2
Current U.S. Data Systems

Information on U.S. international capital flows is published on a quarterly basis in the U.S. international transaction accounts (commonly referred to as the U.S. balance-of-payments accounts), along with data on U.S. merchandise trade, international services transactions, investment incomes (and payments), and unilateral transfers.1 The balance-of-payments accounts represent a summary statistical statement of transactions in goods, services, incomes, unilateral transfers, and capital flows between U.S. residents and nonresidents (foreigners) during a given period. Residents and nonresidents are distinguished by geographical boundaries.2

This chapter discusses concepts underlying the balance-of-payments accounts, describes the methods used to collect data on U.S. international capital transactions and the major sources of

1  

Unilateral transfers cover international transactions in which goods, services, or financial assets are transferred between U.S. residents and residents of other countries with no requirement for payment. U.S. government grants are examples of unilateral transfers. Also included are private remittances by individuals and institutions.

2  

Under the balance-of-payments framework, the terms residents and nonresidents are broadly defined to include individuals, business establishments, governments, and international organizations. A nonresident (foreign) business establishment is any plant, office, branch, or other entity that is physically located outside the geographic boundaries of the United States, irrespective of the nationality of its owners.



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Following the Money: U.S. Finance in the World Economy 2 Current U.S. Data Systems Information on U.S. international capital flows is published on a quarterly basis in the U.S. international transaction accounts (commonly referred to as the U.S. balance-of-payments accounts), along with data on U.S. merchandise trade, international services transactions, investment incomes (and payments), and unilateral transfers.1 The balance-of-payments accounts represent a summary statistical statement of transactions in goods, services, incomes, unilateral transfers, and capital flows between U.S. residents and nonresidents (foreigners) during a given period. Residents and nonresidents are distinguished by geographical boundaries.2 This chapter discusses concepts underlying the balance-of-payments accounts, describes the methods used to collect data on U.S. international capital transactions and the major sources of 1   Unilateral transfers cover international transactions in which goods, services, or financial assets are transferred between U.S. residents and residents of other countries with no requirement for payment. U.S. government grants are examples of unilateral transfers. Also included are private remittances by individuals and institutions. 2   Under the balance-of-payments framework, the terms residents and nonresidents are broadly defined to include individuals, business establishments, governments, and international organizations. A nonresident (foreign) business establishment is any plant, office, branch, or other entity that is physically located outside the geographic boundaries of the United States, irrespective of the nationality of its owners.

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Following the Money: U.S. Finance in the World Economy the published information. Its purpose is twofold: to set the stage for the analysis in Chapter 3 and to note the use of the information required of data filers and how it is compiled into national statistics. In its survey of filers and users of currently required data, the panel found that filers were not familiar with the purposes of the data required of them and that users were uncertain about the quality of the published data. In addition, data filers and, to a certain extent, data users were not fully aware of the various published sources of information on U.S. international capital transactions (see Appendix B). The panel believes that accurate knowledge of the system will encourage accurate and timely reporting by filers and will enhance users' knowledge of the availability of the data and an understanding of its limitations. BALANCE-OF-PAYMENTS FRAMEWORK: CONCEPTS AND USES The basic assumption underlying the balance-of-payments framework is that receipts equal payments. Just as, in business accounting, debits equal credits, the same principle applies to the transactions of a nation. By definition, total receipts on current account items are necessarily equal to current account payments plus the net increase in claims on foreigners. The current account of the U.S. balance of payments covers exports and imports of goods and services, unilateral transfers, and incomes on investment, while the capital account records financial transactions. Data for these accounts for 1990-1993 are shown in Table 2-1. The Bureau of Economic Analysis (BEA) of the Department of Commerce is responsible for the compilation of the U.S. balance-of-payments accounts. In principle, the balance of the current account equals that of the capital account because the underlying framework is the double-entry accounting concept. Under this concept, it is assumed that when merchandise is exported (a credit), the exporter receives a payment either in a foreign bank (a capital outflow debit) or in a domestic bank (a debit as a foreign account is drawn down) or extends credit to the importer (a capital outflow debit). It is an accounting convention that an export is treated as a credit or a plus entry; an import, a debit, is represented by a minus entry. For financial transactions, decreases in an economy's foreign assets or increases in an economy's foreign liabilities are treated as credit entries. Conversely, debit entries reflect increases in for-

