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Monty Python takes on Asian reserve accumulation

by Brad Setser
February 23, 2005

This is too good for me not to link to it.

Billmon has reduced the Roubini-Setser critique of Bretton Woods 2 down to its essential elements.

The Lex column in the Financial Times covers similar ground, but in a less entertaining way.

The FT’s bottom line: the system is “structurally unstable.”

Asian central bank reserves almost doubled to $1,900bn between 1999 and 2003, and swelled further in 2004, mostly in dollars. This is starting to resemble a pyramid scheme. If nobody dumps dollars, banks may avoid losses on these holdings, but if any bank tries to protect itself from possible losses by selling dollars, everyone will be hurt. … Right now, it is hard to see any central bank breaking rank. … However, just because everyone has a tactical interest in playing the current game now, that does not make it structurally stable in the long term. If or when the distortions linked to these pumped-up reserves unravel, the “pop” will be painful.

If any of you want to update the FT’s charts to reflect 2004 reserve accumulation by Asian central banks, my calculations suggest that Asian central banks added $535 billion to their reserves last year, pushing their overall reserves above $2400 billion ($2.4 trillion).

Net US external debt probably rose to around $3.3 trillion at the end of 2004 (with FDI valued at market rates). So the debt the US owes to Asian central banks accounts for a substantial share of the United States’ net external debt, and a not-insignificant share of the United States’ roughly $11 trillion gross external debt.

38 Comments

  • Posted by still working it out

    Excuse my ignorance on this (I don’t have any financial training at all), but could someone please answer this question for me?

    What will be the impact to Japan, China, Taiwan, Korea etc if/when their central banks suffer large capital losses on their US dollar securities? In a sense they are just paper losses so it seems to me that it would not really matter. I am sure that is wrong, but I would like to know why.

  • Posted by anne

    Another foolish foolish question. Lots of these in philosophy. Suppose the Bank of Japan loses 20% on dollar reserves. A 20% increase in the value of the Yen more than makes up for the loss in reserve value. Where then is the problem from this foolish perspective?

  • Posted by ying-yang

    The dollars in the Japanese banks represent the price that the americans paid for goods. If the dollar depreciates, and the value of those instruments declines, it means that the Americans have not paid the full price for the goods. If the decline is large enough the americans will have got the goods below the manufacturing cost.

  • Posted by Jesse

    The irony of all this of course is that if there had still been a ‘gold standard’ in place, some exterior limitation on transactions and deficits, this situation could not have occurred.

    Greenspan said before Congress last week that the reason things are working as well as they are now is because the Fed is acting as if there were still a gold standard, implying monetary restraint, and restraint in allowing the formation of debt.

    The pity is, of course, that this is just not true, and the Fed tossed caution to the wind in the 1990′s, and is testing the limitations of the new BW II as some bright fellow have observed. Indeed it seems as though Bush II is trying his best to crush it, for it to be replaced with what? A global currency?

    O tempore. O mores.

  • Posted by brad

    still working it out:

    consider the following example.

    a “speculator” manages to buy renminbi from China’s central bank.

    the speculator ends up with 8.28 renminbi, the central bank with a dollar.

    the central bank’s balance sheet shows a renminbi liability, and a dollar asset. (I could make this more complicated by introducing sterilization, but that more or less just means that the speculator sells its renminbi cash to the central bank for a renminbi denominate treasury bill, so the amount of cash in circulation does not go up; similarly, rather than holding a dollar cash the central bank could buy a treasury bill and get some interest).

    now suppose the renminbi is revalued, so one renminbi is now worth say 6 to the dollar.

    The speculator then sells its renminbi to the central bank for dollars. The speculator has 8.28 renminbi, so the speculator can, after the revaluation, now buy 1.38 dollars — a nice profit.

    the central bank effectively sold renminbi at 8.28 to the dollar (one renminbi = 12 cents), and then bought the renminbi back at 6 to the dollar (one renminbi = 17 cents).

