Foreign reserve accumulation by developing countries hurts their citizens
I explained this before in a previous post-but here would like to explain it more-because this is an absolutely terrible thing which these developing world central banks do to the hard earned money of their citizens.
Buying bonds of liquid government securities like the US Government, Governments in Europe, is the same as loaning money to them-a bond is a loan. What does that mean? Central banks from Chile to Russia to China to India, which have holdings of these bonds to "provide liquidity and stability for their currencies" are really loaning the money out to rich countries. It is absurd for poor people to loan money to rich people; it is likewise absurd that poor nations hold rich nation Government bonds. What they are doing is exchanging some of the hard earned money for exports by their citizens with these paper assets-which keep employment up in the rich countries. A central bank of a developing country is providing jobs to people in the rich countries in the name of silly things like liquidity enhancement, favoring exports, etc.
Liquidity and stability of a country's exchange rate is not an excuse for keeping large amounts of money OUTSIDE the country. Let people and companies who take out foreign currency loans pay the consequences of extreme fluctuations-that doesn't mean that the hard work of an average citizen of Chile or China, and an average developing world citizen who is NOT working for these companies which are involved in taking our loans outside their countries (currency speculation), is exchanged for a bond of a developed world country.
Favoring exports is another common excuse for accumlating reserves.
There are two problems with this thinking: 1) By keeping the home currency low they are actually hurting exporter's earnings. The exporter could sell for a better price if there's wasn't a silly central bank keeping the home currency artifically low. His profit margins would be better. No one got rich by selling cheap-the rule for business is to sell dear-and exporters clamoring for a lower currency are married to the idea of selling high volumes but their net earnings would be the same if they sold less volume at better prices. 2) Even if this strategy of keeping home currency low was somehow helping exports-every time a country is doing something to favor exports; it is hurting it's imports. It is hurting it's development if importation is of productive goods and articles. There's no reason to believe that the fastest way to get rich for the developing world is to increase exports.
Like the balance of trade, favoring exports is another stupid thing which people worry about (and dumb politicians help). There is no reason to favor exports-if exports are good for a country, it will automatically turn out that way by a free trade.
It is as if the developing world country citizens have these bottlenecks called their own central banks who are ensuring that they never develop-these banks are their own citizens' worst enemies.
Capital should be employed at home-that's where it generates maximum employment, that's where the returns are the highest, because of circulation of capital being the fastest at home. A Government holding foreign bonds is one of the most bizzare things in the financial world. The job of the Government is to increase employment at home-not abroad. And the returns are normally better at home as well; why on earth keep money outside???
The collapse in the stock markets of the developed world right now is a great time for developing world central banks to cash in their chips because of high demand of the developed world government bonds by their own citizens. That's a great trade-the mantra of all businesses, including trading, is to buy low and sell high. If China decides to sell off half of it's 2 trillion dollar in foreign reserves and brings back stuff which is in short supply back home-basic materials are the obvious choice, as I have explained in a previous post-but productive stuff like Caterpillar and Hitachi machines, Airbus planes etc. are also a great investment to increase employment back home, to provide more jobs, and to remove the silly fascination which the Chinese and the rest of the developing world has with exports, can you imagine how much better off the ordinary citizens of China would be? It is time the developing world grew up and matured-it is time that they realized that the developed world is not as rich as they thought-that actually by holding foreign reserves they are holding back the development of their own countries.
It is not okay to buy stock in Rio Tinto and other foreign companies to increase the returns. That doesn't help the Chinese citizen-employment needs to be generated at home, not outside. These returns on Rio Tinto stock are fictitious-they are paper returns doing nothing for the Chinese citizens. However, that capital invested outside has already been paid for by the hard working Chinese who have exported stuff to the world-which in this case is exchanged for useless Rio Tinto stock (from the Chinese citizen's point of view) [As a side note-Rio Tinto is one of my biggest stock holdings]. Chinalco, a state owned aluminium producer, should keep expanding at home, get into other businesses, whatever; but not send precious Chinese capital outside the country in the name of enhancing returns. A private individual or company invests outside for their own diversification and return enhancement; a Government has no job diversifying outside the country with hard earned capital of it's citizens. China should buy products of Rio Tinto-e.g. Coal---which will make energy cheaply available in China. That way it helps its own citizens, who are short of cheap energy, and ALSO helps Australia and the rest of the world by giving them more incentive to produce more coal. Owning Rio Tinto stock doesn't help---because Rio Tinto can't produce more coal if there are no buyers. A baker doesn't invest in a shoemaker---it goes ahead and buys shoes, uses them, and that way helps himself and the shoemaker.
The worst thing China does is give money to foreign Governments-who spend it in unproductive ways (loans to banks, General Motors). It is better if China buys products useful to satisify the interests of it's own citizens; and it is in that way that it actually helps the world the most. As Smith said---it is from selfish self interest that we end up helping the world the most, not from charity or benevolence. The same applies here.
