Brad Setser

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Gone (sand) fishing …

by Brad Setser
November 28, 2006

I am going to be away from my desk for a few days, giving a talk on petrodollars (and petroeuros).   Posting will likely be rather sporadic. 

Talking about petrodollars (and petroeuros) to group that presumably knows far more about petrodollars (and petroeuros) than I do is rather intimidating.  

I suspect they needed an outside speaker because the folks who actually manage the world’s petrodollars don’t want to inadvertently reveal what they are doing with the money.  I, alas, don’t have any secrets to reveal.    I work with the (extremely incomplete) data collected by the US and the Bank of International Settlements.  (Reviewed in detail here; RGE subscription required)

I am not complaining though.  These kinds of talks help pay the bills.  And I am interested in hearing what folks in the GCC think about the dollar right now, and about the GCC’s peg to the dollar. 

The GCC’s aggregate current account surplus (around $200b) is only a bit smaller than China’s surplus.  And the GCC pegs to the dollar.  I suspect that creates some constraints.

Presumably one of the smaller central banks in the GCC – say the central bank of the UAE — could shift some of its reserves out of the dollar without moving the dollar/ euro.  The big money in the UAE isn’t in the central bank in any case.   I am not so sure that the same argument works for the Saudis.  The Saudis have been adding to their reserves (SAMA foreign assets) at a rather impressive clip.  

I don’t think the oil exporters have quite as much of their fortune tied to the dollar as many East Asian central banks.   But I also expect the GCC countries have more exposure than say Russia or India – countries that presumably have only about half their reserves in dollars.   

I am also interested in learning a bit more about how folks inside the GCC view their peg to the dollar right now.   

The composition of ADIA and SAMA’s portfolio is a secret.  But my views on the GCC peg are not

I think the GCC’s dollar peg is an impediment to global adjustment.   More importantly, I don’t think the dollar peg creates an appropriate framework for monetary policy in the Gulf.   

Think of it this way: there are times when the oil exporters shouldn’t “import” the monetary policy of an “oil importer.”

1998 was on such time.  Oil prices were tanking even as the US was booming.   The GCC didn’t need a strong currency.  Or US interest rates.  

Interestingly, right now may be another time when importing the monetary policy of an oil importer may cause problems for oil exporters.  

The US may or may not be heading toward a recession.  But the US economy did slow in the second half, and the market now seems to expect that the Fed will lower rates next year.  The US needs the stimulus provided by a weaker dollar to offset a fall in the housing market. 

The GCC, by contrast, neither needs a weaker currency or looser monetary policy. 

Rather the opposite actually.   

Inflation has started to pick up in the Gulf as countries start to spend more of the oil windfall.   Sure, the GCC countries tend to import most goods and a lot of their labor, and that helps to hold inflation down.   But importing labor also puts pressure on the rental market – and bids up demand for a lot of services.    It isn’t a panacea.    Inflation in some GCC countries is well above inflation in the US (even if energy prices have been held down).  

And ironically, the bigger the boom, the higher inflation and the lower the real interest rate  …  Think of Spain – where a booming economy has pushed up inflation and resulted in lower real rates than in the rest of the Eurozone.  Then think of Spain on steroids.  That seems to be the current situation in Dubai and Qatar, the most frothy economies in the GCC.  

Much has been made of how the GCC countries have avoided the fiscal profligacy that marked the last oil boom.   Fiscal surpluses are huge.    

But fiscal policy is only half the macroeconomic policy equation.    Fiscal policy hasn’t been as contractionary as it could have been.   But monetary policy is increasingly stimulative.   I am not sure that is an ideal policy mix.   The Gulf may avoid a boom in social spending, but not a boom (and subsequent bust) in investment.

It certainly seems to me like the dollar’s recent weakness is coming at a particularly bad time for the GCC countries.   Big fiscal surpluses effectively kept most of the oil windfall out of the local economy.   The big surpluses acted as a form of sterilization.  So long as the government never sold many of the dollars the state oil company earned in global markets for local currency, the central bank didn’t have to withdraw the local currency from circulation by selling sterilization bills.   Fiscal sterilization (large surpluses) and growing government oil funds substituted for monetary sterilization and growing reserves. 

