RGE - So where exactly are all the world's reserves going?

RGE - So where exactly are all the world's reserves going? : So where exactly are all the world's reserves going? Created: Feb 16 2006 We don't yet formally know the BEA's estimate for the end of the year current account deficit, but we have a pretty good idea. We have the trade data for the entire year, and data on investment income and transfers for the three of the four quarters. We also now have a lot of data about how the US financed its current account deficit. One hint: debt. Enough to have a pretty good idea what the year end data will show about a lot of things. One thing is clear. There is going to be a big fall off in recorded central bank flows to the US. A really big fall off. In 2004, central banks provided the US with close to $400 billion in financing. The BIS thinks that understates the "real" financing provided by central banks, since central banks increased their offshore dollar bank accounts by $100b or so - so roughly $500b of the world's $640b or so in (valuation adjusted) reserve growth ended up dollar assets of one kind or another. The US data is going to show far smaller inflows in 2005. The TIC data shows that central banks bought about $115b billion in long-term securities, down from $236b in 2004. And that overstates total central bank purchases of securities. In 2004, central banks added to their holdings of short-term Treasuries as well. In 2005, they reduced their holdings of short-term treasuries by $43 billion. So, in net, central bank holdings of US securities increased by $71-72 billion v. $324 billion or so in 2004. Foreign central bank's "onshore" dollar deposits are up by 19.2 billion in the first three quarters - so a reasonable estimate for the full year total is $26.6 billion. The total last year was $70b. That would put total central bank financing of the US - if you believe the US data - at a bit under $100 billion, or about ¼ the level of 2004. If you read this blog regularly, you know I don't believe the data. Why? Simple: there hasn't been a comparable fall off in global reserve accumulation. See Bill Pesek. The IMF put global reserve accumulation in 2004 at about $700 billion. Roughly $60 billion of that came from the rising dollar value of euro reserves, so the "flow" or "valuation adjusted reserve increase" was closer to $640 billion. The dollar/ euro started 2004 at around 1.26, and ended above 1.35. According to the IMF, total global reserves increased by $327 billion in the first three quarters of this year. During that time, the euro fell from $1.356 to 1.2060 - reducing the dollar value of a lot of euro denominated reserves. Other reserve currencies (the yen, for example) also fell against the dollar. Those moves cut the reported stock of reserves by about $100 billion by my estimates, so total reserve accumulation for the first three quarters was around $425 billion. Add in another $100b for q4. That is very conservative. I estimated a $92 billion (valuation adjusted) increase for the major emerging economies alone. That brings the global total up to $525 billion, maybe more. $550 b would not surprise me. The kicker: that doesn't include the $63b increase in the foreign assets of the Saudi Monetary Authority. The Saudi's don't report all the funds held by the central bank as reserves - only a tiny subset. That puts the total increase in central bank assets in 2005 at between say $588 billion (call it $590b) and $610 billion. And if you include all the foreign assets of the Saudi monetary authorities, by rough estimates, the pace of reserve accumulation by emerging economies actually picked up substantially in 2005. I get a (valuation-adjusted) increase of around $430 billion for the major emerging economies (all the major Asian economies, Brazil, Turkey, Mexico, Russia, and the Saudis) of the world in 2004, and closer to $510 billion in 2005. In sum, there hasn't been much of a fall off in reserve accumulation, only a fall off in recorded central bank inflows to the US ... Hmmm. If central banks really only invested $100b in the US in 2005, and my estimate on their total reserve accumulation is right, that implies $490-510b in inflows to other reserve currencies. But there has not been an acceleration in overall inflows into the Eurozone. I am not a huge fan of the overall "bond conundrum" analysis of Christopher Balz of Commerzbank - he take the US data at face value, and I think understates the role of central banks. But he does have a nice chart showing illustrating this point on p. 4 of his report. Hmmm Of course, there is another possibility: offshore dollar reserve accumulation and hidden central bank buying account for a decent chunk of the "private" inflows in the TIC data.