Brad Setser

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Foreign central banks aren’t going to finance much of the 2009 US fiscal deficit; their reserves aren’t growing any more (the q4 2008 COFER data)

by Brad Setser
March 31, 2009

The latest COFER data doesn’t show much change in the dollar’s share of global reserves: the dollar accounted for 64% of the reserves of countries that report data to the IMF at the end of 2008, exactly the same share as at the end of 2007. The dollar’s share of the reserves of advanced economies rose just bit, going from 66.9% at the end of 2007 to 68.1% at the end of 2008. And the dollar’s share of reporting emerging economies — a set that importantly excludes China — fell from 61.3% to 59.7% over the course of 2008.

Those small changes though aren’t the real story. The real story is that global reserve growth — and thus dollar reserve growth — has slowed. Look at the following chart. To estimate the stock of dollar reserves, I assumed that the countries that do not report data to the IMF held a constant 65% of their reserves in dollars (this is effectively an assumption about the dollar share of China’s reserves*). And to keep things simple, I didn’t add in the growth in the non-reserve foreign assets of China’s central bank or the growth in non-reserve foreign assets of the Saudi Monetary Agency. This is very easily replicable graph.

The obvious implication of the recent downturn in total reserve holdings — and the $180 billion fall in q4 wasn’t driven by currency moves — is that the pace of growth in the world’s dollar reserves has slowed dramatically.

In the fourth quarter, the IMF data shows a $110 billion fall in the dollar holdings of countries that report detailed data to the IMF. That all came from emerging economies — who had to sell their reserves to finance massive capital outflows. The reserves of the countries that don’t report data to the IMF also fell by $55 billion. They likely reduced their dollar holdings proportionately.

The US data didn’t show comparable sales from central banks. Central bank inflows slowed to a crawl, but the US data doesn’t show large sales. That implies, I think, that the world’s central banks pulled a lot of large dollar deposits from the “eurodollar” market. They weren’t in the mood to take chances after Lehman. Big uninsured deposits were risky. Some of that money — along with the money that was withdrawn from the agency market — found its way into Treasuries.

A chart of central bank purchases of Treasuries against reserve growth shows that central bank purchases of Treasuries soared even as dollar reserve growth fell.** That can only go on for so long.

Over time — setting big shifts in the composition of reserves — central bank demand for Treasuries tends to track reserve growth.

The obvious implication: most of the 2009 US fiscal deficit will need to be financed domestically. The Fed’s custodial data indicates central banks are still buying Treasuries, though at a somewhat slower pace than in late 2008. But their demand hasn’t kept up with issuance.

That isn’t necessarily a bad thing either. If a large fiscal deficit was driving an expansion of the US current account deficit — and a rise in say China’s surplus that was being recycled back into the US — I would worry a lot more about the United States external position than I do now. The US should want the rest of the world to take policy steps to support demand for goods — not to restrict demand growth, run current account surpluses and have more money available to lend to the US.

* This is lower than I have used in the past; the latest survey data suggests China did diversify its reserves from mid-2007 to mid-2008, and it is quite clear that China accounts for most of the $2177b in unallocated reserves. The fall in unallocated reserves in q4 likely reflects the fall in the reserves of countries like the Emirates.
** The BEA’s data hasn’t been revised to reflect the latest survey; that explains the fall off in inflows from q2 2007 to q2 2008.


  • Posted by DJC.

    China PBoC quietly reducing reliance on US Dollar

    China’s currency swap with Argentina is the highest-profile move yet in a quiet campaign by Beijing to reduce reliance on the dollar by expanding the reach of its own tightly controlled yuan to Asia and Latin America.

    The agreement emphasizes China’s growing economic stature — and anxiety about the dollar’s health — ahead of this week’s G20 summit in London, where Beijing is expected to press for a bigger role in managing global finances.

    “Beijing has its eye on raising the status of the yuan,” said Royal Bank of Scotland economist Ben Simpfendorfer. “They are the world’s second-largest exporter and the third-largest economy, so it is in their interest to handle trade in yuan.”

    China has signed a string of agreements in recent months promising to lend yuan to South Korea, Malaysia, Indonesia and Belarus if needed to respond to a financial emergency. Beijing says Hong Kong, a Chinese territory with its own currency, will be allowed to use yuan for trade with the mainland.