(one little footnote – the Saudi government has lots of dollars on deposit with the Saudi Monetary Agency … pushing up Saudi reserves.  But the mechanics are still different than in say China, where exporters convert dollars into RMB at the central bank and the central bank has to sell sterilization bills to withdraw the RMB from circulation)

But all signs indicate that most GCC countries are scaling back their “fiscal” sterilization as they ramp up investment and otherwise start to put more of their oil windfall to use domestically.   

There is nothing wrong with that.   If you are a country with a lot of oil – enough to last for several generations and oil’s long-term price is say $50 a barrel, there isn’t a strong case for keeping spending at the equivalent of $20 a barrel and saving $25 a barrel (assuming oil costs $5 to produce).   Particularly if a large fraction of the funds that are being saved have been parked in dollars – dollars that may not hold their value over time.

But more spending isn’t consistent with sustaining the real depreciation of the GCC currencies brought about with the dollar peg.   Keeping the GCC’s real rate low requires saving most of the oil windfall.    Spending even some it is already putting upward pressure on prices.    That pressure should continue – as both the weaker dollar (and higher import prices) and new investments in the pipeline put pressure on prices. 

There is an interesting contrast between the GCC and China.   Both after all peg to the dollar.   Both have large current account surpluses.   Both have currencies that have depreciated in real terms over the past few years, as the dollar has fallen against Europe.  

In China’s case, sustaining the real depreciation has required a set of policies that have locked up a lot of China’s savings in the banking system by restraining investment.   Martin Wolf has put it best: to turn the RMB’s nominal depreciation into a sustained real depreciation, China had to pursue a set of policies that pushed up national savings and kept the growth in investment below the growth in savings.     China’s banks are – as Denise Yam of Morgan Stanley has noted – now sitting on a huge amount of (RMB) cash.      

In the GCC’s case, sustaining the real depreciation also required a set of policies that raised national savings.   The GCC countries didn’t need to lock the country’s savings up in the banking system by restraining bank lending, as China did.   The government controlled most of the oil revenue directly and so long as it didn’t spend a large chunk of the oil windfall, it could raise national savings directly.   Rather than locking up savings in the banking system and leaving the banks no alternative but to lend to the central bank, the GCC countries locked up the oil windfall in offshore accounts.

At least they did.  They are slowly letting more of those funds flow into the local economy.   Just as every municipality in China wants to be the next Shanghai, there seem to be lots of cities in the Gulf (and on the Saudi side of the Red Sea) that hope to be the next Dubai.     

Monetary and exchange rate policy was – by chance – sort of restrictive in the Gulf in 2005.    The dollar rose from its 2004 lows, and the Fed was raising rates.  Fiscal policy was also fairly restrictive – only something like 1/10 of the oil windfall was spent in 2005.  But with the Fed on hold and the dollar sliding, monetary conditions in the gulf are no longer restrictive.   Particularly since high regional inflation rates imply low – and in some cases negative real rates.   Fiscal policy is also a lot less restrictive than it was.   The IMF estimates about 40% of the 2006 oil windfall will be spent.    In 2007, I suspect that the dollar peg will lead the GCC to import looser monetary policy than it should have, particularly as fiscal policy continues to be less restrictive.

There will be less fiscal sterilization.   And more – I suspect – inflationary pressure.    That is what has to happen in some sense.   A surge in the real price of oil shouldn’t lead to fall in the real value of the currencies of the biggest oil exporters.   And so long as the GCC pegs tightly to the dollar, the only mechanism for the real value of GCC currencies to rise is a pick up in domestic inflation.   

At least that is how it seems to one observer looking in from afar.  It may seem different up close.   And the people who matter on the ground may have an altogether different view. 


  • Posted by Anonymous

    If liquidity and safety are the two main criteria for fresh reserves allocation is the Yen the best place to go? Plus isn’t it cheap?

  • Posted by Guest

    Our loss is their gain.

  • Posted by Dave Chiang

    The Arab Gulf Oil states still need the military protection of the United States, and will continue to price their Oil exports in only US dollars. The problem for the Arab Gulf Oil regimes is they know they cannot rely on China or Russia for their survival and this is why they still want to maintain a close relationship with Washington. Realistically, it will be very hard for China to compete with the United States politically and militarily in the region, especially when it comes to the vital U.S.-Saudi ‘special relationship’. And since critical commodities especially oil and natural gas imports are priced in only US Dollars, the Chinese have no reason to depeg their yuan currency to the dollar. Until the oil market is traded in multi-currencies, US Dollar hegemony is de facto preserved with the implicit backing of the Arab Gulf Oil reserves.

