Enlighten me, because I've never heard of any congressional law dictating
that foreign central banks use their dollars to invest in US T-bills. It
sounds quite preposterous. If there actually was such a law, how could it be
enforced? The Chinese and other central banks freely trade the USD in global
money markets for euros, yen, pounds, etc., and can disguise their purchases
through intermediaries when necessary.
In fact dollars are not used to solely purchase T-bills. The central banks
also hold longer term Treasury bonds and Fannie and Freddie agency bonds,
and they regularly alter their mix of US securities depending on market
conditions and the economic outlook. The People's Bank of China has lately
been using it's dollar stash to buy gold. The central banks also make USD's
available to their banks and, through them, to their corporations for
foreign trade as well as portfolio and direct investment purposes in the US
and elsewhere. The sovereign wealth funds (SWF's) primarily buy equities - a
rather celebrated example being the China Investment Corporation's large
(and so far unsuccessful) stake in Blackstone, the American private equity
giant.
The reason the central banks accumulate USD reserves has less to do with
their presumed safety or relatively low rate of return than with maintaining
their currency pegs to the USD for export purposes. The USD, in any event,
is no longer universally regarded the "highest quality" money. Central
bankers and other investors are worried about the USG inflating it's way out
of the current crisis and the effect USD devaluation will have on their
massive dollar holdings, and are consequently trying with some difficulty to
diversity in a gradual and orderly way out of what is now increasingly
viewed as a "dollar trap".
----- Original Message -----
From: "Jim Devine" <[email protected]>
To: "Progressive Economics" <[email protected]>
Sent: Tuesday, July 21, 2009 5:32 PM
Subject: Re: [Pen-l] Reserve Currency Question
right: cash is more liquid (by definition). But T-bills are as safe as
cash. Any higher return entails risk.
But doesn't this distract us from your initial question, Jayson?
On Tue, Jul 21, 2009 at 2:22 PM, Jayson Funke<[email protected]> wrote:
But cash, as in the case of sovereign wealth funds, can be invested in
more
lucrative investments than t-bills. So cash is not always bad to hold,
especially when it is the reserve currency - technically the "highest
quality" money.
On 7/21/09 5:06 PM, "Jim Devine" <[email protected]> wrote:
I don't know the law, but it's clearly in the creditors' interest to
hold T-bills rather than cash, since T-bills pay interest.
On Tue, Jul 21, 2009 at 2:03 PM, Jayson Funke<[email protected]> wrote:
Hello Penners,
As I understand it, the US requires foreign countries that hold US
dollars
as reserve currency to do so by purchasing and holding US T-bills (thus
contributing to the US's ability to maintain its current account
deficit). I
recall reading somewhere that as early as the 1950s Congress wrote this
into
law, that US foreign reserve dollars must be held in the the form of
T-bills.
If this is correct, is the US unique in this regard, or do other
currencies
have similar requirements as to how their currencies are held by
foreign
states?
Any light you could shine my way is appreciated.
Jayson
Jayson J Funke (ABD)
Graduate School of Geography
Clark University
950 Main Street
Worcester, MA 01603
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--
Jim Devine / "And when California slides into the ocean, as the
mystics and statistics say it will, I predict this hotel will be
standing until I've paid my bill." -- Warren Zevon [paraphrased].
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