    Monday’s agreement calls for China and Argentina to exchange 70 billion yuan, or $10 billion, of their currencies for use in trade and investment, eliminating the need for each other’s companies to buy dollars to pay for transactions.

    “Dollars will not be needed for trade,” the Communist Party newspaper People’s Daily said. “This measure will play a positive role in improving regional currency stability, preventing financial risk and reducing the spread of the crisis at this extraordinary time when the financial crisis is growing daily.”

    Gradually expanding use of the yuan would be partly a defensive move by China, said Zuo Xiaolei, chief economist for Galaxy Securities in Beijing.

    “China is affected a lot when the dollar is up and down. Everyone is looking for balance and self-protection,” she said. “How can China protect its own interests in the current economic situation? You can’t change the U.S., so you can only change yourself.”

  • Posted by zanon

    BRAD: This is not necessarily a bad thing. One of the major forces reducing aggregate demand is increased demand for US$ savings. The Federal deficit needs to get very big, very quickly to fund that increase in demand, and the Obama administration have not run fiscal correctly to do that. So savings continue to rise, and aggregate demand continues to fall.

    If FCBs reduce their demand for $s, then the deficit has less savings demand it needs to fund. We might see AD pick up, and deflation end.

    Not the best outcome for the Obama administration, but then they made many bad moves. Certainly it could be worse.

  • Posted by Mogden

    Since every last man Jack in this country is in debt up to his eyeballs, how exactly is our torrent of federal debt supposed to be financed domestically? Print dollars?

  • Posted by charlie

    The obvious implication: most of the 2009 US fiscal deficit will need to be financed domestically

    It doesn’t really mean that. What it implies is most of the deficit will need to financed via private investors. Not necessarily in the US.

    Another option is the US FED will greatly increase dollar denominated debt holdings as they have stated they would.

    What I think happened is a lot of private investors in the US and abroad bought US treasury debt in a flight to safety. Because of this, the USD rose in value which meant that the USD peggers didn’t need to buy as many dollars and hence didn’t have to buy as many treasuries. I think if this reverses, foreign central bank reserves will go commensurately to pick up the slack.

    I don’t see what you’re inferring as a long term trend.

  • Posted by GAM

    The outcome of the G20 has been basically predetermined by the markets as shifting from a genuine discussion on global stimuli and actions to resume global growth to one of a discussion of regulation. On the other hand for Emerging Markets the recapitalization of the IMF still seems to be on the agenda and a driver of the markets. Mexico just announced it’s in a postion to accept a 30 to 40bln credit from the newly minted FCL, for example. Given the noises China is making and the fact that it is expected to contribute to the IMF funding, what if they decide to go at it themselves such as some forum participants have suggested (70BLN CNY line to Argentina thus securing something of use from Argentina such as grain provision as I don’t see why they would expect Argentina to pay back in any other way) rather than indirectly provide stimuli via an expanded IMF in which the US still carries veto right?

  • Posted by don

    The best result for U.S. AD is a cessation of official dollar purchases abroad. I think the future pressures will be exactly the opposite, as countries try to export unemployment.

  • Posted by gillies

    if the downturn and contraction of bank lending in importing countries hit exporting countries exports, and thus reserve growth and treasury purchases also contract – was that not to be expected ? and does it not make nonsense of the ‘savings glut’ as the driver of global ‘imbalances’ ?

  • Posted by zanonz

    mogden: private savings today comes from fed deficits. It’s where it will come from tomorrow. The fed can ‘print’ all the money it wants, and if ppl save it, that printing is not inflationary.

    The us gov does not need fcbs to “finance” anything. We’ve been funding *their* desire to save dollars.

  • Posted by Howard Richman


    I don’t think you are really seeing anything here that will cause higher U.S. interest rates. The foreign loans will continue to be available to finance the U.S. trade and budget deficits. There are two obvious explanations for the fall in Central Bank reserves:

    1. The oil exporters must have been pulling back, what with the fall in the price of oil during the fourth quarter.

    2. There was no need for the mercantilist central banks to buy dollars during the fourth quarter, given the huge flow of private savings to the United States already driving up the dollar. The mercantilist governments target exchange rates.