    So look at it from the central bank’s point of view. before the revaluation, it held a dollar (an asset) worth 8.28 renminbi against a 8.28 renminbi in cash (cash = a central bank liabliity), after the revaluation, it held a dollar worth 6 renminbi against 8.28 renminbi in cash. Its assets no longer cover its liablities.
    that is a problem is all holders of the central bank’s liabilities decide they want to trade their liabilities for the central bank’s assets.

    If all the holders of renminbi wanted to exchange their renminbi for dollars, they could not. there are no longer enough dollars to go around.

    Now throw in a twist — a central bank’s balance sheet includes both foreign assets (dollars) and domestis assets (usually government debt), which are held against its liabilities (domestic currency cash, or money). If after, a revaluation, foreign assets are worth 6 renminbi (going back to the example) and domestic liabilities are worth 8.28 renminbi, the central bank’s balance sheet can be made solvent if the central bank is given a government bond (a domestic asset) worth 2.28 renminbi. That bond has to be a gift — the central bank does not buy it, the government just gives it to the central bank. That bond is worth 0.38 dollars (2.28/ 6). so if the central bank sells the bond along with its dollar asset, the central bank has enough money to fully repay speculator who initially bought 8.28 renminbi for a dollar, and now wants to trade the 8.28 renminbi for 1.38 dollars.

    The government — the taxpapers — have to service the bond that the government gave the central bank that the central bank then sells in the market to pay off the speculator. That is the real cost of the central bank’s loss.

    Make any sense?

    the cental bank’s technical insolvency (liabilities in excess of assets) matters if the holders of central bank liabilities (cash) decide they want to trade their liabilities (cash) for the central bank’s assets (dollars and government debt). to assure that the central bank has enough assets to cover its liablities, the government has to give it an additional asset (government debt).

    In my story, I left out lots of twists — notably sterilization — and I suspect the last transaction (selling the “recap bond” to generate the extra 38 cents I need) is rather unrealistic. It would be more realistic to assume that the extra government bond went to back domestic currency in circulation, and the central bank just ran down its dollar assets. but I hope I still got the basics right. any monetary economist out there should feel free to provide a better explanation.

  • Posted by Movie Guy

    Brad

    “Net US external debt probably rose to around $3.3 trillion at the end of 2004 (with FDI valued at market rates).”

    I’ve read the BEA info, but I must be missing something.

    The Bureay of the Public Debt, United States Department of the Treasury puts our debt figures at:

    Debt held by the public: $4,491,052,249,387.46

    Intragovernmental holdings: $3,201,314,635,516.81

    http://www.publicdebt.treas.gov/

    What happened to the additional $1.191 trillion in the public debt as acknowledged by Treasury?

  • Posted by Avinash

    apologies if this link has appeared on this site before:….

    http://ist-socrates.berkeley.edu/~pog/academic/IFA/ifa.pdf

    …”International Financial Adjustment” – Pierre-Olivier Gourinchas and H´el`ene Rey

    ….The paper proposes a unified framework to study the dynamics of net foreign assets and
    exchange rate movements. We show that deteriorations in a country’s net exports or
    net foreign asset position have to be matched either by future net export growth (trade
    adjustment channel) or by future increases in the returns of the net foreign asset portfolio
    (hitherto unexplored Þnancial adjustment channel). Using a newly constructed data
    set on US gross foreign positions, we find that stabilizing valuation effects contribute as
    much as 31% of the external adjustment. Our theory also has asset pricing implications.
    Deviations from trend of the ratio of net exports to net foreign assets predict net foreign
    asset portfolio returns one quarter to two years ahead and net exports at longer horizons.
    The exchange rate affects the trade balance and the valuation of net foreign assets. It is
    forecastable in and out of sample at one quarter and beyond. A one standard deviation
    decrease of the ratio of net exports to net foreign assets predicts an annualized 4%
    depreciation of the exchange rate over the next quarter.

    …This was blogged on crookedtimber.org a few days ago-interesting

  • Posted by anne

    Then, do I properly understand?

    So, if the Bank of Japan holds dollars and the dollar loses values against the Yen, debt in Yen is no longer properly matched against dollars. The Bank of Japan has suffered a loss. If India is using dollars to insure infrastructure projects, a loss in dollar value means those projects are not properly funded. Assets have to match liabilities properly.