  • Posted by Maverick

    DC I find your comments interesting especially your China perspective.

    China looks like a “radioactive” ticking bomb, the “fusion” material comprises of investment bubbles (many of those perpetrated by provincial officials eg. steel mills, cement factories etc. mostly labour intensive as to prop up employement), potential overcapacity, absense of a welfare state, explosive future demographics (ageing), entranced povetry outside the big cities, a banking system that even after the corrections/help from the PBoC continues to be immersed in bad loan practises and a peg that restricts proper macroeconomic policy and exposes PBoC to great losses.

    Add to the above an almost complete absense of legal recourse for foreign nationals and entities.

    What I am trying to understand here CD is how can anyone see China as a potential world power let alone an Empire in 50 years time. (As some exuberant analysts suggest)

    India might look like a safer bet if it liberates its markets more and builds a proper infrastructure.


  • Posted by Adrasteia

    The bigger problem in China is the complete lack of environmental controls on heavy industy. I suspect that this is also the reason for the record ozone depletion numbers this spring.

    Open question: How much of an economic superpower can you be once you have destroyed all your sources of potable groundwater with heavy metals?

  • Posted by Dave Chiang

    Everyone knows about China’s many problems and headaches, but unlike the world-improvers in Washington, the Chinese are at least attempting to fix the numerous problems within their nation. Is anyone in Washington even attempting to address the nation’s budget deficit, trade deficit, health care deficit, illegal immigration problem, or education deficits? At the very least, the Chinese have a cool $1 trillion dollars in foreign reserves to spend on addressing the numerous domestic problems that will take time and patience to resolve. By contrast, the Washington Consensus has expended $300 billion dollars and counting on pointless, stupid wars in the Middle East with absolutely no end in sight. In direct expenses of the Iraqi war including long-term health care costs for 23,000 disabled soldiers amount already to $2 trillion dollars. The unilateral neo-militarism will only lead to self destruction of the war-making nation. After the economic bankruptcy by the only remaining superpower, the Chinese will be left reconstructing a new world order by default.

  • Posted by Guest

    Both India and China have produced staggering economic growth in recent years, but India continues to lag behind on many fronts, correspondents say.

    China has a literacy rate of 95%, compared with India’s 68%. Indian exports of manufactured goods in the financial year ending last March were valued at $71bn, compared with $713bn for China.

  • Posted by Guest

    “A leading Aids campaigner in China has vanished, feared detained by police, after the authorities ordered him to cancel a conference that was to have looked at the state’s responsibility for infections and blood safety… Wan, a former Health Ministry bureaucrat, has been an outspoken critic of the government’s handling of HIV and Aids. In 2002, he was arrested for passing on state secrets after revealing how entire villages in Henan province had been infected through blood sales… ‘When things like this happen you are reminded of China’s dark side, its human rights abuses,’…”,,1957262,00.html

  • Posted by Guest

    “…For many observers, however, the bigger story lay underneath in any case, in the apparent confirmation by Central Bank Governor Al Suwaidi that the US dollar will be abandoned in its role of currency peg, not by 2010, but by 2015…”

  • Posted by HZ

    Look at it this way, despite all the constraints imposed by the antiquadated political system, China had made huge strides. Now imagine that if the political situation improves … The potential is awesome even if the course is uncertain.

  • Posted by Guest

    Let’s look at some quotes from Bernanke speech today:

    [1] “Outside of housing and motor vehicle sectors, economic activity has, on balance, been expanding”

    …. LOL. That might sound like just two sectors but those two sectors constitute an overwhelmingly massive portion of individual spending. And since when do we get to subtract inconvenient sectors in order to achieve positive metrics? And he cites labor?! Pshh. Wage growth is stagnant. Just watch what happens to consumer spending in an environment of flat wages and increasing prices.

    [2] “Real GDP growth this quarter is likely to be in the same general range that it was in the second and third quarters”.

    LFMAO! Real GDP was 2.6% (ANNUALIZED!) Nothing else needs to be said about that absurd comment.

    [3] “economic growth will… over the course of the coming year… return to a rate that is roughly in line with the growth rate of the economy’s underlying productive capacity”.