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Following the Money: U.S. Finance in the World Economy TABLE 2-1 U.S. International Transactions, Current and Capital Accounts, 1990-1993 (in millions of dollars) Category 1990 1991 1992 1993 Current account Exports of goods, services, and income 696,841 717,041 731,373 755,533 Merchandise 389,303 416,913 440,361 456,866 Services 147,239 163,215 176,563 184,811 Income 160,300 136,914 114,449 113,856 Imports of goods, services, and income -754,926 -730,680 -767,217 -827,312 Merchandise -498,336 -490,981 -536,458 -589,441 Services -117,016 -117,618 -120,850 -127,961 Income -139,574 -122,081 -109,909 -109,910 Unilateral transfers (excluding military grants of goods and services, net) -33,663 6,687 -32,042 -32,117 Current account balance -91,748 -6,952 -67,886 -103,896 Capital account U.S. assets abroad, net -70,363 -51,512 -61,510 -147,898 U.S. official reserve assets -2,158 5,763 3,901 -1,379 U.S. government assets other than official reserve assets 2,307 2,900 -1,652 -306 U.S. private assets -70,512 -60,175 -63,759 -146,213 Foreign assets in the U.S., net 122,192 98,134 146,504 230,698 Foreign official assets in the U.S. 33,910 17,199 40,858 71,681 Other foreign assets in the U.S. 88,282 80,935 105,646 159,017 Capital account balance 51,829 46,622 84,994 82,800 Statistical discrepancy 39,919 -39,670 -17,108 21,096   SOURCE: Data from Bureau of Economic Analysis (1994a:94-95). eign assets or decreases in foreign liabilities. This concept is useful because people want to know both the size of the trade balance and how it is financed. Or they want to know why a country is gaining or losing official reserves. Under the double-entry concept, the sum of all transactions should be zero: both sides of each transaction should offset one another and the balance of the current account should equal that of the capital account, with opposite signs. However, unlike the internal consistency of ordinary business accounts, the compilers of the balance-of-payment accounts must gather information from a variety of independent sources: merchandise trade is based on

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Following the Money: U.S. Finance in the World Economy customs data, and the entries in banking or other financial accounts are derived from a variety of sources. Since the data or estimates used are from diverse sources, they usually cannot be reconciled exactly, leading to a balancing item representing the net errors or omissions, denoted as ''statistical discrepancy" in the accounts. The statistical discrepancy represents only the arithmetical difference between the balances of the current and the capital accounts; it does not reflect the gross errors and omissions of the different types of transactions, which may be larger than the statistical discrepancy. Gross errors and omissions in different accounts may offset one another. An important purpose of the balance-of-payments data is to provide information needed to understand the impact of the external sector on the domestic economy. The balance-of-payments data form a key component of the national accounts, which also include the national income and product accounts (NIPA) compiled by BEA, and the flow-of-funds accounts and the balance sheets of the U.S. economy, both prepared by the Federal Reserve. The balance-of-payments data enter into these other components of the accounts; Figure 2-1 shows the sources and uses of the balance-of-payments data. The NIPA measures the production, distribution, and use of output in the United States by four economic groups: persons, business, government, and "the rest of the world." It would be impossible to have a complete set of NIPA for an open economy without taking account of net exports and their composition. Exports of goods and services are part of the gross domestic product (GDP). Imports are part of consumer expenditures, gross domestic investment, and the other components of gross national expenditure. The difference between a nation's saving and its investment has to include net foreign investment (positive or negative) to be complete.3 During the past decade, for example, the United States financed an important part of its federal budget deficit by incurring a current account deficit, which showed up, cumulatively, as a reduction in net foreign assets. This development is reflected in the balance-of-payments accounts.4 3   Consider the basic equation: (I - S) + (G - T) + (X - M) = 0, where I is gross domestic investment, S is gross private saving, G is government spending, T is tax revenue (G - T is the budget deficit), X is exports of goods and services, and M is imports of goods and services (so that X - M is the current account position). That is, if the federal deficit is not offset by net saving in the private sector, the current account will be in deficit. This is a useful way of analyzing what is happening m a country, and it involves the balance-of-payments data.

