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Another facet that will complicate matters is the degree to which a country's foreign currency reserves are spread across a wide basket of currencies or concentrated in one primary currency. All other things being equal, I would expect a country that has a wide spread of currencies in reserve to be less exposed than one that has only $ or Yen or €. After all, if our politicians are stupid and irresponsible, there is a very real risk that one or more of those currently major currencies will go belly-up. In which case your reserves are going to be worth not-so-much.

As an aside, it might be worthwhile to compare to balance of trade instead of currency reserves. If this is going to be a long transition (and I think it will), then the currency reserves are going to suffice like a hand pump in New Orleans, whereas the ability to eat into a favourable balance of trade might be a more robust measure.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue May 27th, 2008 at 05:54:23 AM EST

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