Those were Robert Rubin’s words to describe the US current account deficit. They apply equally well to the amount of dollars the world’s central banks lent to the US in 2006.
Press coverage of the IMF COFER data has tended to focus on the fall in the dollar’s share of global reserves in the fourth quarter of 2006, something that seems largely to be the product of central banks in the world’s advanced economies. Blame Switzerland, Sweden and Italy – though I wouldn’t be completely surprised if the Japanese were slowly reducing the dollar’s share of their reserves as well.
The real story in my view, though, isn’t the small slide in the dollar’s share in q4. It is the huge overall growth in the world’s stock of reserves – something that continued in q4. As a result, the world’s central banks supplied an unprecedented amount of financing to the United States — close to $600b by my estimates, which include some things that aren't in the COFER data.
The COFER data has a few important limitations (noted by Reuters). The COFER data only provides data on the currency composition of about 2/3s of the world’s reserves. And because the reserves of countries that don’t report data to the IMF (China) are growing faster than the reserves of countries that do report data to the IMF, the COFER data only tells us the currency composition of about ½ the current flow. That is a big gap.
Moreover, the COFER data doesn’t include the Saudis non-reserve foreign assets (which increased by $70b in 2006) or what might be called China’s missing reserves – the funds China has used to recapitalize the state banks and a life insurer, along with the dollars China likely has moved off the PBoC’s balance sheet with currency swaps. Those missing reserves – by my estimate – increased by about $45b in 2006.
The COFER data does tell us that the world’s central banks stock of reserves increased by $853b or so in 2006, rising to above $5 trillion. About $508 of that increase came from countries that report data on the currency composition of their reserves to the IMF, and $345 came from countries that do not. By my estimates, about $150b of the $850 increase came from the increase in the dollar value of the world’s existing euro, pound and yen reserves, and $700b came from actual “flows.”
$700b is a new record. And almost all of the growth came from emerging markets.