    Thanks, if this is so, Brad. Steve Hsu explained the problem in this way, as well.

  • Posted by Dave Altig

    Brad — I think the interesting picture is not the update to the Lex data, but the longer history. Today’s share of dollar holdings by foreign central banks is about where it was in 1984. It fell by half over the course of about ten-years: An episode of orderly adjustment in our own recent history. I posted the picture at macroblog.

  • Posted by anne

    Dave

    Does this to you imply a smooth adjustment as after the Plaza Accord? Was the Plaza Accord ultimately harmful for Japan? Also, this time Asia holds proportionately more dollars. Is there a problem here? What of hedge fund holdings, given carry tade speculation?

  • Posted by jm

    Looks to me like the Greenspan ploy is not to offer the Mr. Creosotes just one more wafer-thin mint, but rather to stuff firehoses down their throats. Which is exactly what they deserve.

    Why weren’t economists denouncing Asian mercantilism back when there was still time to avoid these monstrous imbalances, instead of denoucing as anti-free-traders those who insisted trade should be balanced? This is what happens when you let people utterly subvert the fundamental price signals of the market.

  • Posted by brad

    movie guy — external debt is different from public debt. net external debt is all claims by foreign residents on the US (foreign holdings of treasuries, agencies, etc; foreign bank deposits, foreign direct investment, etc) – all claims on the rest of the world held by US residents.

  • Posted by brad

    Dave — I’ll take a look at the picture. Foreign holdings/ total debt is arguably less interesting than foreign buying at the margin — I have been struck by the pace at which foreigners (notably foreign central banks) have been adding to their holdings.

    Two other important differences between today and 84: in 84, the US was still a net creditor, if memory serves, so overall external assets exceeded liabilities; and, in 84, the current account deficit was roughly 3% of GDP and the budget deficit was roughly 6% of GDP, now the budget deficit is 3% (actually 3.5%) and the current account is 6%. We are going to be adding to net external debt for some time in the future.

    I presume part of the reason why foreign holdings of treasuries as a share of total debt went down after 84 is that a) the current account deficit went down sharply after 86, so overall foreign claims stopped rising and b) the fiscal deficit remained large until well into the 90s (albeit not quite as large), adding to the overall stock of public debt.

    Slowing the pace of external debt accumulation in the 80s took the enormous XR adjustment at Plaza. THat, with lags, reduced the current account deficit by say 2%, bringing the deficit down to 1% of GDP — the overall impact of the devaluation was probably larger, since w/o it, the current account/ trade deficit would have kept rising. My general sense is that the rule of thumb that a 30% shift in the total = 3% of GDP improvement in the current account comes from the roughly 30% shift then. Extrapolate out, and we are not on track to bring about any comparable reduction in our external deficit now …

  • Posted by glory

    here’s another FT editorial comment :D

    http://news.ft.com/cms/s/7468d91e-860b-11d9-b506-00000e2511c8.html
    Dollar scare reveals fragile support

    cheers!

  • Posted by jm

    To balance the current account will require that literally millions of Americans lose the jobs they have now in the distribution of imported goods, and take jobs in factories the design and making of tradable goods of quality and functionality competitive with Asian products, and in the building of more factories to make more such. On the Asian side there must be a shift in the opposite direction. It’s not just a matter of shifts in the numbers.

  • Posted by jm

    For every seller there must be a buyer. For net foreign holdings of dollar assets to decline, there must be buyers with foreign currencies in hand. If the BOJ sells its US Treasury securities to an American who has only dollars to buy with, they still have dollars. From whence are other to get the yen and won and yuan needed to make purchases that will actually decrease foreign dollar holdings?

    Sell? To whom?

  • Posted by anne

    Brad

    The explanation/example in your comments finally completes your arguments for me. A perfect example that allows me to work back easily to your formal essays. Thank you, thank you :)

    JM

    Brad DeLong has also written of the need for job shifting to export markets to improve our balance of trade. I am not optimistic this is readily done simply because the value of the dollar continues to decline. The competitors we have now have more flexible cost structures than in 1985, and they will do all they can to hold domestic market share. There is an extensive extensive amount of surplus labor to be absorbed in China. Please argue over this matter.

