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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: rich evans who wrote (24525)	2/28/2005 9:44:18 AM
From: Wyätt Gwyön	Respond to of 116555

How does the scenario that the overseas company is an American subsidiary or multinational company which keeps part of the dollars instead of exchanging them affect your analys i think that is accounted for in the current acct balance, including both the trade account and capital account. when the US co buys a foreign co or sets one up via foreign direct investment (FDI) a la China, that is a credit to their capital acct and a debit to ours--keep in mind that there is now an ongoing "drain" from our capital acct as more money is sent for overseas FDI than comes to the US (interestingly, China is heavily reliant on FDI, whereas Japan wasn't--perhaps if Chinese policy was more restrictive vis-a-vis FDI, they wouldn't have the wherewithal to buy so many US dollars through their CB, and hence there would be greater upward pressure on the RMB/USD fix). when past FDI investments yield profits which are not repatriated they are obviously not counted in our acct (and to be fair, the same goes for the substantial FDI in the US). however, i don't see why the US-owned foreign subsidiaries would hoard USD as it would get rather expensive for them (they would have to issue debt to fund these holdings at some point, just as at the country level they issue debt to sterilize the bonds--and of course the company isn't as concerned as the country with sterilization!). they, like other local cos, will need local currency to pay their bills. hence they will convert to local and pressure USD. however, if/when they repatriate those profits (an action which Congress is trying to encourage this year with an ultralow 5% tax in the Patriot Investment Act or whatever it's called), they would exchange the forex for USD and then bring the funds over, i think through the capital acct (somebody correct me if it's another one). ContraryInvestor.com recently did an analysis of US profits held overseas that could be repatriated. as i recall, a good percentage if not most of those profits seemed to be held by pharmaceuticals cos in places like Puerto Rico (for tax reasons)--not exactly "foreign", and already in USD. if materials are 80% of COGS on average and are often traded in dollars despite overseas transactions and labor paid in local currency is 10% on average, it would seem much of this trade imbalance stays in Eurodollars or Asiadollars and never gets converted there is definitely some very large "float" of offshore dollars, related to commodities transactions. i don't know how to quantify it or relate it to the total USD C/A issue. but more simply, we can look at the foreign holdings of US treasuries (held in custody by the Fed), and see that they account for more than two-thirds of CB forex holdings. obviously these dollars are not part of the "commodity float" since they are held by the Fed.