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Following the Money: U.S. Finance in the World Economy FIGURE 2-1 Sources and uses of U.S. balance-of-payments data on capital accounts.

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Following the Money: U.S. Finance in the World Economy The flow-of-funds accounts detail the sources and uses of savings in the U.S. economy by sector and by type of transaction. They are useful in assessing the effect of monetary policy and the general financial conditions of various domestic sectors. The balance sheets of the U.S. economy show the assets and liabilities of the country. These data, together with other information gathered for regulatory purposes, are used in monitoring the safety and soundness of U.S. financial systems. Another use of the balance-of-payments data is to show the external financial position of the nation as reflected in its net foreign investment position and how this position is changing over time. If the United States is increasingly becoming a net debtor to the rest of the world, that has implications for the welfare of future generations. Similarly, the trends of trade and capital flows, as displayed by the current and the capital account data over time, are intended to guide assessments about the nation's foreign exchange rate, whether the rate is likely to change or should be changed, and whether the country's external trade imbalance can be sustained. BEA publishes U.S. balance-of-payments data quarterly in its Survey of Current Business. Figure 2-2 (box) lists selected publications prepared by BEA on U.S. international transactions. In addition to providing an important data source for the preparation of the national accounts, various components of the U.S. balance of payments are used by both the public and the private sectors, as well as by international organizations and abroad. Researchers and policy analysts extensively use the direct investment data collected by BEA, as well as other available data sources, in their analysis of the effects of foreign direct investment in the United States on U.S. production and employment and the competitiveness of U.S. firms in global markets. Data on international transactions in U.S. and foreign securities, as well as other 4   Note that the identity, S - I = X - M, fundamental to the balance-of-payments framework, implies that to the extent domestic saving is not matched by an increase in domestic capital accumulation, there will be an increase in U.S. private or official claims on the rest of the world. By the same token, a deficit in the current account must be financed by some combination of a decrease in claims on nonresidents and an increase in liabilities to nonresidents so that the result is a decline in net foreign assets held by the domestic economy. The identity defines the relationship among the variables. It does not, however, describe the behavior of economic agents. By itself, the equation cannot provide a comprehensive analysis of the forces behind the developments in the current account.

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Following the Money: U.S. Finance in the World Economy available data sources, inform market research. Data on short-and long-term international capital transactions, by country, are examined to assess market pressures and determine worldwide capital flows. Data on cross-border deposits are analyzed to determine their significance for implementation of monetary policy. The data are also reviewed to assess the long-term sustainability of the U.S. external imbalances and their relationship to domestic saving and investment. In short, the balance-of-payments data are used in both the public and private sectors to analyze the nation's short-term external payment imbalances, its longer term structural finance, exchange rate movements, and sources of credit and liquidity creation, among others. The statistical discrepancy in the U.S. balance-of-payments accounts grew significantly during the 1970s and 1980s, both in absolute and relative terms. It was also marked by large fluctuations; see Figure 2-3: it surged from a cumulative total of -$5.5 billion for 1960-1969 to +$36.9 billion for 1970-1979 and to +$221.6 billion for 1980-1989. In 1989 alone, the statistical discrepancy was +53.1 billion, or more than 8 percent of exports plus investment income. In 1992 and 1993 however, the discrepancy dropped to between 2 and 3 percent of exports plus investment income. The striking difference in the magnitudes, variations, and trends between the statistical discrepancy before and after the early 1970s suggests that the net errors and omissions in the U.S. balance-of-payments accounts since the early 1970s have not resulted largely from random events. In its report (Kester, 1992), the Panel on Foreign Trade Statistics found that U.S. exports of goods and services have been persistently underreported. Complex developments in U.S. international financial transactions since the 1970s, coupled with a data collection system that lagged behind those changes, also led to increasingly inaccurate valuations, growing inadequacies in coverage, and errors in estimation procedures of capital flows and investment incomes that affected the size of the statistical discrepancy (see also Stekler, 1991). To understand how the adequacy of the existing data on U.S. international capital transactions has been affected by changes in the world financial markets, the next section describes how these data are collected. CAPITAL ACCOUNT DATA Capital flows in U.S. balance-of-payments accounts refer to transactions in financial assets between U.S. residents and nonresidents (foreigners). Financial assets include loans, bank deposits,