  • Posted by anne

    http://www.nytimes.com/2005/02/24/business/worldbusiness/24offshore.html?pagewanted=all&position=

    Medical Companies Joining Offshore Trend
    By ANDREW POLLACK

    Bala S. Manian rarely looked back when he left India to attend graduate school in the United States. Since 1979, he has started one medical technology company after another in Silicon Valley.

    But Dr. Manian is now rediscovering his native country. His newest medical venture, ReaMetrix, which makes test kits for pharmaceutical research, is still based in Silicon Valley. But 20 of its 28 employees are in India, where costs for everything from labor to rent are lower.

    The exporting of jobs by ReaMetrix is telling evidence that the relentless shifting of employment to countries like India and China that has occurred in manufacturing, back-office work and computer programming is now spreading to a crown jewel of corporate America: the medical and drug industries.

    It could be a worrisome sign. The life sciences industry, with its largely white-collar work force and its heavy reliance on scientific innovation, was long thought to be less vulnerable to the outsourcing trend. The industry, moreover, is viewed as an economic growth engine and the source of new jobs, particularly as growth slows in other sectors like information technology.

    “What I see in India is the same kind of opportunity I saw in the Valley in 1979,” said Dr. Manian. In the United States, he said, “a million dollars doesn’t go more than three months.” In India, by contrast, “I can run a group of 20 people for a whole year for half a million dollars.”

    While life sciences jobs may be less vulnerable to outsourcing than jobs in information technology, industry officials say many companies are looking at that option as pressures mount to control drug prices and cut development costs….

  • Posted by Jesse

    http://www.reuters.com/newsArticle.jhtml?type=topNews&storyID=7730871

    US Treasuries drift lower on disappointing auction
    Thu Feb 24, 2005 01:11 PM ET

    []
    NEW YORK, Feb 24 (Reuters) – Treasuries prices were pressured on Thursday after an auction of new U.S. government debt drew only meager demand, reviving worries that foreigners might be losing their appetite for U.S. debt.

    The sale of $24 billion in new two-year Treasury notes went at a high yield of 3.498 percent. It drew bids for 1.93 times the amount on offer, below the already modest 2.01 achieved at the last sale and below last year’s average of 2.2.

    Indirect bidders, including customers of primary dealers and foreign central banks, picked up just $7.35 billion, or 31 percent of the whole issue. That only just beat the meager 29 percent at the last sale. Primary dealers themselves got $15.66 billion of the issue.

    Yields on the current two-year note (US2YT=RR: Quote, Profile, Research) ticked up to 3.49 percent from 3.45 percent late Wednesday. The benchmark 10-year note (US10YT=RR: Quote, Profile, Research) dipped 2/32, lifting yields to 4.28 percent from 4.27 percent.

  • Posted by jm

    anne:

    Mercantilistic exchange rate (XR) manipulation and trade imbalances shouldn’t be needed to ensure absorption of the surplus Chinese labor. In a properly functioning world, the trade flows should balance. To buy the Chinese goods (and so to pay the Chinese labor), we should need to get yuan by selling them something of genuinely equal value.

    But instead we get yuan by selling Treasury securities to their central bank.

    We must therefore ask: Why do those controlling the PBoC allow us to get yuan by selling Treasury securities, instead of forcing us to ship something physical of equal value to China, or to sell assets such as land, factories, etc.? Is it because they believe that those securities will have more purchasing power in the future? Or is it because the yuan with which they buy those securities are Other People’s Money, and they and their associates can accumulate power and profits by thus being able to sell the labor of their countrymen at a discount to its already-low price? Might the amount of foreign reserves that must be accumulated to suppress the yuan-dollar XR be a rough measure of the value being diverted from the pockets of Chinese labor to the pockets of those in control?

    Now, if their central bank truly had the long-term interests

  • Posted by jm

    Last line above “Now, if their central bank truly had the long-term interest” was an editing error.

