I agree that the present flow of Chinese intervention is unsustainable, and would advise them to raise the rate of their creeping appreciation a bit, but that is their problem. I just do not think that what China is doing should be such a big problem for the US.

The Chinese commitment to a fixed exchange rate is a far greater restriction on them that the Americans. Such arbitrary restrictions usually represent an opportunity. Having a self imposed commitment to buy something from the US to balance payments at their chosen exchange rate, and faced with what is available to buy, the Chinese buy bonds, reducing US interest rates. If the US government does not believe that its private sector’s response to this is appropriate (eg because it thinks that consumers are being myopic), it should accommodate China’s demand for bonds and buy some other country’s bonds. Rather than use the pejorative term “intervention” for this US response, call it ALM!

Now if China’s policy is forcing it to pay silly prices for US assets, this ALM ought to be profitable for the US (ie a case of “exorbitant privilege”). But even if it is not profitable, acquiring a diversified portfolio of state savings might nevertheless be worthwhile for the US on risk return grounds.

This is silly. We should wish that the US would practice responsible economics so that no adjustment is necessary. Unfortunately, that’s apparently like asking Wile E. Coyote to sprout wings.

total increase in allocated $ reserves = $79.1b
increase in euros = 25.8b euros, of $34.0 … obviously, to hold the $ share constant, the world needed to buy more $ and fewer euros

in industrial countries, the increase in $ reserves was $14.7b, and the increase in euro reserves was euro 7.5b, of $9.9b … that is well below the ratio needed to keep the $ share constant. the existing split was 73% $/ non-$, so with the $ falling, over 73% on a flow basis needed to go into $. didn’t happen.

for ems that report, the increase in $ reserves was $64.4b, the increase in euros was euro 18.3b ($24.1b). There wasn’t quite enough to keep the $ share from sliding, but there was an effort (the pre-existing split was 60/40 — so they were buying more $ on a flow basis than was in their portfolio.

the increase in unallocated reserves — using the imf’s measure — was $106b. maybe $16b comes from valuation gains, which leaves a flow of $90b that the IMF doesn’t have data on, a flow roughly equal in size to the flow from those countries that imf does have data on. that unallocated flow includes China. and i think you have argued that you didn’t see big CHinese sales of $ for euro or pounds in q4 …

a full analysis requires looking at all the smaller currencies (i.e. pound, yen, CHF) which requires a bit more work … but my bottom line is pretty clear:

a) we don’t know
b) EMs still look to have supported the $ by buying a ton of $, but we only have data on about 1/2 the flow.
c) industrial countries not so much … italy and sweden perhaps shaped this data tho, so it may not be japan (which alone = 65% of the industrial country total)

Fixed currency exchange rates under the original Bretton Woods agreement after World War II provided the foundation for decades of global prosperity. It was only after the exorbitant costs of the Vietnam war that Richard Nixon negated fixed currency rates for a floating rate regime. The current gyrating currency rates are damaging to Chinese manufacturers who work on thin profit margins of 5 percent or less. When the US Dollar versus Japanese currency exchange rate can shift by 5 percent overnight, which has happened in the past, it is primarily driven by Wall Street Hedge Fund speculators to the detriment of the “real” economy. By providing a modicum of monetary stability, the fixed currency exchange rates by the Asian Central Banks provides a stable monetary platform for the “real wealth” generating sectors of the world economy. Unfortunately, equilvalent monetary policy foresight is nowhere to be seen in the Washington beltway. Republicans and Democrats, both parties are subservient to the narrow economic interests of Wall Street Hedge fund speculators. Wall Street special interest groups have both sides of the aisle covered: Henry Paulson for the Republicans, and Robert Rubin who supported the Enron Corporation in control of the Democratic party.

$ 64.7% from 65.8% in Q3
EUR 25.8% from 25.1% in Q3
£ 4.4% from 4.3% in Q3
Yen 3.2% from 3.1% in Q3

I have a hard time feeling sorry for the serial interveners who (eventually) will be left with less than they started with- it’s not as if the US/G7/IMF haven’t asked them to cut it out.

I’m curious though- why to you think more official intervention is the answer to the problem, rather than less official intervention from the mercantilists?

Large external debt in foreign currency, large reserves. Large external debt in domestic currency, (almost) no reserves. This is the received wisdom, but is it actually wise?

If, for some reason, there is a surge of creditors wanting to take back their savings when they mature (which could be some desperate crisis in their own country, and not necessarily a loss of faith in the US), then they can be paid off, in dollars. But the creditors will want to either exchange the dollars for foreign currency, generating depreciation, or spend them in the US, causing a depreciation against real goods and services (ie inflation). If the US does not have the means to smooth this process, it could become a vicious circle. Yes the US would have followed the letter of the law, and not defaulted, but the result could be very disruptive, nationally as well as internationally. I can understand that the US might take a caveat emptor line to justify holding fewer reserves than its external debt might warrant if in foreign currency, but not as little as it does now.

The foreign debt cover rule which you raise, usually attributed to Greenspan and former Argentinian finance minister Guidotti (neither source known for monetary rectitude!), suggests that a country should have reserves cover for one year’s debt service. I reckon the ballpark figure for the US ought to be in the region of $1bn. Even if you haircut that by 50% on the grounds that the US debt is in dollars, and you include gold in the US reserves, they are still several times too small.

It seems to me that the US attitude to foreign exchange reserves is another example of US exceptionalism which will become increasingly unsustainable as the US influence in the world falls more into line with its size. In practical terms, America needs the cooperation of the world to pay its relatively comfortable way by selling its intellectual property rights (eg movies, as rpbwalsh mentions above). It may not get this cooperation from countries that feel cheated out of a slice of their savings.