The Inflow of Capital to America Is Public Sector, Not Private Sector

Brad Setser agrees with Marty Feldstein:

RGE - Martin Feldstein is right: Felstein has argued that more "competitive" dollar would contribute to reducing the US trade deficit, and at least help to slow the rise in the US current account deficit. I agree -- though I would think the case for Asian and Gulf appreciation is stronger than the case for Euro appreciation. Dollar depreciation alone isn't enough... but it is a part of the process....

Feldstein also has argued that the US data understates central bank financing of the United States. Throw in financing from the oil states' investment authorities as well. And the more I look at the data, the stronger Feldstein's argument that the US data understates official inflows looks.

For one, recorded inflows of around $220b seem low relative to global reserve accumulation (after adjusting for valuation changes, and including all Saudi foreign assets) of around $660-670b. There is no doubt that central banks bought more euros and pounds and yen in 2005 than they did in 2004. Recorded purchases of euros, yen, pounds and the like in the IMF's COFER data... leaving $350b for the dollar.... However, the IMF COFER data exludes reserves China shifted to its state banks (and a smaller currency swap), Taiwan's reserves and the increase in the Saudi-Monetary authorities non-reserve foreign assets. Add those in and global reserves grew by about $660-70b by my estimates. So even if the world's central banks bought $250b of euros, pounds and yen in 2005, that still leaves a bit over $400b for the dollar.... And the $660-70b total leaves out the Norwegian oil funds, and the oil money parked in the Kuwait investment authority, Abu Dhabi's investment authority and so on.... So I strongly suspect the US data understates official financing by at least $100b, maybe more. And that sets aside the question of what the world's banks are doing with all the dollars that central banks have placed on deposit....

I plotted the increase in global reserves against (net) debt inflows to the US -- that is foreign purchases of US debt net of US purchases of foreign debt -- and recorded official inflows to the US. It turns out that official inflows tracked global reserve growth until 2004 -- which makes sense, because all Japanese flows show up in the official US data -- but not in 2005. There is a much closer match between overall reserve growth and net foreign purchases of US debt.... It certainly seems like the US data misses some official flows.

In the part of the Treasury's Foreign Exchange report that no one reads, the Treasury argued -- based on the official data -- that private demand for US assets picked up in 2005. They are right. But they insist a bit too much.... $400b in net private flows from foreign investors to the US in 2005 is more than the $250b (if you believe the official data) or $150b (if you believe me/ the BIS and think offshore dollar deposits from central banks indirectly helped finance the US) in private financing for the US in 2004. But $400b is not enough to cover a $800b deficit. The US still needed $400b from its friends in the governments of China, Russia and the Middle East.

And all the available data suggests it will need far more in 2006.

Not, mind you, that I would be incredibly happy if the U.S. current-account deficit were financed entirely by private capital inflows. The Lawson Doctrine has a spotted history.