  • Posted by anne

    JM

    If I understand properly, I do not agree. There is no question in my mind that China’s leadership wishes the broadest possible development for the country, and in fact has been remarkably successful in stimulating development. There are severe problems to be addressed as they “iron rice bowl” social benefit system is set aside, but development has been successful in a way that economists thought impossible 20 or fewer years ago. Trade with America has been of enormous moment in China’s development.

  • Posted by jm

    anne:

  • Posted by jm

    anne: The day job interferes — will try to reply tonight.

  • Posted by Uber

    Currency Reserves’ revaluation losses and Central Banks’ sterilization costs are mainly nominal, balance sheet issues. It does mark-to-market past distortions and intervention, and of course CBs can make mistakes in intervening too much or in their choice of reserves currencies.

    But, look at Brazil or South Africa or even Thailand and Korea. All have allowed appreciation of their currencies over the past few years, and so are sitting on “huge losses”. That’s the price you pay for having an undervalued currency which helps build reserves. For some reason when Russia or Argentina devalued no one said, “what geniuses, look at their mark-to-market gains on their reserves”.

    The important thing is the REER (real effective exchange rate). It governs balance of payments, and can shift resources (employment, profits, wealth) from capital to labor. *That* is what Asian’s are doing: keeping their people poor but employed, and increasing returns on capital. (See Mike Dooley et. al.)

  • Posted by brad

    Uber — when Russia/ Argentina devalued, their net reserves (gross reserves – what they owed to the IMF were close to zero), and the government’s overall were major net debtors (their dollar/ fx assets exceeded their dollar/ fx liabilities).

    If you look closely at Brazil’s balance sheet, you will see that a) its net reserves remain quite small (all the $ it owes the IMF) and b) the government has a large amount of fx linked domestic debt. Its overall foreign currency debts exceed its foreign currency assets, so it gains (on net) from the appreciation of the real.

    Asian central banks, and Asian governments (and now Russia too) are in a different position — their aggregate FX assets exceed their FX debts. central banks are usually profitable — they discount government bills that earn interest for cash, so they can offset some losses. But I suspect the scale of Korea’s capital losses from the won’s recent appreciation has something to do with the korean government’s recent interest in seeking higher yields on its reserve assets. China is sitting on an enormous capital loss — now,that loss may remain a paper loss so long as neither foreign speculators or chinese citizens with renminbi want to trade their renminbi for $ assets after a devaluation, but it is still a potential issue.

    and you need to look at the difficulties associated with sterilizing large, ongoing inflows.

    I do not deny the benefits of a weak real exchange rate — stronger exports, stronger employment in export sectors, stronger profits in those sectors as well. But I do think the costs associated with sustaining that policy are increasing …

  • Posted by anne

    “I do not deny the benefits of a weak real exchange rate — stronger exports, stronger employment in export sectors, stronger profits in those sectors as well. But I do think the costs associated with sustaining that policy are increasing.”

    Robert Rubin said just this, with more emphasis on the costs involved.

  • Posted by jm

    If money actually has any meaning, it is hard to see how a paper loss can be “just a paper loss”. Is not a paper loss simply a real loss that one has just refused to admit is a loss (unless one has strong reasons to believe that the value will somehow be recovered later). Right now, in one mutual fund I own (thankfully a small part of my assets), I have a “paper loss” of about 75%; since it’s a bear fund and I expect a market crash, I hope it will someday recover its value, but until it does, I certainly won’t think of it as “just a paper loss”. Unless an asset held by a central bank is somehow fundamentally different from an asset held by an individual, well, how can it be different?

  • Posted by Jesse

    Well, the US at least has their attention…

    http://www.theaustralian.news.com.au/common/story_page/0,5744,12364202%255E601,00.html

    US deficits risk crash: Treasury
    David Uren and Roy Eccleston
    February 25, 2005

    PETER Costello’s closest adviser fears the US is heading for a devastating financial crash that could ravage Australia’s economic growth…..

