It follows that the only thing you can do with your foreign reserves is prop up your own currency.
That has not always been so, and may cease to be the case in the future.
In the old-fashioned mercantilist frame of reference, reserves represented the number of other people's mercenaries you could buy rent. So military force was used to maintain a trade surplus in the face of an overvalued currency (having an overvalued currency and a trade surplus allowed people to eat their cake and have it too in terms of ForEx reserves).
In the event that previously stable militaries disintegrate into mercenaries, we may be heading back to '99. 1799, to be specific.
Viewed in this light, Blackwater, et al take on rather ominous undertones.
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
the only thinkthing that China might do is start borrowing dollars (whether the public or private sector does this is immaterial) to fund its economic or military activity, using its currency reserves to back that debt (basically, the Chinese central bank can safely allow the Chinese economy to accumulate an amount of dollar-denominated debt equal to its dollar reserve holdings
