China has stated interest in diversifying its currency and debt holdings in its foreign reserve accounts by buying up other BRIC assets, mainly currencies in Russia, India and Brazil, one of the strongest and most stable currencies in the Americas.
To quickly explain why this view is certainly not ours, consider that our position is that the abnormally high consumption of US households during the 2000s was matched by an abnormally large trade deficit in goods and that feedbacks among, borrowing, consumption, the dollar, US long term rates, foreign reserve accumulation and other factors worked to keep these two effects moving in tandem.
The second step would be for the PBC to perform dollar-for-yuan foreign exchange reserve swaps with African central banks, with China offering to split the seigniorage (the difference between the face value of currency and the cost to produce it) with the African nations as a form of foreign aid.
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Goldman's economists suggest that 61% of a properly diversified foreign-exchange reserve would be in dollars, with 32% in euros and 7% in yen.
There, according to the Chinese Foreign Ministry, the leaders discussed the currency swap and foreign-exchange reserve pool ideas with their Russian, Indian and Brazilian peers.
Regardless of the amount of difficulty involved, the big four emerging markets plus South Africa said earlier this week they were considering setting up a foreign-exchange reserve pool and a currency-swap arrangement in an effort to avoid any credit crisis stemming from the advanced economies.
In this very building, deep in the underground vaults, sits billions of dollars of gold, held by the Federal Reserve for foreign governments.
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For most countries, the interest cost of domestic borrowing is greater than the return on foreign reserves, because reserve currencies tend to pay lower interest rates.
Ron Paul, a libertarian congressman from Texas who commands a small but devoted following for his unstinting hostility to the Federal Reserve and foreign entanglements, is also likely to enter the fray.
One reason China is setting up its sovereign wealth fund now is that huge trade surpluses and a vast reserve of foreign exchange mean it simply has too much cash to absorb into its own economy, and capital controls keep it from investing in liquid assets like American T-bills.
Since he avoids use of U.S. government debt as a reserve asset for foreign governments, Lehrman proposes the use of gold bullion alone in this role.
The central bank last year cut interest rates and raised reserve requirements for foreign and local banks in an unorthodox attempt to deter rising capital inflows.
That liability usually ends up as Treasury debt parked at the Federal Reserve in custody for foreign governments, the proof of purchase for billions of dollars in extra U.S. imports.
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There will come a time when the dollar is not the only reserve currency, when foreign governments will not depend so heavily on the United States for their own prosperity, thus will be less forgiving in regards to our self-serving economic policies.
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High reserve requirements, especially against foreign borrowing, are one option.
The Treasury's proposal would prohibit U.S. financial institutions from opening or maintaining accounts for foreign banks that process transactions for Liberty Reserve and require special steps to guard against any transactions involving it.
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The Reserve Bank is due to release foreign-currency transaction data for April later this month, and some analysts say the intervention may have gathered pace again.
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Among others, Alan Greenspan, chairman of the Federal Reserve, has expressed support for competition from foreign-owned exchanges.
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Two objectives for the U.S. Federal Reserve, which set it apart from some foreign central banks, are to influence the availability of credit to maintain economic health and to reduce unemployment.
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The Federal Reserve can still lend to banks, and to foreign central banks via swap lines.
These include the uninterrupted supply of foreign uranium fuel and help in building up a strategic fuel reserve.
In other words, they tighten with reserve requirements and ease with open market operations in the foreign exchange market.
Because interbank markets are global in scope, the Federal Reserve has also approved bilateral currency swap agreements with 14 foreign central banks.
As a case in point, the Federal Reserve--in close cooperation with other domestic and foreign regulators--regularly conducts so-called horizontal reviews of large financial institutions, focused on specific issues and practices.
Elsewhere in Asia, stocks in the Philippines tumbled in heavy selling as foreign funds unwound positions in anticipation of the U.S. Federal Reserve beginning to wind down its bond-buying program.
The dollar rose on Monday after Russian Finance Minister Alexei Kudrin said it would not be replaced as the world's reserve currency in the near future and China's vice foreign minister Ha Yafei has assured the US that "nobody is talking about dumping the US dollar".
But Dino Kos, a former chief of markets at the Federal Reserve Bank of New York who now works for Portales Partners, a research firm, notes that the yuan does not meet one of the most basic requirements of a reserve currency: other countries cannot use it to intervene in foreign-exchange markets because it is not freely convertible.
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Now China has much of its foreign exchange in U.S. treasury bonds, part of a total reserve worth over a trillion dollars.
This is indeed close to what America's Federal Reserve is now doing with quantitative easing at home and swap lines to foreign central banks.
If worse comes to worse, the Treasury (with the help of Congress) could prevail on the Federal Reserve to buy its debt at prices more favorable than those demanded by foreign creditors.
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