  • Posted by Tono

    Mogden – That is exactly how it will be financed, through quantitative easing. The problem that no one seems to talk about enough is that now that the asset side of the Fed Balance sheet is so heavily composed of Agencies and Treasuries, they will have to dump them back onto the market (potentially bursting THAT bubble) in order to drain the huge increase in Reserve Balances at the Fed. I have dealt a little on the subject on this blogpost.

  • Posted by Tono

    Dear Brad,

    Thanks as always for your work. Is there anyway of estimating China’s USD reserve maturity distribution? It seems to me that once their peak, we can realistically begin to move toward a more multi-polar world. My guess is the powers that be, of which China is one of them, won’t allow it before then.

  • Posted by gillies

    two brief comments of marginal relevance :

    does anyone believe that o p e c producers cut production ? or do they just announce cuts and buy oil futures, boosting prices and convincing other ‘players’ that there is a shortage ? any way to know ?

    and secondly : google (google images) zhou xiaochuan or hu xiaolian and put a human face on the horribly impersonal expression “the chinese.”

    totally and utterly irrelevant : you may even stumble across zhou xun, actress, by mistake on your way.

  • Posted by John

    they do not have a choice. Fed buys the treasuries, it’s monetize and borrow in synch. No private investors can replace that, foreign nor domestic, this just worsens the problem.

    On previous article, “China took the risk on USD”. What would you do with the world reserve currency at the point when the political policies were(in actuality) for a strong and stable currency?. What most people did when interest rates in the US were sky high and the mighty USD was the icing on the cake ? You can see the result today. nothing different anybody could do.

  • Posted by Matthew

    Brad, is all this new data in the IMF’s IFS illuminating? It’s called SRFs, and I was proud that the UK seems to not have been able to supply it.

  • Posted by Glen M


    The until China’s demand matches its production the world will not be any more multi-polar. The shortage in today’s world is demand, and therefore control of it is most precious.

  • Posted by Tono

    Glen M,

    You’re right, good point. But that only tackles the building up of additional reserves and not the maturing of existing ones it seems like to me. And we know China isn’t about to start dumping them into the market…

  • Posted by Indian Investor

    When a foreign citizen or firm exports to the US, how does ‘reserve growth’ in their Central Bank result? Can anybody who believes in ‘mercantilist’ foreign central banks, or in ‘reserve growth’ as an autonomous, trade-volume-driven, variable, tell me the steps by which this sequence actually occurs?

  • Posted by DJC

    The US, encouraged by the likes of President Barack Obama’s advisor Larry Summers, has for decades mismanaged its finances by exploiting the hegemonic character of the dollar in international trade. Beijing, for one, needs to forge an economic strategy independent of Washington’s.

    US Dollar Hegemony needs to be eliminated for the benefit of the rest of the world’s population.

  • Posted by guest

    the most important event to take place this week, the G20 meeting in the next 2 days. What I see are spin doctors all over the place. International organizations like the IMF, the World Bank and the OECD have been more or less simultaneously coming forward, in a well orchestrated move, to drive home points like praise the US dollar and call for much more European quantitative easing. The report issued today by the OECD is nothing short of scandalous, or maybe we should stay it would be if it didn’t fit in so well with all the other agenda driven bugger.

    All three organizations are still nothing but mouthpieces for the Wall Street controlled government of the US. And it’s not that the other major countries had never noticed that. What is different, very different, this time, is that after 60 years the US is no longer the world’s main and only superpower. Having private businesses organized as faceless corporations, while granting them the same rights as flesh and blood people, culminating in the almost archetypical model of Mussolini’s corporate fascism that we see today, is forcing it to its knees. In order to once again become the land of the free, America needs to go through the painful process of disarming its richest and most powerful institutions and individuals.