    Oh the spin. I’m dizzy. First off — the only reason we don’t have massive inflation (in the face of our ever expanding money supply) is because of globalization and cheap overseas labor markets. We’re neck deep in cheap asian imports which have drowned out any future hope of our own domestic manufacturing viability. And now Bernanke is citing our overpriced and dormant “capacity” as an indicator of future growth? LOL. Yah… right… our overcapacity is a gooood thing. Okaaay. [The only way our manufacturers are coming back to life is if the dollar gets much, much cheaper — and the American worker gets much, much poorer. Oh, right… maybe that’s the plan.]

    Position: The dollar is currently taking a nosedive and will continue to do so because wealthy investors are moving dollars out of the US at a blinding speed. The only thing that will *really* screw America is if all the little people follow suit. Bernanke will tell them everything’s going to be ok… while the rug gets pulled out from under them.

    My personal position: Invest in Asia (or just buy FXI if you don’t know much about Asian stocks). Buy Gold. Buy Silver. Buy a basket of foreign currency CD’s.

    The sh*t is flying towards the fan at 100 miles per hour.

  • Posted by Guest

    As W.E. Clark explains in his magisterial book `Petrodollar Warfare’, the real pillar of US dominance is the dollar. As long as oil will be quoted in dollars, the rest of the world has to by dollars and sustain its exchange rate. If OPEC (like Saddam Hussain) asks to be paid in euro, the dollar will fall heavily. The result will be massive inflation, a possible run on the banks, and a collapse of the US financial system, like we saw in Argentina a few years ago. The final fall of the American empire will be the fall of the dollar.

  • Posted by HZ

    Does the fiscal prudence of the GCC this time mean that that can sustain high oil price for a longer time? Traditional oil boom leads to profligacy, and when consumer nations cut back, oil producers need to pump more to maintain their elevated spending level (it is always easy to raise spending level but hard to cut back!) which further depresses price and leads to the inevitable bust. This time around, the GCC can afford to cut back production — it is hard to imagine that Venezuela or Nigeria can afford to do the same — in response to slackedned consumer demand. It actually makes sense for them, as oil is potentially worth a lot more a couple decades down the road than it is worth now. By offshoring the surplus now, instead of spending it, they can afford to reduce production to maintain price and run a deficit if necessary.

  • Posted by DOR

    When in doubt, paint scenarios !

  • Posted by moldbug


    It is very easy for me to understand, or at least convince myself that I understand, why the Chinese choose not to move their reserves out of dollars, euros, yen, pounds, etc, and into precious metals.

    I don’t have a clear understanding of why this is the case for the Gulf countries. In fact, I don’t have any kind of an understanding at all of this matter. So I would find any information on the subject nontrivially enlightening…

  • Posted by touche

    The folks in the GCC would dearly like to know what to do with their petrodollars other than squander them on US bonds.

  • Posted by HZ

    OPEC has announced 1mbpd of cut and may announce more. It is just not credible that non-GCC countries can afford to cut more than token amount — so the loss of revenue, if actualized, will fall on GCC mainly. They also have to counteract potential non-OPEC increases. In other words, to be credible, they need a war chest to show that they are serious.

  • Posted by Maverick


    I hear you. My main concern is that the “cool $1 Trillion” might evaporate fast out of FX movements the PBoC can hardly control (or maybe it can to a point at an enormous cost though) If that safety net starts to diminish the future outlook might get less rosy.

    Unfortunately PBoC has painted itself to a corner, holding a fiat currency with questionable intrinsic value which is certainly less than even the current levels.

    Current investments in the African Continent look wise although future political stability of those African nations is an ever ending concern.


    Touche! The environment is indeed another major issue which I should have included. Enviromental degradation of the scope and depth currently afoot in China has the potential of costing $Billions in the future. It already affects millions of people living in cities clogged with noxious gases and smog.


    Yes the potential is indeed enormous but as you correctly point out a political improvement might not be the panacea we all hope for.

    Regards to all,

  • Posted by Anonymous

    Suggestion to un-loved (in the US) foreign investors:

    Ask to be for your oil is GE stocks or Boeing shares those similar stocks which benefit from your own recycling.

    Love will return to you very rapidly.