  • Posted by brad

    anne — do you have the link to rubin’s quote? I suspect he was talking about the US, and I was talking about Asia, but it is still sort of strange …

  • Posted by still working it out

    Thank you brad, anne and ying-yang.

    I think I now understand the basic risk that the Asian central banks are running. Very interesting.

  • Posted by camille roy

    “Why weren’t economists denouncing Asian mercantilism back when there was still time to avoid these monstrous imbalances, instead of denoucing as anti-free-traders those who insisted trade should be balanced?”

    We’ve all observed the way the right wing has been infected with ideology that has destroyed their judgement. I wonder if something similar has occurred with the neo-liberal pro-globalization and free trade crowd. In terms of abandoning domestic productive capacity, we’ve already danced to the edge of that cliff. There may be nowhere to go but over the edge. How can we ‘re-build’ our industrial base and exchange domestically manufactured goods for imported ones? What trend supports that? It’s a fantasy. If our consumer market implodes, it will be a sort of sink hole. Our middle-class will plummet. The sheer numbers of low paid Chinese and Indian workers being integrated into the world economy indicate this. What is the wage differential — I think it’s around an order of magnitude, from the assembly line to professional services. How can any feasible exchange rate compensate for this?

  • Posted by Movie Guy

    Brad

    Still trying to get through my own fog and catch up.

    “Net US external debt probably rose to around $3.3 trillion at the end of 2004 (with FDI valued at market rates). So the debt the US owes to Asian central banks accounts for a substantial share of the United States’ net external debt, and a not-insignificant share of the United States’ roughly $11 trillion gross external debt.”

    At which point, I fell off my horse and raised the issue of total U.S. public debt vs. U.S. net external debt. You cleared that up nicely; thanks. Now on to what I was trying to sort out.

    1. What is the estimated percentage or dollar value of U.S. public debt, $4,491,052,249,387.46, which is held by (a) foreign central banks, (b) Asian central banks, (c) foreign investors, (d) Asian investors, and (e) U.S. investors (all classes/groupings)?

    2. Assuming that answers are available for Q1, is it reasonable to assume that the general balance of other U.S. net external debt (other than U.S. Treausry instruments and dollar holdings) is represented by corporate securities, mortgages, real estate holdings, corporations, agriculture, and similar investments? What else? And which of the above represent any threat to U.S. macro economic interests?

    3. If U.S. gross external debt is roughly $11.0 trillion, what percentage is projected to be owed by Asian central banks? By Asian investors?

    I share concerns about the possibility that foreign central banks may continue to reduce their holding of U.S. Treasury instrments. The late two market sales appear to indicate this possibility, but we’ve not seen a full blown effort to sell the bonds at any yield level have we? In other words, will the bonds not sell if the yields rise high enough to attract buyers? Or is there a point at which the foreign central banks simply step aside and let other buyers take advantage of the yields?

    I don’t know what they would do with their dollar holdings, though. You can only buy so much oil.

    While I may not “like” the other forms of net external debt held by foreign interests, I’m not inclined to conclude that such necessarily represent any economic threats of major significance. If so, a few examples from anyone, please. I can name a few, but economists I know personally have dismissed most of my concerns in recent weeks.

    Lastly, as we helped build the New China (most recent project), New South Korea, and New Japan, did we expect a different scenario? Did we not anticipate that our imports would be much larger than our exports to that region of the global economy? If so, then we should have anticipated the imbalances. As such, we knew then and know now that we have tools at our disposal to trim those imbalances.

    What ultimately triggers an effort on the part of the U.S. to initiate a rather quick or firm adjustment of the imbalances? Why aren’t we seeing the first round of special tariffs targeted to goods and services from nations which represent the largest imbalance trading partners? What’s the obstacle? WTO concerns? Global recession? What else holds back such an effort?

    Why should the U.S. wait for the foreign central banks to initiate moves to force a correction of the imbalances? Yes, this is an oversimplification of their broad concerns, but the question serves a purpose.

    Anyone is welcome to tackle my questions.

