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The underside of the currency war: how to make foreign exchange reserves

During what is now called " war of currencies, foreign exchange reserves play a central role. China, Japan and Brazil accumulated hundreds of billions of dollar to depreciate the value of their currency. Little element of economic life are as yet poorly understood. For the vast majority of economic analysts, "a country builds its foreign reserves through its trade surpluses." This sentence long intrigued me. How a state governing a market economy have the power to reinvest the profits of his business enterprises? Imagine that you are the leader of a Japanese company exporting to the United States. Do you think you would agree that the government move you take the dollars you have accumulated in order to reinvest in good U.S. Treasury? Such a mechanism would make sense only in a communist state in the image of the USSR or Cuba. In a market economy, it's just not possible.

In fact, as I could realize it by digging the subject there is no mechanical link between the lower trade surplus and foreign reserves. A large deficit countries may very well hold important. It is just that countries with the means and interest to have strong foreign exchange reserves are inherently countries with strong trade surplus. Indeed, trade surpluses tend to cause an appreciation of the domestic currency makes domestic exports less attractive. To avoid this assessment and preserve their industry, governments resort to excess reserves. Foreign exchange reserves are the result of political . Without it, they would not exist. We will make an inventory of different types of financing of these enigmatic reserve.

The case of Japan's foreign reserves by borrowing

According to a former finance minister of Japan: "Japan has 1 000 billion foreign exchange reserves, but they were funded by Debt unlike the Gulf countries, Singapore or Australia. " Yep! The easiest way to create foreign exchange reserves is still debt. The land of the Rising Sun has a debt of 20% of its GDP to finance its foreign exchange reserves. The mechanism is very simple. The government borrows yen in financial markets and investing that money in U.S. Treasury bonds denominated in dollars.

The case of Australia reserves through a budget surplus

The Australian government's budget was in surplus between 1996 and 2008. Part of this surplus was invested in foreign reserves. The mechanism is again could not be more simple. A surplus means that the Australian government revenue were higher expenses. The surplus denominated in Australian dollar was then invested in foreign currency. The Gulf countries are Norway or in cases similar.

The case of Brazil's reserves through money creation

With over $ 283 billion, Brazil is ranked 7 th world in terms of foreign reserve. As shown in the balance sheet of the Brazilian central bank, most of these foreign reserves has been funded by money created from scratch. The mechanism here is again very simple: the central bank created the Brazilian Real in any room and uses it to buy U.S. Treasury bonds denominated in dollars. This policy could have devastating inflationary effects which a large number of countries is possible without major clash in Brazil with a mandatory bank reserve ratio to around 40%. Thus the demand for money central banks are very strong, Brazil can run printing money quickly and use it to fund its reserves.

The case of China: a hybrid model

China with over 2600 billion in reserves, China alone accounts for nearly a quarter of global currency reserves. China uses three methods listed above to finance its foreign exchange reserves: money creation, debt and budget surplus. In reality the money creation is the main mode of financing the reserves in China. China has three primary advantages allowing it to emit large quantities of base money: rapid economic growth, a high reserve requirement ratio of about 16% and savings is very important crystallizing a strong demand for money by the Chinese people.

course there are strong linkages between macroeconomic trade surplus and foreign exchange reserves. Surpluses have a strong impact on savings and fiscal balance. However, this link has absolutely nothing automatic and many countries have regular trade deficits have significant foreign exchange reserves. For proof, France has foreign reserves of 142 billion dollars, ranking at 16 th world in terms reserves ...

Regarding the reserve requirement, a point which interests me particularly, it is easy to see how develop the reserve requirement ratio higher in countries like China and Brazil (16% and 43% against 2% within the euro area) give them an immense clout in the global economy.