  • Posted by Anonymous

    Suggestion to un-loved (in the US) foreign investors:

    Ask to be paid for your oil is GE stocks or Boeing shares those similar stocks which benefit from your own recycling.

    Love will return to you very rapidly.

  • Posted by Cassandra

    Indeed, the petro-dollar recycling “problem” THIS time is the result of secular trends arising NOT from cyclical trends or market shocks, but from growing NIC energy demand and global supply constraints. Price-hiccups aside, this means chronic petro-surplusses are of more than anecdotal interest, and their threat to the balance of international monetary system is severe and must be countenanced.

    GCC pegs are only part of the story. As with other US imbalance issues, there is enormous scope to unilaterally improve the situation on the demand side – particularly in the USA, as both Japan & Europe have demonstrated. The lack of coherent energy policy with non-conflicted longer-term public interest goals will, with hindsight, be seen as singularly the biggest failure of American Government and American vision in the late 20th century.

    In the meantime, pin-heads continue to debate the “urgent” nature of same-sex marriage, abortion, and immigration, while oil remains cheaper than bottled water. Freedom, of course, comes with responsibility: but it is ironic that the same rugged invidiualistic freedoms that contributed to America’s ascent a century ago, will be responsible for her unpreparedness as we enter what will probably be the biggest crisis in her history, and her potential undoing.

  • Posted by Maverick


    You are right on the money.Oil is cheaper than bottled water and as long as this remains the case no one will have the guts to implement a proper energy policy.

    One concern is that the widely dispersed cities and poor public transport make the US a hard case to crack on the demand side. Can one imagine living in LA without a car or St. Louis for that matter? To efectively curb demand for oil one should start from a radical redesign of the US cities and thus a radical change in the US way of life. Europe’s high density cities and a long tradition of public transport make demand side policies better and cheaper to implement.

    In any case those idiotic SUV’s must be taken off the US streets and be recycled. Pronto!


  • Posted by Dave Chiang

    “I hear you. My main concern is that the “cool $1 Trillion” might evaporate fast out of FX movements the PBoC can hardly control (or maybe it can to a point at an enormous cost though) If that safety net starts to diminish the future outlook might get less rosy.” – Maverick

    According to World Bank and IMF estimates, 70% of the $1 trillion Chinese Central Bank reserves are in US Dollars, the remaining 30% consists of Euro and yen. Let’s suppose the US Dollar plunges 20% over the coming year. A 20% loss on US Dollar denominated bonds translates into a $140 billion paper loss, but the Chinese are still receiving a 5% bond dividend yield on long term US Treasury bills which translates into an approximate $35 billion gain. Plus if the Euro and yen have appreciated 20% versus the US Dollar that translates into a $60 billion gain. Although my calculations are far from exact, the monetary loss of 20% on the US Dollar would not be financially significant; Chinese Central Bank reserves would remain the Euro equilvalent of $955 billion which is hardly a catastrophic loss on the balance sheet. So the Chinese would be in reality be taking a less than 5% monetary loss which is what I sometime lose in a single day on my overall stock investments on a down market.

  • Posted by Guest

    Housing prices begin falling off a cliff

    From the Herald Tribune reports from Florida. “Prices remain the story in home sales, with Sarasota-Bradenton prices falling 18 percent in October, the second biggest drop in the state. The Charlotte County-North Port market was not far behind, with a drop of 17 percent, from $243,900 to $202,800.”

    “Only Fort Myers-Cape Coral took a bigger fall, posting a 44 percent decline in median sales price, from $445,100 to $249,200, the Florida Association of Realtors reported on Tuesday.”

    “Chad Roffers, president of Sarasota-based Sky Sotheby’s Realty, said the price decline goes hand in hand with slowing sales. ‘An 18 percent decrease feels about right. We’re seeing unit sales down by a third across the board and prices off by 20 percent from the peak in mid-2005,’ said Chad Roffers, president of Sarasota-based Sky Sotheby’s. ‘Those sellers who accept that level of value are seeing action. Those who hold out for 2005 prices are not.'”

    “Budge Huskey, president and chief operating officer of Coldwell Banker Residential Real Estate, is not convinced that prices are done declining. ‘Sell now; you may get less in three months than today.'”

