The $10b a month club

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Monetary Policy

Forget nukes.  To be in the top-rung of emerging powers – a true brick in the new global financial order – you need to prove yourself by financing the US.    With growing (economic) power comes responsibility …. And specifically the responsibility to do your part to prop up the beleaguered dollar, and finance a US current account deficit that is now far larger than the private markets want to finance.

In February, for the first time, it looks like four different countries joined the $10b a month club. 

India’s reserves were up $14.6b in February.   A bit of that came from valuation gains, but on a flow basis, India no doubted added substantially more than $10b.

Russia’s reserves were up $10.7b between February 2 and March 2 … 

Brazil’s reserves increased by $9.985b – $10b in my book– in February.  They rose another $2.2b in the first week of March.

All three added on average over $2b a week to their reserves in February.  For the sake of comparison, SAMBA calculates that Saudi Arabia – which can almost mint dollars by pumping oil – only added on average $1.4b a week to its reserves (SAMA foreign assets) in 2006.  

China hasn’t reported its reserve growth, but with a $24b (gulp) February trade surplus it is hard to see how China’s reserves didn’t increase by significantly more than $10b.  $30b seems likely, unless China did something to hide its reserve growth.  China’s current account surplus is bigger than its trade surplus, it still is attracting net inflow of FDI and private Chinese savers don’t seem so keen on the dollar.

Call it $30b for the BRIes and $30b for China. 

That is $60b in reserve growth from only four countries … and February is short month, one where both Brazil (Carnival) and China (New Year) took a week off.  

For comparison, the US trade deficit is currently running at around $60b a month, and the current account deficit is around $70b a month.   So if all the BRICs reserve growth was directed toward dollars, it would be enough to roughly finance the US trade deficit.  And if other emerging economies added $10b to their reserves and sent them all to the US, that would be enough to finance the US current account deficit. 

All the talk about how we live in a world dominated by private capital flows frustrates me.

The data increasingly suggests that we live in a world dominated by the policies of a small number of really big official players – with private market players positioning themselves in accordance with what they expect the really big players to do. 

Countries like Brazil and India attract big capital inflows, but send the money back to the US rather than use it to finance large current account deficits.   More on that soon.

Countries like Russia still bank a large share of their oil and gas exports – and also send net inflows of private capital back to the US and Europe.   

And countries like China have lots of spare savings to lend the world.  But Chinese private citizens want to hold RMB not dollars or euros.  So sustaining the net outflow of Chinese savings requires a rather complicated operation where the PBoC, in effect, borrows the RMB that it won’t let the banks lend out and uses them to finance its lending to the US.  The story is a bit more complicated because China issues RMB against its growing reserves and then removes them by in effect buying them back in exchange for debt, but the net effect is that the PBoC ends up holding dollars and euros that China’s private savers no longer want to hold – thus sustaining the RMB’s undervaluation and China’s large surplus.

Sum up the growth in the foreign assets of the GCC countries, and you might  have a fifth member of the $10b a month club – SAMBA is forecasting that the Saudis will average a bit under $5b a month in reserve growth, and ADIA, QIA and KIA all are adding to their foreign assets.      Japan reported a $9.7b plus increase in its reserves in February as well.  But Japan cheated --  Japan banked the interest payments on its bonds, but it also marks its portfolio to market and thus a large part of the rise in Japan’s reserves is explained by the fall in US interest rates.  

p.s. you could easily argue that real power comes from big stocks, not flows.  That increases the relative importance of private markets – as there is a lot of US and European private savings that is invested in US assets that has to stay invested in US assets to sustain the current equilibrium.   On the official side, there are basically three members of the trillionaire’s club, if you generously round Japan’s $900b to a trillion.    The GCC countries almost certainly also have a trillion dollars in foreign assets among them, though the money is divided between three large investment funds (ADIA, KIA and QIA), one big central bank (SAMA) and, I assume, the private holdings of a couple of ruling families.  But they don’t coordinate …

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