Special relationship, indeed

For those of you who find the New Year’s celebrations too noisy and might be looking for an alternative use of your time, there’s lots of, er, fun to be had looking through the data in the latest IMF release of the Coordinated Portfolio Investment Survey (CPIS).  This is a survey that the Fund does to assemble data on cross-border holdings of equity and debt securities.  Unfortunately, some of the really juicy stuff is missing — don’t look here for data on overseas holdings of sovereign wealth funds or China, or assets held as official reserves.  And the new release only covers up to end-2008: financial markets had already fallen a lot, but much of the economic impact of the crisis was still to come.  But for the countries that do provide meaningful data, one learns quite a bit.

A good place to start is with the overseas securities holdings of the USA (we’re working from Table 1).   At the end of 2008, they were valued at $4.3 trillion.  At the end of 2007, they had been $7.2 trillion.   That’s a 41 percent decline.  And at the end of 2002, they had been just $2.2 trillion.  So this was an extraordinary ride for financial markets.  It’s also a hint into one thing that was missed as a warning signal during the bubble years: we all heard the concern about overseas accumulation of assets in the US as a logical consequence of the US current account deficits, but at the same time, the US was running up big positions abroad.  Assuming that all this stuff netted out and that the gross positions wouldn’t matter much wasn’t a very good assumption.

So anyway, where is all this US stuff invested.  Quite a bit in the offshore financial centres: Caymans $315 billion.  Bermuda $163 billion.   Lots in where you’d expect to be the US to be doing lots of investing.  Canada $378 billion.  Germany $250 billion.  Japan $389 billion.   But the Big Daddy of them all, the UK — $647 billion.  Which was down from an astonishing $1.1 trillion at end of 2007.

Now of course many caveats apply.  These are the countries where the relevant securities were issued and not where the money was actually going.  And these numbers reflect both flows of new money and valuation changes.   Nonetheless, two things worth mentioning: the huge size of these holdings relative to the “real” economy, and the continuing magnetic pull of the UK as a financial intermediation center for the USA, despite all the talk of the euro, emerging Asia etc.

It’s an aspect of the UK economy in which the UK government doesn’t seem that interested.  It’s an open question as to whether it can be assumed to continue.