    “Sales of condominiums in the Sarasota-Bradenton market were off 51 percent from the same time a year ago. The median sales price dropped 27 percent, from $294,000 to $216,000. ‘Condos always go belly up when economy gets sluggish,’ said (realtor) Barbara Anson.”

    “‘We now have to come back to reality,’ she said. ‘I am explaining to my sellers in Myakka that the bubble has busted. They’re not going to get $350,000-$400,000 for a 10-acre parcel like they used to. They’ll get $200,000.'”

  • Posted by Cassandra

    There will be no recession without/until (1) fiscal policy is corrected (2) the bond market finds its “mojo” and plays vigilante as in days of old, (3) should the Fed decide to forfcefully and significantly invert the curve, or (4) Should oil spike to >$100bbl. Until then, the housing market is a sideshow and a macroeconomic nuisance, but won’t sink the ship so long as money & credit is plentiful and expanding, especially when all other asset prices are raging.

    Anecdotes as described by Guestg above will quickly be forgotten (or looked upon wistfully and regrettfully) when as in Auz & UK, nominal median US home prices slip from the hold of the eddy in which they are presently caught and resume their upwards march following other monetary tell-tales. Those investors relying upon further nominal price compression to realize their bearish fincl market sentiments should carefully consider the hazardous consequences of repeatedly pissing into the wind. I say this NOT as a bull or with vested interest (if anything I am short housing as a primary renter), but rather as a skeptical observer of current US political-economy.

  • Posted by HZ

    PBoC liability is in RMB so if RMB appreciates 20% together with Euro/Yen against dollar, capital loss is on the dollar holding. No gain on the Euro/Yen holdings. There is only gain if Euro/Yen appreciates 20% against RMB.
    But agree these are all paper gain/loss and do not concern PBoC that much. Excess liquidity in RMB is their real concern.

  • Posted by Dave Chiang

    PBoC liability is in RMB so if RMB appreciates 20% together with Euro/Yen against dollar, capital loss is on the dollar holding. No gain on the Euro/Yen holdings. There is only gain if Euro/Yen appreciates 20% against RMB. – HZ

    But the RMB won’t appreciate 20% versus the US Dollar anytime soon since the currency exchange rate is fixed by the Chinese government.

  • Posted by HZ

    Then you confuse me. “A 20% loss on US Dollar denominated bonds translates into a $140 billion paper loss, but the Chinese are still receiving a 5% bond dividend yield on long term US Treasury bills which translates into an approximate $35 billion gain. Plus if the Euro and yen have appreciated 20% versus the US Dollar that translates into a $60 billion gain.”

    If RMB does not appreciate where is the loss? If you denominate everything in USD/RMB there is no loss, only Euro/Yen gain; if you denonimate everything in Euro/Yen, there is no gain, only USD loss. Shouldn’t double count.

  • Posted by bsetser

    DC — you also need to net out of the PBoC’s interest bill on the portion of its reserves that are offset by sterilization bills .. that still leaves the PBoC with a decent ongoing income (not all reserves are sterilized), but it is a bit smaller.

  • Posted by Dave Chiang

    Hi Brad,

    That is true that I didn’t include the cost to the PBoC by sterilization bills. But I also omitted in my very rough calculations, interest received by the PBoC on the $300 billion in Euro and yen bonds. My point is that the financial losses to the PBoC with even a drastic 20% devaluation of the US Dollar versus the Euro does not represent a catastrophic financial loss to the balance sheet of the Chinese government. Even the most bearish economists like Stephen Roach are not predicting a drastic 20% devaluation of the US Dollar over the coming year.


  • Posted by Cassandra

    “…interest received by the PBoC on the $300 billion in Euro and yen bonds…”

    Interest on YEN bonds??!? Ha! Ha! Ha! That’s funny…

  • Posted by Anonymous

    Brad- any thoughts on this report?

    65% Of BOJ’s Foreign Assets In Dollars; 30% In Euros

    TOKYO (Nikkei)–The Bank of Japan gave its first-ever breakdown of its foreign-currency assets Wednesday, reporting that dollar-denominated assets
    accounted for about 65% as of Sept. 30.

    Euro-denominated assets made up around 30% of the total foreign-currency assets of 5.23 trillion yen. Assets in pounds were about 5% of the total.

    These proportions are similar to those seen at other central banks. According to the International Monetary Fund, as of June 30 the dollar accounted for about 65% of the foreign reserves at central banks around the world for which allocations were available. Around 25% and 4% of such reserves were in euros and pounds, with yen assets making up roughly 3%.

