Foreign Exchange Reserves

Is The USA Going Bankrupt ?

Iceland clearly went bankrupt in a more traditional sense. While the USA is bankrupt, China is the richest country in the world. On the CIA World Fact-book chart for "Reserves of Foreign Exchange in Gold" you'll see China up at the top again, with huge foreign exchange and gold reserves. Most of China's foreign exchange reserves are held in US dollars.

On this chart, the USA is at number 19, with foreign exchange and gold reserves just above Switzerland's (but notes the USA has smaller reserves than Malaysia, Libya, Mexico and Iran). So compare the figures - the USA's negative current account balance with the USA's reserves - what is actually there backing the dollar - and you'll see a huge discrepancy. I've explained in other articles why I foresee the continuing stealth devaluation of the US dollar rather than an outright dollar collapse.

Many people believe the Euro will break up. If you are going to keep reserves in fiat currency, and you want to avoid the dollar, the Euro is the logical choice. Sterling might recover in the short term.

Effect of Increased Foreign Exchange Reserves on Inflation in China
 

Both methods have proven the long-term and stable relationships between foreign-exchange reserves and inflation. The increase in foreign-exchange reserves of a country will lead to the increase in base money running. China's foreign exchange-reserves have increased significantly the effect of inflation from results of empirical test.

The pulling effect of foreign exchange-reserves on inflation is 0. The increase of foreign-exchange reserves has a positive impact on the second period in the short-term. And the effect of foreign-exchange reserves on inflation is increasing gradually.

Funding United States Stimulus Package With Chinese Investment in US Treasuries
 

With China sitting on a growing mountain of foreign exchange reserves no one can miss the significance of the secretary of state for the United States, Hilary Clinton's decision to make China the center piece of her four nation Asian tour. By continuing to support America's treasury instruments, the Chinese are recognizing our interconnections".

China already holds $700 billion worth of U.S. Treasury Securities. China entered the current global economic crisis with ample savings, but also with some significant economic weakness. China's holdings of treasuries, account for over forty five percent of its foreign exchange reserves which could prove risky. Some critics argue that China needs to diversify its foreign exchange reserves.

The Euro Keeps Falling
 

China, in particular, has emerged the strong winner. For example, China's State Administration of Foreign Exchange clarified in May 2010 that Europe will continue as the key investment markets for China's foreign-exchange reserves of nearly $2.5 trillion. Currently, 1 Chinese Yuan (or Renminbi) trades at 0.1183 Euro, or 1 Euro = 8.453 Renminbi.

As the China Investment Corporation (CIC) states aptly, the turmoil in Europe had only had a limited impact on its investment decision-making process.