Amajor reason for the dollar’s current overvaluation is the widespread misunderstanding of the nature of capital flows to the US. The business press and many financial analysts provide the reassuring message that the flow of capital to the US substantially exceeds the amount needed to finance the US current account deficit, and that that inflow is coming primarily from private investors who are attracted by the strength of the American economy.

This optimistic analysis of the capital inflow is wrong. It results from a misinterpretation of the data provided by the US Treasury in the press release for its monthly Treasury International Capital report. It is easy to see why analysts reach this wrong conclusion. Recent TIC press releases stated that the capital inflow was $278bn (€230bn) in the third quarter of last year, or $82bn more than the current account deficit for that quarter. The Treasury also reported that $257bn of this capital inflow came from private buyers.