  • Posted by psh

    ‘no recession without/until’

    [… or maybe (5) Leverage goes negative in one big illiquid asset class, such as housing, and (6) bad debt interacts with bankruptcy restructuring to curb consumption.]

    Not to question this Fed’s willingness to monetize any and all mortgage debt, of course. Nothing could prevent that except regulatory capture by lenders — and securitization makes lenders more diffuse and less effective as lobbyists. But lenders did finally get their bankruptcy bill, and it’s spawned a collection industry that could put some new feedback loops in the demand function. Fear of wage attachments or default judgments could have the Fed pushing on a string in no time. A little anecdotal media coverage could really do a job on consumer confidence. Good thing no one’s noticed.

  • Posted by HZ

    “the total foreign-currency assets of 5.23 trillion yen”
    5.23 trillion or about 50B USD sounds impossibly low.

  • Posted by bsetser

    psh – I would need to spend some time with the data but HZ seems to have a point; most of what we normally call Japan’s reserves are actually the MoF’s foregn assets, and they may not be included in this statement. I would be very surprised is only 65% of the MoF’s foreign assets were in $. Msot think the number for Japan is 80-85% of the MoF’s foreign assets are in dollars. Look at Truman and Look at the imf data for industrial coutries … my sense is that it only worls with a high japanese $ total, given what we know abot the reserves of other industial coutries.

  • Posted by Maverick

    Isn’t the current decline of the $ a result of the current Fed policy to keep interest rates artificially high? Doesn’t that create a shortage of goods and services compared to the existing money supply?

    I keep hearing of the need for a soft dollar to help ease the trade imbalance with the rest of the word. How is this correction to take place when the bulk of the US manufacturing base has moved abroad? Even services are subcontracted to countries like India. It seems that such a re-allignment can only happen if US practises drastically change.

    What if PBoC decides to substantially convert $ to Euros. A decline in $ value will certainly ensue but wouldn’t the Fed be compelled to step in and offer bonds to sop up the resulting liquidity and thus bring the $ decline to a halt?


  • Posted by Anonymous

    Are the BoJ 5trn reserves not putting pressure on the MOF to diversify? In the event of a $ decline the MOF would make substantial losses not the least losing face vis-a-vis the MOF which is even more painful than dropping a few tens of billion $.

  • Posted by Anonymous


    Are the BoJ 5trn reserves not putting pressure on the MOF to diversify? In the event of a $ decline the MOF would make substantial losses not the least losing face vis-a-vis the BOJ which is even more painful than dropping a few tens of billion $.

  • Posted by HK

    Brad–The Bank of Japan holds only a fraction of Japan’s total reserves, while bulk of them are held by the Government (i.e., the Ministry of Finance). Therefore, the breakdown of the reserves held by the BoJ would not provide any information about the currency composition of Japan’s total reserve holding.

  • Posted by Dave Chiang

    Federal Reserve Chief Bernanke has announced his trip to China in December to press the screws on the Chinese. The US wants only the Chinese yuan to revalue so an across the board devaluation of US Dollar hegemony can be avoided. Other nations especially India and Mexico would not be required to make an equilvalent currency revaluation. Why should the Chinese agree to castrate their own economy? China would become even less competitive in labor intensive industries that are already losing significant marketshare to India, Vietnam, Mexico, and Cambodia.

    If the Chinese were to revalue, would the US government permit global oil sales to be denominated in Chinese yuan. Clearly not. Therefore the Chinese are clearly justified in maintaining the current policy of building foreign exchange reserves for the purchase of strategic commodities that remain priced only in US Dollars. The Washington Consensus cannot have it both ways; demanding US Dollar hegemony but also demanding that the Chinese castrate their exports by significantly revaluating their yuan currency.

  • Posted by Cassandra

    Indeed exchange rates are only one variable enroute to greater global balance and more efficient allocation of resources. Though perhaps you believe it preferable for the US to adopt “Japanese-style” NTB’s, nationalistic purchasing preferences & cynical neglect of currency xchge rate for parochial gain, European-style consumption taxes, in order to “re-balance”? The US has de facto yielded substantial portions of her manufacturing base to China (& other Asian exporters). Why should China not also yield to those now lower-wage economies substantially worse off? Is it not difficult to criticise the defense of advantage, when seemingly defending advantage?