  • Posted by jm

    camille roy:

    Don’t be _too_ pessimistic. Since China was able to build an industrial base in a relatively short time, we should be able to rebuild ours just as fast. The American manufacturers who have survived are must be very good — economic Darwinism at work. I don’t think the middle class will necessarily plummet due to low-paid Chinese and Indian worker competition — every dollar that goes overseas has to come back somehow, whether to purchase goods or as a loan. The problem with Asian mercantilism, in my view, is that it distorts both our economy and the Asians’ own by subverting the pricing signals through which “comparative advantage” should work to maximize global economic welfare, causing both sides to end up with unnatural and suboptimal resource deployments that become increasingly difficult to sustain over time, and from which a transition to more natural and optimal deployments will involve wrenching dislocations (i.e., millions of people having to shift from retailing and distribution of imports to manufacture of export goods). But that shift may not go well, so sunny optimism, too, may not be advisable.

  • Posted by brad

    movie guy — read my long paper with roubini! it answers most of your questions, even if it is perhaps somewhat too long.

    quick answers

    1. What is the estimated percentage or dollar value of U.S. public debt, $4,491,052,249,387.46, which is held by (a) foreign central banks, (b) Asian central banks, (c) foreign investors, (d) Asian investors, and (e) U.S. investors (all classes/groupings)?

    I do the calculations for a, c, and e using marketable debt (slightly different from public debt) in the paper. the Treasury nets out the fed’s holdings and reports a and c (an implicitly e, which is 1-c). Foreigners hold 53% of marketable debt not held by the fed. Recorded central bank holdings are about 30%. Most people suspect real central bank holdings are a bit higher, say 35-40%.

    2. Assuming that answers are available for Q1, is it reasonable to assume that the general balance of other U.S. net external debt (other than U.S. Treausry instruments and dollar holdings) is represented by corporate securities, mortgages, real estate holdings, corporations, agriculture, and similar investments? What else? And which of the above represent any threat to U.S. macro economic interests?

    The data here is in the NIIP release of the BEA (end 2003). You have to update it to reflect ongoing flows in 2004, which are available through q3.

    3. If U.S. gross external debt is roughly $11.0 trillion, what percentage is projected to be owed by Asian central banks? By Asian investors?

    Asian central banks is relatively easy. Asian reserves are now $2.4 trillion. If between 75% and 80% are in dollars, they hold between 1.8 and 1.9 trillion of US debt — since Japan holds a large share of all asian reserves and it holds mostly dollars, I would guess $1.9 trillion or 17% of all claims on the US (with claims defined broadly to include direct investment, foreing holdings of stock) are held by Asian central banks.

    Asian investors would take a bit more work … japan and korean firms obviously have important investments in the US, private japanese investors also are important players in some us markets.

  • Posted by Movie Guy

    I don’t believe that the percentage holdings by Asian foreign central banks and investors represents a pressing threat at this time. If the percentages were 20% higher, I would be more concerned.

    WHEN the Dollar is put through another devaluation cycle, is it not the case that the existing debt becomes less of a concern?

    At what percentage of debt ownership should we really become concerned?

  • Posted by enrique

    Brad
    If the dollar falls against the renminbi of course Chinas assets in dollar are worth less in renminbi. But they hardly would worry about all people wanting dollar for their renminbi, because in that case the renminbi simply would fall back to the original exchange rate.The problem I see for China is that a falling dollar probably would mean some inflation in the US and worldwide – at least in dollars – so their reserves would mean less in real terms, be it oil, goods, iron.

  • Posted by brad

    Enrique — good point. I need to modify my scenario a bit.

    Scenario one is that the PBOC repegs. then it guarantees the new exchange rate, and a rush ouf of the renminbi (to take profits) leads to a fall in reserves but no move in price.

    Scenario two is that the PBOC introduces a degree of flexibility in the exchange rate. Then a rush to take profits after a renminbi revaluation would put downward pressure on the exchange rate. That rush may be limited, however, if the PBOC does not let the renminbi move all that much initially, and with a significant current account surplus (one that might go up from the improvement in China’s terms of trade after a revaluation) and ongoing FDI inflows, there could well be large ongoing inflows that support the renminbi after the revaluation.