greenspan's mortgage bubble.

Now, the United States will have to "fund itself" after 15 years of big global subsidies--and do so with Federal credits for investment, infrastructure, and productivity.