Does the Composition of Foreign Securities Purchases Really Matter?
Every month, we see certain economics bloggers pouring over the data on net foreign securities purchases for the US, trying to discern implications for strength or otherwise in the financing of the US current account deficit. In fact, the current account deficit must be financed by definition, so the absolute amount of financing is never in question, yet many analysts persist in approaching these data as though the financial account tail wags the current account dog. For a given domestic saving-investment imbalance, asset prices adjust to ensure that the resulting current account deficit is financed. Shifts in the asset composition of the financial account are likely to reflect changes in relative asset prices, but the absolute value of this financing is essentially pre-determined for a given current account deficit. Only the prices these assets trade at is in question, and these reflect the influence of all market participants, not just those foreigners looking to recycle surplus USD
Related Questions
- Am I required to file if my reportable total purchases and total sales of long-term securities by foreign residents falls below the $50 million exemption level?
- How should purchases and sales of long-term foreign currency-denominated securities (debt and equity) by foreign residents be reported?
- Does the Composition of Foreign Securities Purchases Really Matter?
