1. Don’t you have the causation wrong here? The real reason the ca is huge is because foreigners accumulate dollars via trade. In other words, they want to do business with America. The reserve currency aspect has nothing to do with it. We are the reserve currency because of our huge economy and demand and massive demand for goods. It’s not the result of the reserve status. The reserve status is a result of being the worlds largest economy.

    • No, I don’t have the causality wrong. Foreign central banks want to accumulate dollars because this gives them the ammunition necessary to deal with the kinds of speculative attacks we saw in Argentina, Russia and Asia. The desire of Asian central banks to accumulate dollars is well-documented. And the reserve status is not the result of being the world’s largest economy, the eurozone is equal in size. Reserve currency status for the US is the result of the legacy of Bretton Woods and multilateral negotiation just as the British pound’s status before the USD was the result of the same.

      • No, you’re still missing a basic point. China accumulates dollars bc of trade. Those dollars go to the central bank and get used to protect their currency so they can boost trade. It all starts with the fact that China desires high trade surplus with the USA. The reserve currency has nothing to do with China’s desire to save in us dollars.

        • No, China accumulates dollars because it has pegged its currency at a rate that allows it to do so. The trade surplus and dollar accumulation is driven by the peg.

          • They peg their currency bc they want to do business with America bc it helps employ millions of Chinese and help drive growth. Not because America has reserve currency status. Again, you have the causation totally wrong.

        • It’s really a bit of both. The mercantilism and the reserve accumulation go hand in hand. Take a nuanced approach. See here for example:

          Focusing on the ten EMCs that doubled their reserves since 1999, three distinct groups emerge, as Figure 1 shows: (i) current account surplus countries (Russia, Ukraine and Malaysia) (ii) capital account surplus countries (the Czech Republic, Mexico, Romania and South Africa); and (iii) countries that experienced both current and capital account surpluses (China, India and South Korea). Dividing the rapid accumulators into groups is helpful in terms of structuring the discussion on the underlying motives for accumulation.


          And note that China does not have a trade surplus with Germany for example. That tells you the causality is more complex (savings rates, reserve accumulation, mercantilism, exchange rates) than you are trying to indicate.

          • From the paper:

            “Under the floating exchange rate regimes…there is in principle no need to hold reserves for intervention purposes if the float is fully free.”

            China’s Mercantilist policies are their choice. Not the result of the US dollar being a reserve currency.

  2. john sanford newman

    Another option is to reform the IMF and eliminate the requirement of debt issue for Federal dollar expenditure. If debt issue were used strategically rather than universally it would be the tool needed to manage our foreign balances. To take the fright out of this power for our trading partners the IMF should be used for its original purpose of balancing trade and currency flows instead of in its post Nixon role as neo-classical imperialists trojan horse.

  3. Mike Shedlock points to a nice post (at least it helped me understand it) by Michael Pettis on the effect of trade imbalances – here http://globaleconomicanalysis.blogspot.com/2011/07/hugo-salinas-price-and-michael-pettis.html