Global grey money buoys greenback
Dollar pessimists fail to take this into account, says study
NEIL BEHRMANN
IN LONDON
MONEY laundering, tax and exchange control evasion, and other irregular capital flows are buoying the US dollar and financing a substantial portion of the US current account deficit.
A study by Brendan Brown, London-based head of research at Mitsubishi Securities International, estimates that these 'grey capital inflows' could be accounting for 30-40 per cent of the capital flows that offset the US trade and services deficit.
'Dollar pessimists sounding a state of alarm about the US current account deficit fail to acknowledge the huge flows of funds into the US dollar from grey areas of the world financial system,' he says.
'A proportion of these funds are placed in euro, yen, sterling and Swiss francs, but the bulk remain in dollars and each year steadily finance the American current account deficit.
'In 2003, there was a net flow of funds from the rest of the world to the US of US$550 billion and an estimated US$580 billion this year.'
Around 30-40 per cent or up to US$240 billion of these flows are classified as 'errors and omissions' since they cannot be traced from official sources.
'These huge amounts are 'grey money' from continents such as South and Central America, Africa, parts of Asia and offshore tax havens,' says Mr Brown, who regularly estimates global capital flows.
'The problem in measuring such capital flight is that the errors and omissions item is typically large and volatile for most countries. Thus, any investigation into the hypothesis that hidden global capital sources play a big role in the financing of the mega US current account and savings deficits is unlikely to come up with precise answers.
'Nevertheless, they should be considered by economists and market strategists because the amounts are so large.'
The main identifiable legal sources of net capital outflows in the world that are invested in US dollar securities and also currencies such as the euro, include Japan, US$170 billion; other advanced Asian economies, US$80 billion; China and other Asian developing countries, US$40 billion; Switzerland and Norway, US$70 billion; Middle East oil exporters, US$85 billion; and Russia, US$60 billion.
The unidentified flows include corrupt African and other Third World governments that siphon off tax, international aid and bribes and invest the money with unscrupulous banks.
Then, there are the flows that emanate from drugs, other money laundered funds and false invoicing to mask tax evasion and capital movements from nations with exchange controls.
There are also substantial cash payments for black market trade. Bank notes are generally dollars deposited in secret bank accounts in Switzerland and offshore banking sectors.
Unrecorded flows also include investments by Russians and Middle Eastern investors that wish to hide the identity of their companies in the US, Europe or Asia by registering the names of the businesses in the names of local residents.
These inward investments can be placed in the errors and omissions item of balance of payments, contends Mr Brown. Unrecorded shipping transactions also end up in the errors and omissions item.
Dollar pessimists fail to take this into account, says study
NEIL BEHRMANN
IN LONDON
MONEY laundering, tax and exchange control evasion, and other irregular capital flows are buoying the US dollar and financing a substantial portion of the US current account deficit.
A study by Brendan Brown, London-based head of research at Mitsubishi Securities International, estimates that these 'grey capital inflows' could be accounting for 30-40 per cent of the capital flows that offset the US trade and services deficit.
'Dollar pessimists sounding a state of alarm about the US current account deficit fail to acknowledge the huge flows of funds into the US dollar from grey areas of the world financial system,' he says.
'A proportion of these funds are placed in euro, yen, sterling and Swiss francs, but the bulk remain in dollars and each year steadily finance the American current account deficit.
'In 2003, there was a net flow of funds from the rest of the world to the US of US$550 billion and an estimated US$580 billion this year.'
Around 30-40 per cent or up to US$240 billion of these flows are classified as 'errors and omissions' since they cannot be traced from official sources.
'These huge amounts are 'grey money' from continents such as South and Central America, Africa, parts of Asia and offshore tax havens,' says Mr Brown, who regularly estimates global capital flows.
'The problem in measuring such capital flight is that the errors and omissions item is typically large and volatile for most countries. Thus, any investigation into the hypothesis that hidden global capital sources play a big role in the financing of the mega US current account and savings deficits is unlikely to come up with precise answers.
'Nevertheless, they should be considered by economists and market strategists because the amounts are so large.'
The main identifiable legal sources of net capital outflows in the world that are invested in US dollar securities and also currencies such as the euro, include Japan, US$170 billion; other advanced Asian economies, US$80 billion; China and other Asian developing countries, US$40 billion; Switzerland and Norway, US$70 billion; Middle East oil exporters, US$85 billion; and Russia, US$60 billion.
The unidentified flows include corrupt African and other Third World governments that siphon off tax, international aid and bribes and invest the money with unscrupulous banks.
Then, there are the flows that emanate from drugs, other money laundered funds and false invoicing to mask tax evasion and capital movements from nations with exchange controls.
There are also substantial cash payments for black market trade. Bank notes are generally dollars deposited in secret bank accounts in Switzerland and offshore banking sectors.
Unrecorded flows also include investments by Russians and Middle Eastern investors that wish to hide the identity of their companies in the US, Europe or Asia by registering the names of the businesses in the names of local residents.
These inward investments can be placed in the errors and omissions item of balance of payments, contends Mr Brown. Unrecorded shipping transactions also end up in the errors and omissions item.
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