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Following the Money: U.S. Finance in the World Economy GENERAL The Balance of Payments of the United States: Concepts, Data Sources, and Estimating Procedures Survey of Current Business (monthly) U.S. international transactions (March, June, September, and December) The international investment position of the United States (June) Foreign direct investment in the United States Direct investment position and related flows of capital, income, and royalties and license fees (June) Operations of U.S. affiliates of foreign companies (May) U.S. business enterprises acquired or established by foreign direct investors (May) U.S direct investment abroad Direct investment position and related flows of capital, income, and royalties and license fees (June) Operations of U.S. parent companies and their foreign affiliates (June) Capital expenditures by majority-owned foreign affiliates of U.S. companies (March and September) U.S. DIRECT INVESTMENT ABROAD Gross Product of U.S. Multinational Companies, 1977-91 U.S. Direct Investment Abroad: 1989 Benchmark Survey, Final Results U.S. Direct Investment Abroad: Operations of U.S. Companies and Their Foreign Affiliates. Annually from 1990 U.S. Direct Investment Abroad: Balance of Payments and Direct Investment Position Estimates, 1977-81 U.S. Direct Investment Abroad, Country by Industry Estimates. 1950-91 (only on computer tape) FOREIGN DIRECT INVESTMENT IN THE UNITED STATES A Guide to BEA Statistics on Foreign Direct Investment in the United States Characteristics of Foreign-Owned U.S. Manufacturing Establishments Foreign Direct Investment in the United States: Operations of U.S. Affiliates of Foreign Companies. Annually from 1989 Foreign Direct Investment in the United States. 1987 Benchmark Survey. Final Results; 1992 preliminary result Foreign Direct Investment in the United States: Establishment Data for 1987 (also available on diskette). Establishment data for manufacturing available annually from 1988 Foreign Direct Investment in the United States: Balance of Payments and Direct Investment Position Estimates. 1980-86 Foreign Direct Investment in the United States: Direct Investment Position and Related Capital and Income Flows. Annually from 1980 (only on diskette) 1992 Benchmark Survey Results U.S. Business Enterprises Acquired or Established by Foreign Direct Investors. Supplementary Tables

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Following the Money: U.S. Finance in the World Economy OTHER RECENT STUDIES Gross product of U.S. affiliates of foreign direct investors, 1987-90, Survey of Current Business, November 1992 (updates data in June 1990 Lowe article, below) Rates of return on direct investment, by J. Steven Landefeld, Ann M. Lawson, and Douglas Weinberg, Survey of Current Business, August 1992 U.S. direct investment abroad: 1989 benchmark survey results, by Jeffrey Lowe and Raymond Mataloni, Survey of Current Business, October 1991 Valuation of the U.S. net international investment position, by J. Steven Landefeld and Ann M. Lawson, Survey of Current Business, May 1991 Gross product of U.S. affiliates of foreign direct investors, 1977-87, by Jeffrey Lowe, Survey of Current Business, June 1990 FIGURE 2-2 Selected BEA publications and articles on balance-of-payments data by topic. drafts, acceptances, notes, government and private debt, equity securities, trade finance, and direct investments. When U.S. residents increase their financial assets abroad or foreigners decrease their financial assets in the United States, a capital outflow takes place and should be recorded. The converse is true for capital inflows. There are two major types of capital flow transactions: private and official. Private capital flows include direct investment and portfolio investment (banking, securities, and other commercial and financial transactions). U.S. official capital flows include changes in the reserves of U.S. monetary authorities—monetary gold, foreign exchange, special drawing rights at the International Monetary Fund (IMF)—and loans and credits to foreigners by U.S. government agencies. These capital flows are reported in the capital account of the balance of payments (see Table 2-2). Incomes (earnings and profits) on direct and portfolio investment are reported in the current account.5 Among private capital flows, portfolio investments have far exceeded direct investment in recent years; see Figures 2-4 and 2-5. For example, in 1993, net private capital flows pertaining to inward and outward direct investment activities totaled approximately $79 billion in absolute terms ($21.4 billion and $57.9 bil- 5   Also included in the current account are government grants and private remittances, which are considered unilateral transfers.