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1998-2007: the great inflation or mad distortion wealth

How monetary anarchy experienced by Western economies may still go unnoticed by economists and the general public? The decade preceding the crisis has been the scene of all the excesses in the United States, Great Britain and the eurozone. Between 1998 and 2007, money supply M1, which is to say, coins, notes and money on current account, grew by nearly 10% per year, an increase of 131% in 9 years. Monetary growth worthy of booming economic area in total contradiction with the slow growth before the crisis. These are 2.13 trillion that were created. The following table shows the gap between the impressive growth of nominal output of goods and services and growth in money supply:

Source ECB

How can we reasonably believe that such a monetary growth this can have no unreasonable impact on the functioning of our economies? Classically attributed to excessive growth of money supply two major consequences: a high price inflation and distortion prices and the distribution of wealth. That's exactly what happened. Let us concentrate on the case of France.

price inflation of goods and services between 1998 and 2007 was only 18% according to Insee, and GDP grew by only 26% during the same period. A superficial analysis thus leaves thinking that the explosion in money supply has not had an inflationary impact which might have been expected. However, a point is regularly overlooked by most analysts: the currency has an impact on asset prices. Until proven otherwise, is still with money that you buy a property, shares or gold. There is no reason suggesting that strong growth in money supply have no impact on asset prices. They have exploded during this period at rates totally disconnected from economic growth.

An indicator highlights the extraordinary inflation, household wealth, which aggregates the amounts of all assets held by the French (real estate, stocks, bonds, money in the bank ...). According to INSEE, the French heritage would have thought 138% between 1995 and 2007. 138% in 12 years, a growth worthy of India or Brazil in a stagnant economy. To me, the conclusion is obvious: the explosion of money supply during the decade preceding the crisis has resulted in a sharp inflation in asset prices.

This inflation has had several important consequences: 1

A high price distortion : asset prices rose sharply compared to the prices of goods and services and wages

2 Strong distortion wealth: those who have assets have seen their wealth rise sharply without reason, while those who have nothing have seen their incomes stagnate

There is not much reason to doubt. A strong asset appreciation benefits the wealthiest classes of society. For example, real estate represents about 60% of French heritage and has appreciated sharply between 1998 and 2007. Those without property were not well received on the increase. Those who own only their principal residence are also not benefited from this increase because they sell their home, they will also buy another whose price has also appreciated. Those are just the most affluent, those who have several properties that have benefited fully from this assessment. For non-owners, this has just made access to the property even more difficult than it was. We shall not dwell longer on stocks, bonds or precious metals held not classes.

short, while labor income has stagnated, the asset prices exploded unduly enriching part of society. The following chart shows that since the '70s, heritage the French turned around 4.5 years of income. This ratio has risen sharply from 1998 to nearly eight years of income in 2007.

This high inflation and this crazy distortion of wealth have not spilled much ink. But the signal sent by this movement was clear: wealth, better speculate on asset prices than work. In less than 10 years, almost 2,130 billion euro have been created in the euro area by our monetary system implausible, more than the annual GDP of France. A large portion of that money went to the emergence of huge speculative bubbles.

Anarchy money has exacerbated inequalities and made even more tense social relations in our country. The lessons of this period have they been included? Far from it. The machine is distributed, our hundreds of issuers have recovered cash to work. After growth of 13% in 2009, we are entitled to a 9% growth of M1 in the first half of 2010. The price of assets has reinvigorated, unemployment is highest, wages are stagnating.

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From Father to Son

generations mingle. Conflicts are increasingly rare. It looks, it is observed. The ideas come as they float. The past resurfaces without any pain. We can not be said of the collective past. All together, there is a little lonely. A chance to be in this place where time defies boredom. I look at the street, she stopped moving for a long time. Defile the people but she did not pay much attention. You get used to everything. Even the beautiful things that repeat. The generations mingle. And with them the memories of a paradise lost and finally found. Things do not move. And we'll pretend.

We are far from perfect. Far from it.

(Serj Tankian - Imperfect Harmony - Reprise)

Wella Straight Before & After

Routines

excitation repetition. The evolution of inaction. Several years have passed to improve and repeat. A tree whose leaves are hung like a finger to passing time. Old age is a return to childishness. Creativity can only belong to the old branches. It is a fact, no deadlock.

So it looks in the mirror every morning. We imagine younger and you become one. Because it is the look that makes the world go round. The world is there to be distorted, transformed, destroyed and rebuilt. Much needed self. It's a fair question for us all, all alone. Look at the old face, at worst she'll look with the same expression.

(Bad Religion - Man Dissent - Epitaph)