    G20 statements will in all likelihood reflect little of that. Much of what will be in them has already been written and rewritten by lobbyists and spinners. Nevertheless, there is no denying that the balance of power has greatly shifted, more than we could have predicted even ten years ago. It’s the end of an empire. I’m not anti-American, or anything like that, but I do think these are developments that will benefit the majority of people on the planet, even though it will be immensely hurtful for all to cruise through the next few decades, which will be characterized by darkness, hunger, disease and death. Along with the dictatorial powers of the utterly unproductive banking industry, something else will have to go: untouchable “leaders” negotiating in plush brightly lit backrooms about how they will spend the money of their people who have none. It’s a dead model, but one that those who’ve come up on top will defend with their lives, or perhaps more accurately, yours.

    One more thing: If you live in America, and you know you will get fired soon, this is the time to buy a Ford or a GM vehicle. You’ll drive for free for a year, they’ll pay for you. That quite a leap: you couldn’t even get a deal like that in Bulgaria in the 1960’s. Once you realize how serious and nutty it has gotten, you might be less surprised that the American position in the world is being devalued so much. And how that happens.

  • Posted by K T Cat

    “The obvious implication: most of the 2009 US fiscal deficit will need to be financed domestically”

    By whom and at what cost? The deficits are cosmic in size. Financed domestically would either mean financial fear by investors as they avoid stocks and go for low-yield Treasuries or it means mammoth print runs at the Fed.

    I’m betting on the latter. At least one more $1T purchase, maybe two this year.

  • Posted by jonathan

    Year over year graphs confuse me. They only really make sense to me if they have a negative y axis and are then centered so you can see that change.

    You’re missing a word in this sentence: “They stopped adding to their reserves, but didn’t large sums in aggregate.” Wouldn’t normally say anything but this word’s important.

  • Posted by guest

    Some April Fools will meet tomorrow in London. But sadly the G20 meeting is likely to be a bad joke yielding no result.

    But first via totoro in comments this:

    Factory output is collapsing at the fastest pace ever. Here is the global roundup. The annualised figures for February are as follows: Taiwan – 43 percent, Ukraine – 34 percent, Japan – 30 percent, Singapore – 29 percent, Hungary – 23 percent, Sweden – 20 percent, Korea – 19 percent, Turkey – 18 percent, Russia – 16 percent, Spain – 15 percent, Poland – 15 percent, Brazil – 15 percent, Italy – 14 percent, China – 12 percent, Germany – 12 percent, France – 11 percent, US – 10 percent and Britain – 9 percent. This is a catastrophe.

    Yes. This is a catastrophic failure of world markets. But what are the G20 going to do about it? Likely nothing.

    At least three groups of countries have very different ideas of what should be the priorities.

    The U.S., UK and Japan want a big global stimulus financed by more debt. The continental big-powers France and Germany want global regulation of all financial markets. China and Russia want a new global reserve currency based on a mix of currencies and gold and in the form of IMF special drawing rights.

    I am unsure about other demands. What are Brazil and Argentine asking for? What are India’s and South Korea’s and Indonesia’s plans? In case you know please let us all learn of it in the comments.

    The likely results as far as I can tell:

    The IMF will get more money so it can support more countries in dire need.
    There will be some statement to keep world trade open and against protectionism but all involved will continue to implement some protectionist measures.
    There will be some symbolic steps to more regulation, but the real steps there will be taken individually.
    In summary the G20 will do nothing important or needed. There is disunity on the diagnostic of how we got here, on the state into which we want to get and on the methods of how to achieve a desirable new equilibrium.

    It is sad but a probably unavoidable bad joke. Then maybe the real bad joke was globalization and wild running free-market believe. If the world learns from this, we may be better off in future days. My hope for that is not great. There are still to many fools around.

  • Posted by fraud

    Fed will have to monetize the debt, at least that’s my opinion…we’ll have 20 Trillion national debt.

    no wonder China and the world crying for an IMF global reserve….

    Anyone catch the low key talk on mark to market?

    well speaking of thoughts, one individual argues.

    “without the credit default swap market, there’s no way banks can report the true state of their assets – they’d all be in default of Basel II. That’s why the government will push through a measure that requires the suspension of mark-to-market accounting. Essentially, banks will be allowed to pretend they have far higher-quality loans than they actually do. AIG can’t cover for them anymore. ”


    Now this should be a headline, was not many months ago the AIG-counterparty, fraud practice, and bonus ponzi discussed on this board became international headlines.

    I’m sure there’s a push for the mark to market, and i think the quote above sums up once again it has to do with AIG.


