Wednesday, January 11, 2006
The balance of accounts
This brief primer on the U.S. balance of payments kicks off a series of posts intended to diminish, dismantle, and decimate the rampant economic ignorance put forth by the financial fear mongering perma-bears. One such Cassandra's litany of lies heard on the TV yesterday was more than I could stomach and incited me into a literal all-nighter of number crunching. So bear with me (pun intended) through my bleary-eyed battle to debunk some of the markets most monotonous myths.
The balance of payments consists of the current account, capital account, and financial account. The data is reported in the
U.S. International Transactions report, which lumps the capital account and financial account together and is generally considered the other side of the balance sheet from the current account though they are not expected to perfectly balance in a specific quarter as a corporate balance sheet would. You can find definitions of these terms in the Bureau of Economic Analysis
Glossary.
We currently have a annualized current account deficit of $195.8 billion, the capital account is running at a slight deficit of $0.3 billion, and the financial account is at a surplus of $272.9 billion. The largest component of the financial account is the 'net foreign purchases of U.S. securities other than U.S. Treasury securities', which was a record $160.7 billion in the third quarter, way up from $114.1 billion in the previous quarter. Of that amount $26.6 billion went into stocks and $99.5 billion went into corporate bonds. Net foreign purchases of U.S. Treasures were a significantly smaller $40 billion following only $9 billion.
What we can tell from this is that foreign central bank actions aren't quite as important as people assume. The most important component is foreign lending to U.S. companies. And that's precisely where Buffett has it all wrong. That doesn't make us sharecroppers because when our companies issue bonds they expect to earn a return on the borrowed assets over and above the yield they pay out on the loans. And the relative ease by which American companies can acquire the capital they need is a major competitive advantage.
posted at 1:30 PM
