by PRABHAT PATNAIK
If one adds up the foreign exchange reserves of all the countries in the world, including under the term “reserves” what these countries hold in the form of gold, US dollars, other reserve currencies, Special Drawing Rights of the IMF, and also liquid assets such as short-term Treasury Bills of the US government, then the total sum in August 2014 came to $12.03 trillion. Nearly two-thirds of this amount is held by developing countries whose reserve accumulation started increasing after the Asian financial crisis of the late nineties. In fact, largely because of this increase, the magnitude of foreign exchange reserves increased five-fold between 2004 and 2014 for the world as a whole. Since then however there has been a decline in the total magnitude of world foreign exchange reserves. By March 2015 this magnitude had declined to $11.6 trillion, which, though by no means a sharp drop, represents a drop nonetheless. And what is more, this drop is not some accidental occurrence, a mere happenstance; it represents a trend which has very serious implications for the world capitalist economy.
A part of the decline no doubt is because of a pure “price effect”. Since the value of the Euro and other reserve currencies is declining in terms of the US dollar, there would be some decline in the value of the total reserves when we measure everything in dollar terms. But this does not explain the entire observed decline. Besides, the fall in the value of the Euro and other reserve currencies in terms of the dollar itself turns out to be the outcome of the same factor that also explains, independent of the price effect, the decline in reserves. What is this factor?
Consider, for clarity of understanding, a very simple world where there are only two segments: a reserve currency country and the “rest”. In such a world there are two ways in which the magnitude of reserves can increase: one, if the reserve currency country has a current account deficit on the balance of payments with the “rest” which it settles by providing IOUs that are held by the latter as reserves. Now, the leading reserve currency country of the world, the US, has indeed been running a persistent current account deficit on its balance of payments which has contributed to the growth of the world foreign exchange reserves. But the recent decline in world foreign exchange reserves cannot be explained by this factor, since the US has not suddenly developed a current account surplus. In other words, trade or current account-based explanations simply do not work in this case.
The other reason why the total foreign exchange reserves may rise or fall is because of private movements of capital across borders. In our simple case, if the wealth-holders of the reserve currency country, say instead of holding this currency at home as deposits in their own banks, decide to exchange this currency for the currency of the “rest” which the central bank of the latter provides at a fixed exchange rate, and to hold this currency of the “rest” as deposits in the latter’s banks, then the world foreign exchange reserves would have gone up. The reserve currency which was held in private banks of the reserve currency country, and hence did not count as foreign exchange reserves anywhere, now gets to be held by the central bank of the “rest” and counts as foreign exchange reserves, because of private wealth-holders’ decisions. Exactly analogously, if wealth-holders, whether or not they belong to the reserve currency country, decide to shift their wealth out of the “rest” and hold instead in the form of assets in the reserve currency country, then the magnitude of world foreign exchange reserves would fall.
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