June 30, 2009
The Newest Data on Foreign Exchange Reserves
Figure 1: US dollar (blue, right scale), US dollar plus 60% of unallocated reserves (green, right scale), and log nominal value of US dollar against major currencies (red, left scale). NBER defined recession dates shaded gray. Source: IMF, COFER, June 30, 2009, Federal Reserve via FREDII, NBER and author's calculations.
Notice that the USD share has not declined, despite a decline in the dollar's value against major currencies. Following Brad Setser's observation that the reason the demand for the dollar as a reserve currency rose is because total demand for reserves increased, I also plotted the levels -- rather than shares -- for the most recent data.
Figure 2: US dollar reserves (blue), US dollar plus 60% of unallocated reserves level (green), and total reserves (black), in millions of US dollars. NBER defined recession dates shaded gray. Source: IMF, COFER, June 30, 2009, NBER, and author's calculations.
I think it's an interesting that reserves have been shrinking for the past three quarters -- and at a pretty rapid clip. They were declining by an annualized 10.3% in 2009Q1 (q/q in log terms; 9.8% in base terms). This development suggests that, even if the dollar retains its share of total reserves, demand for dollar assets might still decline.
While this might constitute a secular force for dollar weakness, it's important that there are forces in working in the other direction, including cyclical factors. Deutsche Bank for instance projects 12.7% appreciation in the DB dollar index by end-2009 (16.1% against the euro, both in log terms). Their forecast implies only a slight depreciation in the dollar index by end-2010, and further appreciation against the euro (20.4% relative to June 26).
Posted by Menzie Chinn at June 30, 2009 12:56 PMdigg this | reddit
Menzie, not that many comments for you.
James aims at the emotional topics and got 68 on a single stroke yesterday.
Menzie, think about your strategy ..
Posted by: John Lee Hooker at June 30, 2009 01:37 PM
Menzie, does Deutche Bank describe their weighting of forces that will lead to dollar appreciation, and how they come to that conclusion? To what extent is deflation the driver of dollar appreciation in their view? Also, the labeling of the charts could be explained more, as in - what really are these lines?
Posted by: Mike Laird at June 30, 2009 02:46 PM
Some thoughts on communication which may be of help to you. A good method to grab a reader's attention is to use an inductive approach, which focuses on action, rather than description.
Here's the recipe:
1. Intro sentence: what you're writing about ('The demise of the dollar has been widely predicted, but as with Mark Twain, news of its death is greatly exaggerated.')
2. Second sentence: The action item you want. To be relevant, every article should have an implicit action item. (eg, 'Although global reserves have dropped by a precipitous 10%, the greenback has held its share of the total--and that's unlikely to change.') The implied action is that the reader needs to adjust his behavior to the assumption of continued dominance of the dollar.
3. List reasons for action. ('In truth, there are few alternatives, and America's trading partners know that they can't sell if America can't borrow.')
4. List reasons in detail. ('Although the Chinese would dearly love to have a 'global currency' to supplant the dollar, as a practical matter, cobbling together such a beast is like bringing Frankenstein's monster to life: full of complications and apt to create a horror story...')
This then is inductive communiction. (See Barbara Minto, the Pyramid Principle.) You'll note that the action item is driving the argumentation and data gathering. Instead of passive reporting, you are arguing a case, which leads you to seek certain information and exclude other bits.
Also, this approach puts the reader firmly in control. If a readers wants to stop after sentence two, he still knows what you want from him: to assume continued dominance of the dollar.
This form of writing assumes that communication always occurs for a purpose. If you don't have anything to say, well, don't say it. On the other hand, the world is always full of things to say, so there's always something to write about. What would you change if you were the President, or Geithner, or Summers? What do you think is wrong with the world? Those things are your natural topics.
Having both taught Minto and taken my share of graduate economics courses, I might recommend you consider teaching your doctoral students about communicating using Minto. (So pedestrian! So useful!) Your problem is the same as many of the macroeconomists you cite in your post: they're not focusing on action items, and this tends to make them boring and irrelevant. Fortunately, this is easily cured with a bit of technique.
Posted by: Steve Kopits at June 30, 2009 05:17 PM
Steve Kopits: Thank you for your suggestions regarding exposition. However, I suspect that my target audience does not include you. Hence, you'll forgive me if I retain my current mode of discourse.
Posted by: Menzie Chinn at June 30, 2009 06:16 PM
Newsflash to those looking for focus on 'action' in communication: Menzie Chinn is neither 'boring' nor 'irrelevant'! We are lucky that a noted and accomplished scholar such as he is willing to share his thoughts and expertise with us. Here's a polite suggestion to those not in the target audience: shh, please be quiet.
Posted by: Phil Rothman at June 30, 2009 09:10 PM
@ Steve Kopits :
Thanks Steve, will forward your comment to Paul Krugman. Paul needs also help in this matter.
David Axelrod says the same like you. And as David is Obamas most beloved spin-doctor, therefore you must be right.
