Family Guy

CFA Level II
#1

So let’s say I am Peter Griffin and I just found out that I am the ruler of Petoria. My federal reserve bank holds a few foreign bonds and since we are running a huge trade deficit with our largest trading partner I decide to sell them to fill the ‘gap’ Now I ask my son Stewie to calculate the 3 components of the balance of payment formula. How should he account for the sale of foreign bonds? Are they part of my capital account or official reserve? I told him official reserve but I think I need some ‘expert’ advice…

#2

I was talking to a guy here at work about what the US can do to fix its current account deficit and he said that selling foreign bonds would be a capital account action…but I have no idea if he’s correct.

#3

KSTHANE Wrote: ------------------------------------------------------- > I was talking to a guy here at work about what the > US can do to fix its current account deficit and > he said that selling foreign bonds would be a > capital account action…but I have no idea if > he’s correct. That’s true if individuals start selling them but what about the Fed. Is it still treated the same way?

#4

Stewie should account for the sale of foreign bonds as part of the Official Reserves. If the capital account surplus cannot completely compensate for the trade account deficit, then the official reserve surplus should kick in to make the Balance of Payments equation equal to zero. When the Fed sells foreign bonds, it gets dollars back in return, a surplus for the Official Reserve account. This is similar to getting dollars back from China when US issues bonds and China invests in them. Here of course we are talking about the Capital Reserve.

#5

I agree w/ Paddy

#6

JamboRambo Wrote: ------------------------------------------------------- > I agree w/ Paddy i assumed by foreign bonds it meant bonds the fed bank was holding of other countries like how China own US treasuries… so isn’t that official reserves?

#7

“Stewie should account for the sale of foreign bonds as part of the Official Reserves.” is what Paddy said…

#8

deleted

#9

JamboRambo Wrote: ------------------------------------------------------- > “Stewie should account for the sale of foreign > bonds as part of the Official Reserves.” is what > Paddy said… oh whoops damn that stewie’s dad, paddy and rambo all got +1

#10

Early on in this century, official reserves assets were primarily gold. Now primarily financial assets denominated in a foreign currency that is widely accepted in international transactions: Pounds assets, U.S. dollar assets (key currency worldwide), Reserve positions in IMF and SDRs (created by IMF).

#11

Thanks tips

#12

But yes, official reserves indeed. +1

#13

Selling bonds is current account action

#14

We are talking about Federal Reserve selling foreign bonds from its repository. We are not referring to selling foreign bonds by ordinary citizen or an US Bank. Federal Reserve selling foreign bonds held in its repository is counted in Official Reserves. This action brings in Dollars and out goes the foreign asset. This will be a counter balance for the current account deficit.

#15

psriniva Wrote: ------------------------------------------------------- > We are talking about Federal Reserve selling > foreign bonds from its repository. We are not > referring to selling foreign bonds by ordinary > citizen or an US Bank. > > Federal Reserve selling foreign bonds held in its > repository is counted in Official Reserves. This > action brings in Dollars and out goes the foreign > asset. > This will be a counter balance for the current > account deficit. The balance of the official reserve was tiny in comparison to massive dificit in current account. Investment account balance OTOH was close to dificit amount.