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Its not like currency reserves are the main determinant of an ongoing ability to finance imports of oil ... for one thing, currency reserves are an accumulated stock, while the oil is a flow ... it is by and large consumed and gone.

Currency reserves may be important for a soft currency country worried about whether it can ride out a short term oil price spike, but its not an indication of ability to cope with ongoing high and rising oil prices.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue May 27th, 2008 at 10:40:26 AM EST
[ Parent ]
Right, but if all I am trying to look at is the immediate effects of peak oil, are currency reserves relevant?

And what would be the proper indicator of the ability to cope with ongoing rising prices?

Anyway, the fact that China's reserves can buy 10 years' worth of its energy imports at current oil prices has to count for something.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Tue May 27th, 2008 at 07:26:30 PM EST
[ Parent ]
Imagine what USD would look like if the PRC did this....

The Hun is always either at your throat or at your feet. Winston Churchill
by r------ on Tue May 27th, 2008 at 07:33:54 PM EST
[ Parent ]
I'm not saying they're going to buy 10 years' worth of their energy in 10 months - just that if it comes to that they would seem to be well-placed to continue increasing their energy use at the current rate for a while...

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Wed May 28th, 2008 at 02:22:29 AM EST
[ Parent ]
China's currency reserves can only buy 10 years of Chinese oil imports if China does not try to use them to buy large amounts of oil ... if it were to do so, the value of the US dollar would crash, and with it would go the crude-oil purchasing power of its foreign exchange reserves.

Those foreign exchange reserves are not savings, they are a side-effect of policies to discount the yuan/renminbi. And that is the real key to the extra degree of freedom that the Chinese have in facing an oil price shock ... since they are forcing the buying power of their currency down now, they are free to permit the value of their currency to rise if they find that the benefits of a cheap yuan policy are outweighed by the problems caused by energy price inflation.

Its not easy trying to find a capability for response to changing conditions in configurations of values in the various external accounts and publicly available trade figures, because those are values from the systems operating under current conditions, and two economies could well function in a very similar way under current conditions, but still have quite different capacities to cope with a particular kind of financial stress.

Now, one good measure of one particular vulnerability to an oil price shock is foreign debt denominated in terms of foreign currency ... this was what hammered the Brazilians in the first oil price crisis.

But as far as a general measure ... I'd have to cogitate on that. Plus also read what other people are saying, of course ... the more grist for the mill, the better it works.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue May 27th, 2008 at 07:50:33 PM EST
[ Parent ]
China's currency reserves can only buy 10 years of Chinese oil imports if China does not try to use them to buy large amounts of oil ... if it were to do so, the value of the US dollar would crash, and with it would go the crude-oil purchasing power of its foreign exchange reserves.

Now here's an interesting question. Suppose China wants to continue increasing their energy use at a few percent per year, using its currency reserves if necessary. How fast and how high and in how much time would the price of oil go, and who else would be deprived of that oil given that global supply has peakedis in an undulating plateau?

What data do I need for that? Total energy use (or domestic production) as well as imports, but how about the demand elasticity of the oil price?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Wed May 28th, 2008 at 02:27:32 AM EST
[ Parent ]
Simply slowing down its accumulation of currency reserves will increase the value of the yuan at a moderate pace.

But its a balancing act, because allowing the value of the yuan to rise too far, too fast will undermine the position of Chinese exporters in overseas markets and cut into China's current account surplus, and China requires those exports in order to purchase a wide range of commodity inputs ... not just oil, but iron ore, natural gas, coal, aluminum, concrete, etc., etc.

"Spending its foreign exchange reserves" is reasoning as if foreign exchange reserves are a dragon's treasure in a cave, somewhere. That is, as if the FX reserves are something that is intrinsically valuable in its own right, as opposed to a standing future monetary claim on future international income flows.

"Spending from Foreign Currency Reserves" implies a massive change in China's FXR policy ... that is, something like a doubling of value of the (indirect) FXR of the yuan/renminbi, going on a rough, back of the envelope reckoning that the yuan/renminbi is at something like 1/4 of its purchasing power parity value, and if it were to operate under a dirty float it would be more like 1/2 of its PPP value.

You are using "spending a bit out of FXR" as if it is an incremental change from the current FX rate policy stance, when the incremental change is to ease up on the steep discount of the yuan renminbi by not accumulating Foreign Exchange reserves at quite the same rate.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed May 28th, 2008 at 01:48:02 PM EST
[ Parent ]
My grasp of the national accounts is small to nonexistent. I guess what you're trying to say is that the trade balance is a better comparison variable than currency reserves.

