21 Jul 2011

The Ten Trillion Dollar Milestone

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.

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