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During the past 10 years, at
least, I have been following the growth of International Reserves. The first
graph I elaborated to show their growth was back in 1999 and it was based on
IMF data up to 1997. Recently, I have been updating the graph using Alex
Tanzi´s numbers. Alex works at Bloomberg and from time to time, Doug
Noland at www.prudentbear.com quotes his numbers regarding International
Reserves, excluding gold.
As of August 2008, as you can
see from the graph, according to Alex Tanzi International Reserves were
growing at the explosive annual rate of 26.5%. Suddenly, since August, Reserves have
stopped growing.
In August, they were just under
$7 trillion expressed in dollars, though “paper” Reserves are
made up not only of dollars, but also euros, British pounds, Japanese Yen and
a smaller quantity of some other currencies.
It seems to me that when a huge
number such as $7 trillion suddenly stops growing, it must indicate that
something very serious is going on. The growth of Reserves was so severe it
was really an explosion; quite abruptly, it has stalled and has actually
turned negative.
One explanation might be that
since the figure is given in dollars, and the values of the other currencies
which make up Reserves have been falling with regard to the dollar (except
for the yen), that the contraction in the value of euro and pound Reserves
caused the amount of Reserves to begin contracting.
Still, the huge rate of growth
of Reserves, year-on-year, was up to 26.5%, and it seems to me that this
previous explanation is not sufficient to account for a sudden halt in growth
and the onset of a decrease in Reserves.
I have not seen a single article
dealing with this important change; I comb the Internet daily and I have
found not one comment on this development.
The International Reserves were
growing by leaps and bounds, as a consequence of the “Imbalances in
International Trade”, where the countries which were issuing currencies
accepted as Reserves were exporting huge amounts of their currencies in
“payment” of their trade deficits. These currencies were then
re-invested by the exporting countries in bonds and agency debt. The main
actor was the US,
which was able to fund its enormous fiscal deficits through the sale of these
bonds and agency debts. It was a nice deal while it lasted for the US and, I
suppose, for the Brits as well as the Europeans.
Now, if the Reserves are no
longer growing but diminishing, this might indicate that the exporting
countries are no longer buying and accumulating more US, British and European
debt. If they are not accumulating more foreign currency bonds and debt, then
the fiscal deficits of the US, the Brits and the European Union countries are
no longer being funded – especially important to the US, which is
running an immense fiscal deficit, what with the US Treasury going into debt
like a drunken sailor on account of the need to bail-out all and sundry
debtors.
Now if the US deficit is
not being funded, then that means that the fiscal deficit is simply being
monetized by the Fed. Or what else can it mean?
The US is on track to incur a fiscal
deficit of $1 Trillion, perhaps much more, in this fiscal year. If the
International Reserves are not growing, that means it will be impossible to
fund that deficit. That would mean: monetary inflation in spades, in the US.
I’ll leave you with this
question: what is the significance of the drastic change in the growth-trend
of International Reserves, from explosive growth, to the sudden beginning of
a contraction?
I hope others, more competent
than myself, address this question. I believe it is quite important that we
have an authoritative answer to it.
Hugo Salinas Price
President, Mexican Civic Association Pro Silver
www.plata.com.mx/plata/
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