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Following the Money: U.S. Finance in the World Economy FIGURE 2-3 Statistical discrepancy of U.S. balance-of-payments accounts, 1960-1993. lion, respectively); those that were induced by international portfolio transactions amounted to $226 billion in absolute terms (Table 2-2). As noted above, the value of accumulated stocks of U.S. assets abroad and of foreign assets in the United States—resulting from capital flows in and out of this country over time (as adjusted for factors affecting their values)—is annually compiled and published in the statement of U.S. international investment position; see Table 2-3.

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Following the Money: U.S. Finance in the World Economy TABLE 2-2 U.S. Capital Account Transactions (in millions of dollars) Transaction 1991 1992 1993 U.S. assets abroad, net -51,512 -61,510 -147,898 U.S. official reserve assets, net 5,763 3,901 -1,379 Gold 0 0 0 Special drawing rights -177 2,316 -537 Reserve position in the International Monetary Fund -367 -2,692 -44 Foreign currencies 6,307 4,277 -797 U.S. government assets, other than official reserve assets, net 2,900 -1,652 -306 U.S. credits and other long-term assets -12,874 -7,392 -6,024 Repayments on U.S. credits and other long-term assets 16,776 5,805 6,026 U.S. foreign currency holdings and U.S. short-term assets, net -1,002 -65 -308 U.S. private assets, net -60,175 -63,759 -146,213 Direct investment -31,295 -41,004 -57,870 Foreign securities -44,740 -45,114 -119,983 U.S. claims on unaffiliated foreigners reported by U.S. nonbanking concerns 11,097 45 -598 U.S. claims reported by U.S. banks, not included elsewhere 4,763 22,314 32,238 Foreign assets in the United States, net 98,134 146,504 230,698 Foreign official assets in the United States, net 17,199 40,858 71,681 U.S. government securities 16,147 22,403 52,764 U.S. Treasury securities 14,846 18,454 48,702 Other 1,301 3,949 4,062 Other U.S. government liabilities 1,177 2,572 1,666 U.S. liabilities reported by U.S. banks, not included elsewhere -1,484 16,571 14,666 Other foreign official assets 1,359 -688 2,585 Other foreign assets in the United States, net 80,935 105,646 159,017 Direct investment 26,086 9,888 21,366 U.S. Treasury securities 18,826 36,857 24,849 U.S. securities other than U.S. Treasury securities 35,144 29,867 80,068 U.S. liabilities to unaffiliated foreigners reported by U.S. nonbanking concerns -3,115 13,573 14,282 U.S. liabilities reported by U.S. banks, not included elsewhere 3,994 15,461 18,452   SOURCE: Data from Bureau of Economic Analysis (1994a:94-95).

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Following the Money: U.S. Finance in the World Economy Under the TIC system, information on international portfolio transactions is collected from both financial and nonfinancial institutions; see Figure 2-7. There are three main elements in the system; see Table 2-5. First, U.S. banks, other depository institutions (including the U.S. branches and agencies of foreign banks), bank holding companies, and securities dealers located in the United States are required to file a combination of monthly, quarterly, and semiannual B-series reports (B forms) on U.S. claims on and liabilities to foreign residents. The amounts of claims and liabilities outstanding, including short-term instruments held in custody for domestic customers, are reported by major types of claims and liabilities (such as deposits, loans, and U.S. government short-term obligations), by major types of foreign residents (such as official institutions, unaffiliated foreign banks, own foreign offices, and other foreign parties as a group), and by an extensive list of partner countries. Reports are required from entities whose aggregate claims on or liabilities to foreigners amount to at least $15 million as of the end of the month. About 950 institutions report monthly. Claims and liabilities denominated in foreign currencies are shown in a separate category as aggregate amounts in dollar-equivalent values, but not in separate foreign currencies. At the end of 1993, aggregate claims and liabilities reported on the B forms totaled $587 billion and $992 billion, respectively. FRBNY's task of validating the B form data is facilitated by the fact that the Federal Reserve system has a supervisory relationship with the banking industry: all banks are required to file with banking regulators the quarterly Consolidated Reports of Condition and Income (commonly known as the Call Reports). These reports provide FRBNY with data to assess banks' TIC reporting compliance. A second part of the TIC system is designed to capture all significant transactions between U.S. residents and nonresidents in domestic and foreign long-term securities. All banks, securities dealers, investment firms, and, in principle, any person in the United States conducting such transactions above a certain minimum amount ($2 million or more in the aggregate during a reporting month) directly with foreigners are required to report such transactions monthly on the S form to the Federal Reserve. The gross (turnover) value of reported securities transactions on the S forms in 1993 was $8.6 trillion. As of 1993, there were about 475 S form respondents. The data are broken down into domestic and foreign securities and into equity and debt securities. Domestic debt securities are further differentiated by type, including gov-

