Economists who keep looking to Japan to explain capital flows into and out of the U.S. financial markets are missing the real story, according to economist Michael Howell of Baring Securities Ltd. Non-oil-exporting developing countries, such as South Korea, Taiwan, and much of Latin America, are running a hefty trade surplus with the U.S. and reinvesting their proceeds in America.
These countries--many of which have "dollar-based or quasi-dollar economies," Howell argues--acquired $32 billion in U.S. dollar reserves in 1993, as well as $45 billion in long-term securities and "an unknown but sizable amount of the $165 billion in short-term securities sold overseas." But, says Howell, Japanese capital flow into the U.S. couldn't have topped $80 billion. "The dollar is the emerging-market currency standard," he says. As a result, the U.S. can run a current account deficit because the emerging world is short of dollars.