  • Posted by Dave Chiang

    Hi Cassandra,

    The starting point to resolving Global Economic imbalances is for the major exporting nations each to unilaterally require that all its exports be payable only in its currency, so that the global finance architecture will turn into a multi-currency regime overnight. There would be no need for reserve currencies and exchange rates would reflect market fundamentals of world trade. Would the Washington Consensus also agree to permit the global sales of oil from the Arab Gulf states to be made in Japan yen, Euros, British pound, and Chinese yuan? We clearly need to promote a new global finance architecture away from a dollar hegemony that forces the world to export not only goods but also dollar earnings from trade to the US.

    The adverse effect of this type of globalization on the US economy is also becoming clear. In order to act as consumer of last resort for the whole world, the US economy has been pushed into a debt bubble that thrives on conspicuous consumption and fraudulent accounting. The unsustainable and irrational rise of US equity prices, unsupported by revenue or profit, had merely been a devaluation of the dollar.


  • Posted by Cassandra

    “The unsustainable and irrational rise of US equity prices, unsupported by revenue or profit, had merely been a devaluation of the dollar.”

    The primary driver of nominal equity prices historically has been money illusion (and not just in the US). In this sense equity prices are merely a mirror of nominal revenue and earnings growth, with the balance made up for by changes in the equity risk premium. One might more accurately say that the money illusion is unsustainable, but for the most part, it IS in fact supported by growth in nominal revs & earns.

    If on the other hand, had you highlighted occasional corporate chicanery via leverage and capital structure re-design meant to manufacture/manipulate earnings and “fool” capital markets into assigning a lower risk-premia than otherwise might be deserved, I probably wouldn’t argue irrespective what efficient market hypothesists might say.

  • Posted by Dave Chiang

    Fed chief Ben Bernanke on the official record states that he “wouldn’t lose any sleep over a weaker dollar”. Ben Bernanke also on the official record mentioned that he “would drop money from helicopters to stimulate the US Economy”.

    The Federal Reserve Chief is really stating that he doesn’t care and won’t support the monetary value of the US dollar despite the soaring core inflation rate driven by higher energy and commodity prices, and the declining currency exchange rate. If Bernanke simply doesn’t care about maintaining the US Dollar’s monetary value with rising inflation, why should anyone care to hold the currency.

  • Posted by bsetser

    HK — you said what i was trying to say, but did it better.

    I actually think Japan is under a lot less pressure to diversify than most, for two reasons:

    a) Japanese interest rates are low, well below US rates, so Japan’s holdings of treasuries generate a positive cash flow.
    b) the yen has depreciated from the point in time when Japan was buying most of its reserves, so it is sitting on a not trivial capital gain if it marks to market.

  • Posted by John Law

    The dollars crisis and commodities boom are all control by the chinese. By keeping the RMB down, technology know how will be transfer to china. Giving the US consumers cheap chinese make products is like giving them drug to get addicted and making interest rate and inflation down so that they spent more and making the US debt much greater , destroying manufacturing base of USA.

    In the mean time secretly buying Gold and silver through third countries when selling china make products to them so hedge against USD. As we know US has the world largest fiancial centers, by pulling the plug in supporting the USD ,the stock and bond market will collapse the most and destroying large part of US economy but not the chinese as their stock market still very small and the chinese are good at enduring these short term pain and reduce dollars losses as they buy gold and siliver to hedge against. Who is so stupid to support a over value USD? It will eventually emerge as winner in this economic war as chinese know military they cannot win USA in 20 years time.
    In the mean time, chinese study and working in USA fiancial sector (hedge fund) will be ask to come back to short the commodities as they have insider information when china will cool down it economy and accumulated the necessary natural resources (especially Oil) when the prices is low and long it when china going to increase it import as china is still a centrally planned goverment state. The EU money will not be affected as china see it as ally in this economic war and future market.

    This is Just a Joke from the Future Shanghai.

  • Posted by Cassandra


    The BoJ has been the white-hot stock-picker too as numerically detailed in BoJ vs.DIC: Who’s Got the Hot Hand. The DIC (Deposit Insurance Corp) and BPSC have been rather more feeble in their stock selection.

    Zaitech lives!!