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Following the Money: U.S. Finance in the World Economy FIGURE 2-7 Portfolio investment data: sources and output.

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Following the Money: U.S. Finance in the World Economy TABLE 2-5 Treasury International Capital Reports Kind of Data and Form Used Who Reports What Is Reported Requirement Cutoff for Reporting Number of Respondents (1993) Aggregate Claims and Liabilities (1993) Banks' international positions: B forms Banks, depository institutions, bank holding companies, securities dealers in the United States U.S.-booked liabilities and claims positions, including custody items, with foreign residents, by major type of item (deposit, loan) and type of foreign resident (official institutions, unaffiliated foreign banks, own foreign offices, other foreign parties). Excludes positions in long-term securities $15 million or more at the end of the month 950 Claims: $587 billion Liabilities: $992 billion U.S. international long-term securities transactions: S forms Banks, securities firms, investments intermediaries, other entities Transactions with foreign residents in domestic and foreign long-term securities $2 million or more in a reporting month 475 Gross value of reported transactions: $8.6 trillion Positions of nonbanking firms with unaffiliated foreigners: C forms Nonbanks in the United States (such as exporters, industrial and commercial firms) Liabilities positions with unaffiliated foreigners. Excludes positions in long-term securities $10 million in either claims or liabilities 400 Claims: $43 billion Liabilities: $50 billion NOTE: See Chapter 3 (Table 3-1) for details of all forms and their coverage.

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Following the Money: U.S. Finance in the World Economy ernment obligations. The countries for which detail is provided are the same as for the banking data. Respondents do not report individual transactions; the monthly reports are a combination of all their transactions in the period. Under the balance-of-payments framework, the geographic allocations of these data are based on the place of residence of the foreign transactor. A recorded transaction with Britain, for example, does not necessarily mean that the trade is in British securities, or that the ultimate buyer or seller is British. It can mean that a French broker, acting on behalf of a Japanese investor, carries out a transaction with a U.S. firm in London. This problem of geographic allocation applies to all balance-of-payments data compiled under the concept of residents and nonresidents as a basis of distinction between the United States and foreign countries. This distinction, however, is particularly problematic for securities transactions, as discussed in Chapter 3.11 This part of the TIC system currently covers only long-term securities (those with original maturities of longer than 1 year). For domestic securities, these include Treasury bonds and notes, federal agency issues, corporate bonds, and corporate stocks. For foreign long-term issues, the major categories are foreign bonds and foreign stocks. Warrants and options are covered only when the underlying security is a stock or long-term bond; the sales and purchases of such derivative instruments are not separately reported from purchases and sales of the underlying securities. Short-term securities (maturity of 1 year or less) are reported on either the B form or the C form, depending on type. Unlike the B form data, which provide positions of claims and liabilities, S form data are flows, covering transactions each month. They do not provide information directly on U.S. holdings of foreign securities or foreign holdings of U.S. securities. Estimates for holdings (or investment positions) are derived by aggregating the annual flow data over time and adjusting for changes in securities prices. For foreign holdings of U.S. securities, the Treasury Department also conducts periodic benchmark surveys. As noted above, however, for U.S. holdings of foreign securities, there were no surveys between 1943 and 1994. 11   For foreign holdings of U.S. securities, the Treasury Department conducts periodic benchmark surveys (described below) that gather information on the ultimate holders of U.S. securities. This information, while imperfect, does permit construction of estimates of the country distribution of the ultimate holders of U.S. securities for the years between benchmark surveys.