  • Posted by purple

    China is hedging its bets to an extent, but it presents little threat to the dollar. Only a shift in military dominance changes that. The U.S. has a presence in the entire Middle East, and a developing one in Central Asia. Also, from the point of view of U.S. capital and oil interests, Iraq was a success.

    The days of US economic dominance are long gone, but most of the world is still neutered militarily.

  • Posted by DJC


    The US Economy has very little “real wealth” industrial production capacity left. The days of US economic dominance are long gone. The only remaining card left for the US is global military projection power which China and Russia lack. The US government has encircled Russia and China with forward deployed military bases to strengthen its position in the geo-political sphere. That is precisely why the current US Economic crisis is so globally destabilizing and dangerous.

  • Posted by Twofish

    gilles: does anyone believe that o p e c producers cut production ?

    Yes. Cartels are notoriously unstable because there is a lot of incentive to “cheap” but OPEC (unlike just about every other cartel in existence) is stable because the Saudis will cut their oil production to compensate for cheating by other members.

    gilles: do they just announce cuts and buy oil futures, boosting prices and convincing other ‘players’ that there is a shortage ?

    I don’t see how buying oil futures will boost the price of spot oil. They aren’t like stocks or anything. Oil is a very interesting commodity since it is impractical to store oil for investment purposes, and so oil futures tend to understate future prices.

  • Posted by Tono

    Can someone (Brad?) please tell me if Central bank holdings of debt count towards Forex Reserves?

  • Posted by bsetser

    Tono — I am not sure i understand your question. most central bank reserves are the treasuries and agency bonds issued by the “reserve currency” countries. So US treasury debt and german treasury debt are very much counted as reserve assets.

  • Posted by locococo

    not reserve liabilities.

  • Posted by Tono

    Thanks for the answer Brad.

    I just looked at the whole COFER data. I’m struck by the fact that globally and collectively reserve accumulation seems to have stopped. It seems QE has now replaced productivity: its no coincidence THREE out of the top FOUR reserve currencies are now doing QE, it’s crazy!

    More in my latest blog post:

  • Posted by kaan

    One should wonder about what happened to the alleged savings glut. Is it only a coincedence that as soon as ponzi scheme unravelled it evaporated.

  • Posted by enduring

    The CIA is providing an interesting table of liabilities by countries, they nicely complete the assets side of the central banks foreign exchange reserves.
    In substance the world GDP is around 54 trillion USD and the USA and UK are representing in external debt almost half of the world GDP in 2007

  • Posted by Mike Norman

    This portends nothing. To the extent that slower accumulation (or an outright decline) in dollar reserves suggests that foreigners will “fund” less of the U.S. deficit, that is being offset by rising domestic savings. Moreover, you overlook a fundamental concept, which is, that gov’t spending adds to total reserves and that is the money used to “fund” the deficit.

  • Posted by K T Cat

    Brad, the Social Security Trust Fund used to be a big buyer of Treasuries. They’re projecting miniscule surpluses this year and next where in the past they had projected sizable ones. Under some scenarios, they may even become sellers of Treasuries.

    Where is this domestic demand for Treasuries going to come from to replace the purchases from central banks?

  • Posted by Gregor

    My view starting in January was that there would not be enough inward capital flows to cover the nasty delta of collapsed world trade vs treasury supply. In addition, I have argued against the idea that domestic savings could make up the shortfall. While BES savings data does indeed show a sharp rise in the annualized rate–it’s not enough. As of FEB 2009 we are saving at a rate now that puts us on pace to save 450B this year. Not enough.

    Thus, monetization while advertised as an operation to reduce interest rates is actually an operation to fund the shortfall in inward flows.

    If an emerging market was printing money to fund inward flow shortfalls, a Sudden Stop would soon follow.

    The notion that the USD is the reserve currency of the world is a much less fixed/structural reality than many people realize.

  • Posted by Wester

    The current system is in terminal…the foundation is ablaze and there ain’t a drop of water for miles…we’ll all continue to live on fantasy island until we can’t. That’s the long and short of it…at some point central banks will run out of reserves to buy treasuries and even then it can be propped up through monetization…at some point the music will well and truly stop. Have you got a chair?