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Thu May 29th, 2008 at 04:08:13 AM EST
[ Parent ]
BruceMcF:
Currency reserves may be important for a soft currency country worried about whether it can ride out a short term oil price spike
You mention soft currency. Does that mean that the US, EU or Japan would be expected to have relatively small reserves because they are hard currency areas?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes
by Migeru (migeru at eurotrib dot com) on Wed May 28th, 2008 at 11:48:37 AM EST
[ Parent ]
The US, EU and Japan are going to have relatively small reserves because they are pursuing a dirty float rather than a policy of trying to steeply discount their currencies against trading partners.

IOW, you get large currency reserves as a side-effect of pursuing the neo-mercantalist policy of discounting the cost of your domestic resources in overseas markets by depressing your currency exchange rate.

The US, EU and Japan can't do that, because their's are the currencies that the neo-mercantalists are targeting. Its not possible for everyone to depress the value of their Foreign Exchange Rate against everyone else, because the FXR of currency B against current A is the inverse of the FXR of currency A against currency B.

A more useful 2-way breakdown would be net energy imports as a percentage of total current account inflows excluding energy exports, and current account outflows excluding energy imports as a percentage of total current account inflows excluding energy exports.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed May 28th, 2008 at 01:55:43 PM EST
[ Parent ]
BruceMcF:
The US, EU and Japan can't do that, because their's are the currencies that the neo-mercantalists are targeting.

Surely Japan is doing it?
by generic on Wed May 28th, 2008 at 02:43:23 PM EST
[ Parent ]
No, of course not.

Why surely?

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Wed May 28th, 2008 at 10:45:51 PM EST
[ Parent ]
Because Japan is holding a Trillion Dollar? Although granted Japan's reserves did not grow particularily fast last year so Japan's currency manipulation may well be a thing of the past.

And then there is this:
How Japan financed global reflation

In 2003 and the first quarter of 2004, Japan carried out a remarkable experiment in monetary policy ? remarkable in the impact it had on the global economy and equally remarkable in that it went almost entirely unnoticed in the financial press. Over those 15 months, monetary authorities in Japan created ¥35 trillion.

[...]

The Bank of Japan gave the ¥35 trillion to the Japanese Ministry of Finance in exchange for MOF debt with virtually no yield; and the MOF used the money to buy approximately $320 billion from the private sector. The MOF then invested those dollars into US dollar- denominated debt instruments such as government bonds and agency debt in order to earn a return.

by generic on Thu May 29th, 2008 at 02:08:02 AM EST
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But in 2007, the Yen was over purchasing power parity, so the idea that the Japanese are deliberately discounting their currency against both the US$ and Euro doesn't stand up to scrutiny.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Thu May 29th, 2008 at 07:00:21 AM EST
[ Parent ]
I agree, but at least discounting the Yen against the $ is not unprecedented.
by generic on Thu May 29th, 2008 at 03:56:28 PM EST
[ Parent ]
Yes, certainly at one time the Japanese pursued a discounted FXR policy ... but that was years back.

Of course when the Japanese adopted a full accommodation monetary policy stance in the 90's, that resulted in a lower Yen (indirect) FXR, but that the way floating exchange rates are expected to work when a country has a sluggish economy and adopts a loose monetary policy.

Mind you, Japanese corporations went through a structural transition in the imported/domestic composition of their exports during the 1990's ... a major factor in the sluggish domestic economy in the 1990's ... so I guess someone could argue that they are embedding the neo-mercantalist monetary policy embedded in the Chinese and Southeast Asian into their exports via the imported component of their exports.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Thu May 29th, 2008 at 06:56:00 PM EST
[ Parent ]
But the Japanese are much more flexible than their regional competitors for the simple reason that they own and co-own manufacturing facilities within many of their largest trading partners - the U.S. in particular. Taiwan has some similar endeavors, but nothing on the scale of the Japanese penetration.

Upshot is that they can - and do, as I can state from personal experience - make manufacturing/import/export decisions based on their analysis of the mid-term, relative financial trends between their domestic economies and those of their 'clients'.

paul spencer

by paul spencer (spencerinthegorge AT yahoo DOT com) on Fri May 30th, 2008 at 02:23:39 AM EST
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The infamous Yen carry trade?

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu May 29th, 2008 at 03:21:56 PM EST
[ Parent ]

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