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Following the Money: U.S. Finance in the World Economy To validate the completeness and accuracy of the S reports, the FRBNY regularly compares the reported data with available information on international securities offerings, purchases, and redemptions. Since borrowers and lenders now have ready direct access to foreign markets and can easily bypass domestic financial intermediaries, it has become increasingly difficult for the FRBNY to ensure complete coverage and accuracy of the S form data. The third major element in the TIC system covers the foreign claims and liabilities of U.S. nonbanks (other than those classified as direct investment or securities). Nonbanking enterprises in the United States include importers, exporters, industrial and commercial firms, and financial entities other than depository institutions and securities firms. A monthly report (CM) is required for dollar denominated deposits abroad (such as Eurodollar deposits and certificates of deposit), and quarterly reports (CQ-1 and CQ-2) are required, respectively, for financial claims and liabilities (deposits, loans, and borrowings abroad) and for commercial or trade-related claims and liabilities (such as international trade receivables and payables). The reporting threshold for these C forms is $10 million with respect to claims or liabilities on the bases of closing balances. In principle, all U.S. residents with foreign claims and liabilities that exceed the exemption level are required to report. The reports contain a limited amount of detail on the types of claims and liabilities. The geographic information is the same as in the other TIC reports; financial claims and liabilities denominated in foreign currencies are shown separately. At the end of 1993, aggregate claims and liabilities shown on the C forms totaled $43 billion and $50 billion, respectively (see Table 2-5). In that year, about 400 nonbanking entities in the United States filed C forms. Since the universe of potential reporters of the C form is large and diverse, data validation for these forms is particularly difficult for the FRBNY. The possibility of missing some relevant potential reporters is high (see Chapter 3). Comparisons of the TIC data with data from other countries indicate that substantial amounts of foreign claims and liabilities by U.S. nonbanks are not reported in the TIC system. On receipt of the TIC data from the Treasury Department, BEA collates the data with all other available information. It checks for internal consistency and consistency with other elements of the balance-of-payments accounts, makes adjustments, whenever necessary, to comply with the balance-of-payments definitions and concepts, and enters the data into the accounts; see Figure 2-8.

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Following the Money: U.S. Finance in the World Economy FIGURE 2-8 Treasury International Capital (TIC) reports: data sources and output.

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Following the Money: U.S. Finance in the World Economy For example, for the B form banking data, BEA converts the position figures into flow data by ''differencing" the positions reported between two consecutive months and by making adjustments for changes in coverage and in the dollar equivalents of claims and liabilities items denominated in foreign currencies. For the S form securities data, BEA makes an adjustment to exclude fees and other charges, which are included in the reported transactions to account for capital flows in securities transactions.12 BEA also compares the TIC securities data with data on direct investment or any other information that might be available. With regard to the C form data, as in the case of the banking data, BEA converts the position data into flow data. BEA also compares these data with those received on direct investment flows. In view of the weakness in the C form coverage, BEA has begun to use banking data from the Bank for International Settlements and from some foreign central banks to supplement the C form data (see Bureau of Economic Analysis, 1994a:79ff). U.S. GOVERNMENT CAPITAL FLOWS The other major segment in the U.S. capital account is the financial activity of U.S. government agencies and the international reserves of the U.S. government. BEA compiles quarterly data on the lending activity and foreign asset and liability positions of the many federal government agencies involved in such activities; see Figure 2-9. These data are obtained through direct contact with the agencies involved. There is a wide range of such activities, which include the lending by the Export-Import Bank, military loans accounted for by the Defense Department, foreign currencies held by the Agency for International Development (AID), foreign Persian Gulf war pledges to the United States, and U.S. grants to foreign countries to pay off their outstanding debts. In addition to the data on loans and credits that BEA collects from U.S. government agencies, BEA compiles data on all other U.S. foreign grants and aid. BEA also includes in the balance-of-payments accounts the changes in U.S. international official reserves as reported by the Treasury Department, including changes in the gold stock, foreign currencies held, and special drawing rights and the reserve position with the IMF. As with other position data, 12   Fees and other charges are reported as international financial services transactions in the current account of the balance of payments.

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Following the Money: U.S. Finance in the World Economy FIGURE 2-9 U.S. official reserves and other U.S. government capital flow data: sources and output.

