from Follow the Money

So where exactly are all the world’s reserves going?

February 16, 2006

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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 also now have a lot of data about how the US financed its current account deficit (try selling debt to foreign investors).  One thing is already 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 -- something the President's Council of Economic Advisors somehow forget to mention in their report.  

The 2005 TIC data shows that central banks bought only about $115b billion in long-term securities, down from $236b in 2004.   Add in the fact that in 2005 central banks seem to have reduced their holdings of short-term treasuries by $43 billion and it seems, in net, central bank holdings of US securities increased by only $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 2005 - so a reasonable estimate for the full year total is $26.6 billion (v $70b in 2004).  That would put total recorded 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.  Or read the rest of this post.

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.

The BIS thinks that roughly $500b of that was invested in dollar-denominated assets of various kinds -- $400 billion shows up in the US data, and the BIS estimates central banks increased their offshore dollar bank accounts by $100b or so.

What of 2005?

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 in "valuation-adjusted" or "flow reserve increate for q4 2005.  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  ...


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.


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.

That is the explanation that makes the most sense to me.

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