Sanjay
Buying bonds of liquid government securities like the US Government, Governments in Europe, is the same as loaning money to them-a bond is a loan. What does that mean? Central banks from Chile to Russia to China to India, which have holdings of these bonds to "provide liquidity and stability for their currencies" are really loaning the money out to rich countries. It is absurd for poor people to loan money to rich people; it is likewise absurd that poor nations hold rich nation Government bonds. What they are doing is exchanging some of the hard earned money for exports by their citizens with these paper assets-which keep employment up in the rich countries. A central bank of a developing country is providing jobs to people in the rich countries in the name of silly things like liquidity enhancement, favoring exports, etc.
Liquidity and stability of a country's exchange rate is not an excuse for keeping large amounts of money OUTSIDE the country. Let people and companies who take out foreign currency loans pay the consequences of extreme fluctuations-that doesn't mean that the hard work of an average citizen of Chile or China, and an average developing world citizen who is NOT working for these companies which are involved in taking our loans outside their countries (currency speculation), is exchanged for a bond of a developed world country.
Favoring exports is another common excuse for accumlating reserves.
There are two problems with this thinking: 1) By keeping the home currency low they are actually hurting exporter's earnings. The exporter could sell for a better price if there's wasn't a silly central bank keeping the home currency artifically low. His profit margins would be better. No one got rich by selling cheap-the rule for business is to sell dear-and exporters clamoring for a lower currency are married to the idea of selling high volumes but their net earnings would be the same if they sold less volume at better prices. 2) Even if this strategy of keeping home currency low was somehow helping exports-every time a country is doing something to favor exports; it is hurting it's imports. It is hurting it's development if importation is of productive goods and articles. There's no reason to believe that the fastest way to get rich for the developing world is to increase exports.
Like the balance of trade, favoring exports is another stupid thing which people worry about (and dumb politicians help). There is no reason to favor exports-if exports are good for a country, it will automatically turn out that way by a free trade.
It is as if the developing world country citizens have these bottlenecks called their own central banks who are ensuring that they never develop-these banks are their own citizens' worst enemies.
Capital should be employed at home-that's where it generates maximum employment, that's where the returns are the highest, because of circulation of capital being the fastest at home. A Government holding foreign bonds is one of the most bizzare things in the financial world. The job of the Government is to increase employment at home-not abroad. And the returns are normally better at home as well; why on earth keep money outside???
The collapse in the stock markets of the developed world right now is a great time for developing world central banks to cash in their chips because of high demand of the developed world government bonds by their own citizens. That's a great trade-the mantra of all businesses, including trading, is to buy low and sell high. If China decides to sell off half of it's 2 trillion dollar in foreign reserves and brings back stuff which is in short supply back home-basic materials are the obvious choice, as I have explained in a previous post-but productive stuff like Caterpillar and Hitachi machines, Airbus planes etc. are also a great investment to increase employment back home, to provide more jobs, and to remove the silly fascination which the Chinese and the rest of the developing world has with exports, can you imagine how much better off the ordinary citizens of China would be? It is time the developing world grew up and matured-it is time that they realized that the developed world is not as rich as they thought-that actually by holding foreign reserves they are holding back the development of their own countries.
It is not okay to buy stock in Rio Tinto and other foreign companies to increase the returns. That doesn't help the Chinese citizen-employment needs to be generated at home, not outside. These returns on Rio Tinto stock are fictitious-they are paper returns doing nothing for the Chinese citizens. However, that capital invested outside has already been paid for by the hard working Chinese who have exported stuff to the world-which in this case is exchanged for useless Rio Tinto stock (from the Chinese citizen's point of view) [As a side note-Rio Tinto is one of my biggest stock holdings]. Chinalco, a state owned aluminium producer, should keep expanding at home, get into other businesses, whatever; but not send precious Chinese capital outside the country in the name of enhancing returns. A private individual or company invests outside for their own diversification and return enhancement; a Government has no job diversifying outside the country with hard earned capital of it's citizens. China should buy products of Rio Tinto-e.g. Coal---which will make energy cheaply available in China. That way it helps its own citizens, who are short of cheap energy, and ALSO helps Australia and the rest of the world by giving them more incentive to produce more coal. Owning Rio Tinto stock doesn't help---because Rio Tinto can't produce more coal if there are no buyers. A baker doesn't invest in a shoemaker---it goes ahead and buys shoes, uses them, and that way helps himself and the shoemaker.
The worst thing China does is give money to foreign Governments-who spend it in unproductive ways (loans to banks, General Motors). It is better if China buys products useful to satisify the interests of it's own citizens; and it is in that way that it actually helps the world the most. As Smith said---it is from selfish self interest that we end up helping the world the most, not from charity or benevolence. The same applies here.
Sanjay
Labels: general commentary
posted by Sanjay "John" Gandhi at 3:17 AM
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