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Following the Money: U.S. Finance in the World Economy BEA makes adjustments to derive the flow amounts. Statistical Directive 19, from the U.S. Office of Management and Budget (OMB), provides the authority for collecting this information. The information collected by BEA from the various government agencies is primarily in the form of government records. The great majority of these records are the accounting records that must be maintained to accomplish the various agencies' missions, to report to Congress, or to report to OMB. Those uses are different from BEA's uses. An example is loans to developing countries. An agency making a loan has a function that directly parallels that of a commercial bank: there is a need to service the loan, and data must be maintained on payments and disbursements as well as on closing balances. In contrast, BEA is primarily concerned with the flows between two consecutive closing balances. BEA computes the flow for balance-of-payments purposes by looking at the difference between the balance of the loan reported for the current quarter and that reported for the previous quarter. (As noted above, grants are classified as unilateral transfers and shown in the current account of the balance of payments, not the capital account.) Reporting on government international capital transactions is expected to be comprehensive and complete; the information is not collected using sample surveys. Data cover all programs and subprograms that involve sending dollars overseas or receiving them from abroad. All transactions are reported on a cash basis and are, at least in theory, reported when they occur. More than 150 agencies typically report on U.S. government international capital transactions. Among the largest are the Department of State, the Export-Import Bank, AID, and the Departments of Defense and Agriculture. The organizations report on a quarterly basis. Unlike data on private capital flows, these transactions are reported in almost any format convenient to the provider. Data editing and verification are accomplished in a number of ways. Historical comparisons are frequently made to determine whether information from a particular agency is out of the usual pattern. BEA maintains reported data from as far back as 1945. In addition, BEA monitors legislation and tracks changes—for example, when new programs begin, when programs are merged, or when programs are discontinued. In addition, budget statements and reports to Congress by the various agencies are compared with what is reported to BEA.

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Following the Money: U.S. Finance in the World Economy INTERNATIONAL INVESTMENT POSITION BEA prepares an annual statement on the international investment position (assets and liabilities) of the United States and reconciles the changes in the investment position with the flow data shown in the capital account of the U.S. balance of payments (see Table 2-3). There are several factors other than capital flows that affect the value of outstanding assets and liabilities. Changes in exchange rates, for example, have an impact on the value of assets overseas. Changes in market prices of assets and capital gains and losses (including writeoffs) can also influence the market value of assets. To take into account these and other relevant factors, BEA includes in the U.S. international investment position a number of elements excluded from the balance-of-payments data: for direct investment, capital gains and losses from exchange-rate translations or disposition of fixed assets; also for direct investment, estimates of changes in market value or replacement cost; for securities, estimates of changes in market value and exchange rates; for banking positions, allowances for writeoffs, breaks in series, or other factors affecting reported positions; and for U.S. government assets, any changes in reported amounts outstanding that do not result from actual transactions. The basic data for the annual statement on U.S. international investment position are derived from the BEA and TIC systems described above. However, some flow data are supplemented by the collection of data on outstanding positions, as in the case of direct investment, and other banking and nonbank data are derived from original position statements as reported by banks and nonbanks. For securities, however, as indicated above, there are recent stock data, compiled from benchmark surveys, only for foreign holdings of U.S. securities. These data, which are collected on a 5-year schedule and are relatively comprehensive, provide a check at intervals on the accuracy of the flow data. Current position estimates for these holdings are essentially the summations of flow data and price and exchange rate changes over the years. These data on the magnitude of U.S. international assets and liabilities are important in at least three respects: (1) they reflect the net external position of the United States (net debtor or net

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Following the Money: U.S. Finance in the World Economy creditor) with the rest of the world economy; (2) they are used to calculate the investment income flows (earnings) on portfolio claims and liabilities, which are reported in the current account of the balance of payments; and (3) insofar as they are generated by separate benchmark surveys, they serve as one of the few available checks on the accuracy of the flow data shown in the U.S. balance-of-payments accounts. Rapid changes in world financial markets have strained the coverage of the existing data system, rendering some of the data inaccurate and incomplete in depicting U.S. international capital transactions. Chapters 3 and 4 discuss these issues in detail.