The Ten Trillion Dollar Milestone
Posted July 18, 2011
A milestone on the road to economic ruin was reached last week. Total Foreign Exchange Reserves topped $10 trillion. That means central banks have created the equivalent of $10 trillion of fiat money that they have used to buy the currencies of other countries. That figure does not include the money central banks have created and used to buy assets denominated in their own currencies, such as the $2 trillion the Fed created during the first two rounds of Quantitative Easing.
Out of the $10 trillion, $8 trillion has been created since the turn of the century and $1.6 trillion during the past 12 months alone. China has “printed” the most, the equivalent of $3.2 trillion or nearly a third of the total. That is 50% more than QE 1 and QE 2 combined. Japan ranks second to China, holding 10% of all Foreign Exchange Reserves.
Both China and Japan created money and bought foreign currencies in order to suppress the value of their own currencies and thereby improve the competitiveness of their exporters. That was the primary motivation of all the countries that built up FX Reserves.
Roughly 70% of all Reserves are US dollars. In other words, the equivalent of $7 trillion was created and employed to push up the value of the dollar relative to where it would have been had central banks not intervened. This interference with the free market has come at enormous cost to the United States, which, in large part due to this intervention, has suffered a cumulative trade deficit of $6.9 trillion since 2000, with a corresponding increase in national indebtedness.
Moreover, as central banks acquired the $7 trillion, they pumped it into US dollar-denominated debt such as government bonds, debt issued by Fannie Mae and Freddie Mac, corporate bonds and asset-backed securities. That capital inflow pushed up US asset prices and mollified the American public even as the country’s manufacturing base was being decimated and as most of its manufacturing jobs were being relocated abroad.
It is mindboggling that US policymakers would have promoted free trade while simultaneously tolerating blatant currency manipulation on a trillion dollar scale. Our New Depression is the direct result of an insane experiment in fiat money, floating exchange rates and unimpeded cross-border capital flows. It has been a terrible mistake from which the United States may not recover.
Please note, Foreign Exchange Reserves and their impact on the US economy are discussed in detail in The Corruption of Capitalism, Chapter 8: The North American Debt Crisis.
I believe, the definition of money per se is not adequately addressed in the past 30 years …
Money IS a relationship between 2 parties; it memorized, the taking side and the giving side … Our fiat systems almost totally override the earler genesis …
What we need now, is a re-definition of money, or else, money as we have them now, will produce a re-definition of men.
hey Richard just a few comments that come to mind as i read your latest piece
if you buy me trucks for $1trillion in 10 yearly instalments and i need to be paid in pesos, and a guy comes in and say: i’ll receive the $ and give you the pesos on a 10-year cross currency swap basis, so you don’t have to take the currency risk, only the interest rate risk, does this corrupt capitalism in any way? if it’s done one-shot every time (ie no need for a swap) does this corrupt capitalism?
if with these $ my guy decides to not hold the cash but swap it for T-bonds instead, does that corrupt capitalism?
if a producer sells his trucks to the domestic market $100K a-piece, should he also look for currency fluctuations abroad to increase the marketing effort where the foreign currency has gone up (and locals trucks have become comparatively more expensive)? why not, an opportunity is an opportunity, however these types of FX (an asset like any other to any FX trader, except it has positive carry) opportunities are best left to specialized people, exactly like for any other free market: currency traders, seems to me
do wide currency fluctuations benefit any retail person, any merchant really? they essentially inflict pain blindly here or there, there and then etc… they mostly exist to reward / punish governments on the basis of the perception of good / bad management of the country’s finances, social order and global (relative, competitive) prospects
all i see in your rather militant piece is an attempt to shift the blame towards fiat money, an essential tool of modern economics: the US have a taxation + a horrible tax code problem. Any sound businessman will set up anything they can offshore and aggressively use transfer pricing to protect any profits and personal earnings of any kind possible, no matter how fearsome the IRS may seem to some people. The infrastructure in the US completely sucks, the country hasn’t invested in decent infrastructure in decades. THIS combination is what drives jobs etc away from the US, nothing else…
just my humble opinion 😉
Fabrice, if you study the history of money, you will see not one fiat currency has ever stood the test of time, all have failed. Roughly every 30 to 40 years systems are destroyed and replaced with a new one. Case in point it was only 40 years ago Breton Woods failed. Only this time because 70% of all the reserves in the world is US dollars, it will be a global reset.
sorry, just seeing this
it seems to me that the history of the world shows without a doubt that gold-based systems have failed us on a much wider scale and longer timeframes than the fiat-based alternatives, and the reasons for it are very well understood. In any event, no one is obliged to hold fiat money, it is easy enough to convert it into any “value” store of your choice and back, and to barter with anyone who is willing. The issue of fiat money depreciation or appreciation is only relevant if you hold or are short of large quantities of it for a period of time where you are locked in ie if you are in an illiquid type situation. Well too bad then… you’ve got to understand the risks
that said, i am all for an always stronger and more transparent central banking system. and that does in no way deprive me of all the other options (barter, alternative “value” stores of my choice that may change from time to time)… actually thats quite the opposite, fiat money gives me more flexibility overall
if you’ve read the above, you may want to ask yourself: yeah but were do’em pesos come frum. Answer: they come from the implicit collateral, ie my country’s wealth, be it land and natural resources etc, and my country’s might, ie nuclear weapons and other useful cutlery should it have to come to that. Basically my guy is going short pesos and long $-denominated T-bonds, if the $ plunges he is going to have to sell some assets / more local goods / some of the T-bonds vs pesos to make up for the lost pesos and restore his balance sheet, that’s it… as long as my guys’ bets are not overleveraged compared to the size of the economy and compared to my country’s “wealth and might” i am not worried… what my guy is trying to do is suppress lethal currency spikes and smoothe wide currency fluctuations as often as possible… to give everyone time to adapt and/or take the pain… kinda like an economic pain killer
In Duncan’s “Dollar Crisis”, there’s a line that says something like ” if printing money were the solution, then the problems of the world would of been solved a long time ago.”
I’ve come across the following interesting article:
It will surely cause some labor tension in China. Also, factories with robots can easily be relocated (even to the US), so China’s cheap labor advantage could erode. Then the USD/CNY policy/manipulation will need to be seriously reconsidered.
@fabrice – seems to miss the point. Main concern I’d have is where do the 1trillion USD come from and what effect does that have on the economy when 1trillion of private debt is recirculated into T-bonds. Who’s buying the trucks, why and how’s that getting funded? …if not indirectly by recirculated dollars and a fractional reserve lending system
When you say the following:
“That means central banks have created the equivalent of $10 trillion of fiat money that they have used to buy the currencies of other countries”, this is not correct. As an example, the money that is leant to the US by China has been earned by China, because they have produced goods and services and sold them. They have not printed this money.
Therefore your entire article does not make sense.