You are welcome…….hopefully you were satisfied by my responses. I am always glad to discuss reserves with those who are interested.

Most countries hold foreign exchange reserves either because of exchange rate policy or to smooth capital flows. Being a relatively closed economy, the US is less exposed to volatile exchange rate movements, but all of the measures of reserve adequacy I mentioned are to provide for capital stops, which usually involve sharp currency depreciation anyway. The US has a large current account deficit, so its consumption depends on a steady capital inflow. If this suddenly stops, reserves allow time for the economy to adjust.

Imports are a measure of the importance of foreign supply in the economy. Overseas debts represent committed external payments which should be made regardless of the capital stop, so it is prudent to set aside a reserve to meet them. Currency depreciation can trigger capital flight, and demand deposits are readily liquidated. Allowing for this protects against financial crisis. The recommended levels are usually based on the experience of countries which have undergone currency crises.

In US case, however, I would also say that as the provider of the reserve currency, it would have been wise to have matched some of the reserve inflows with its own reserve assets – kind of asset-liability matching. The dollar debt sales that this involved would have constrained the private sector consumption boom by keeping long run interest rates up and held the dollar down.

Why haven’t the US done this? Partly because there are a few economists who take an interest in this relatively arcane subject, and those that do tend to have a predilection for floating exchange rates and against state intervention……the US badly needs some RebelEconomists! The operational staff at the FRBNY seem to be regarded as an information-gathering resource rather than an expert source of informed policy advice. And partly because there has been little political interest in putting a dampener on the party that the official capital inflows have allowed the US to throw.

It really does seem that the US has no reserves policy; they let sleeping dogs lie.

The weakness of your argument is revealed by the fact that you pick up on a minor word; I just give a range of measures, one of which happens to be traditional rather than being associated with any particular proponent.

Shouldn’t a large economy have large reserves? How long can the US expect to remain the global reserve steward, and does it want to do so? Then what? The US is giving unwanted advice to China about the growth of its reserves, and has complained about Japanese currency policy, even during its prolonged slump. Why does the US lecture other countries about the cost of reserves, and hold three quarters of its own reserves in gold? What is US reserves policy?

There isn’t one? Thought not!

Thanks for response.

“…Unlike its Arab adversaries, Israel is not a member of any of the regional organizations… Military exports and security assistance play an important role in promoting Israel’s foreign policy interests. Israel’s closeness with a country is often correlated to security cooperation. For example, Israel’s emerging close political ties with India and Turkey contain a strong military component, as did its past ties to South Africa. Absent the confidence of other states in Israel’s ability to fulfill contracts, the Jewish state’s strategic outreach might be undercut. At the very least, Sino-Israeli relations would weaken if Israel were prohibited from pursuing the lucrative Chinese arms market…” http://www.meforum.org/article/926

The Chinese have been slowly encouraging RMB bond issues by foreign entities (mostly ADB/World bank stuff to dat, but recent rule changes have made it easier for others), and even now permit the funds to be converted into dollars and spent offshore, but it is hard to convince anyone that raising RMB to spend offshore is a good idea. Even if you could get sub-4% borrowings, the expected annual RMB appreciation of 4-5%, with the possibility of upside surprises, means that in dollar terms your borrowings will cost at least 8% and probably a lot more. No one is interested. Until they can convince the market that the RMB will stop appreciating (perhaps after a one-off maxi-reval), there is no incentive to take money out of the country. This is part of their curse, and why liberalizing capital restrictions is having such little impact.