Guess you might work in PR, too ... :)
Posted by: John Lee Hooker at July 1, 2009 01:04 AM
Well, where is your target audience? 4 of 5 comments are about the nature of the post, not its content. Does this meet your expectations?
If not, just trying writing a couple of pieces inductively. See if you think it helps.
Posted by: Steve Kopits at July 1, 2009 05:09 AM
Really interesting piece. I like your blog posts on these types of topics a lot more than your more political pieces.
Posted by: Jacob at July 1, 2009 06:12 AM
Steve Kopits: This is an analytical piece, not a call for action. I do have an inductive piece: see here [pdf].
Posted by: Menzie Chinn at July 1, 2009 08:43 AM
I read Menzie's pieces regularly, but seldom comment. I guess much of his target audience is like me: we are usually silent unless feeling compelled to say something.
Posted by: Yu'er at July 1, 2009 09:46 AM
Some more comments on exposition. Why 60% of unallocated reserves? Is that a guess as to the true extent of dollar reserves? (If so, that seems reasonable to me.) What doesn't compute, though, is the large recent gain in the dollar, which is only very weakly reflected in the share of dollar reserves. Your sentence "Notice that the USD share has not declined, despite a decline in the dollar's value against major currencies." has me bemused. It seems to me that post-2000, the dollar share of reserves has tracked the decline in the dollar fairly well (with the exception of the recent dollar gain).
The most important thing in these data (IMHO) is the recent decline in the level of dollar reserves.
I still don't buy your view that the U.S. trade deficit after the dotcom bust was internally generated. Rather, I think U.S. monetary and fiscal policies were loosened to replace the drop in U.S. business investment demand. Asian governments used currency mercantilism to gain part of the AD generated by this replacement effort, thereby extending and increasing the need for the effort. Japan and China hold something like $4 trillion in foreign reserves,most of it gained after 2000. These reserves correspond directly to domestic forced savings, and a commensurate 'savings glut' for the rest of the world
Posted by: don at July 1, 2009 11:59 AM
I read Econbrowser every day, and same as Yu'er never comment. I consider this No 1 economic blog, even though I am aware that Marginal Revolution has the most hits. Furtehrmore, I suggested this blog to some of the non-economist friends who find it very readbale and easy to understand. Overall, this blog continous to be very popular, and people would not come back to it daily if there were problems with "communication". It already "grabs" a lot of attention.
So, Steve you might want to revisit your Minto notes or take some more graduate economis course in order to make a distinction between the purpose of analytical pieces and "call for action items".
Posted by: Dragi at July 1, 2009 12:15 PM
I enjoyed the remarkably prescient Twin Deficits piece linked to in a comment above and in an earlier post about your push vs. pull explanations for the recession. However, the following points about fiscal policy and monetary policy seem inconsistent. You blame government borrowing for increased interest rates, encouraging investment from abroad, but also blame low fed funds rates for stimulating consumption demand. Well, wouldn't the government borrowing created a crowding out effect, without which housing demand could have been stronger?
"Government borrowing increased the demand for credit, bidding up interest rates and hence the value of the dollar. This process made U.S. exports relatively less competitive on world markets and made more difficult the position of U.S. industries competing with imported goods."
"The conduct of monetary policy over the past four years has contributed to the widening of the trade deficit.13 While the aggressive easing of interest rates by the Federal Reserve in the wake of the stock market collapse successfully staved off a consumption decline, it also led to a housing market boom that continues to this day."
Posted by: MikeR at July 1, 2009 01:05 PM
"Government borrowing increased the demand for credit, bidding up interest rates and hence the value of the dollar....."
I must be totally whacked. I always thought government borrowing increased the supply of credit. The borrowing is in the form of treasury bills, notes and bonds. It's a debt that is represented by a very real credit sold into the markets.
If the markets are flush with cash, the interest rates of the various credits will be low. If there exists a significant savings "glut" Far East mainly, plus oil producers, the US could issue credits cheaply. Which I think is what has been happening.
It was always easier to sell bonds when the money was large.
Posted by: beezer at July 1, 2009 01:53 PM
Although I am not an economist or business person, I took the required 2-3 economics courses in collegium. They were prfoundly based on Rational Expectations Hypotheses. The Professor concluded, I believe, that renting and owning a home offered similar returns. I did what the Professor told me to do, and instead of losing potentially a million US$'s on a home, I rent and have profited greatly. They also said that stock speculation cannot be profitable so I dont speculate in stocks. However, Goldman, Lehman, BearSterns, CITIBANK, and AIG are well beyond bankrupt. Did the real estate and Wall Street peoples not attend college? or did they drink their way through Harvard?
Posted by: Dong Feng at July 1, 2009 04:02 PM
Phil Rothman, Yu'er and Dragi: Thanks for your words of support.
MikeR: Good question. I don't preclude the possibility of offsetting effects. I think lax monetary policy combined with the oft-mentioned regulatory disarmament and allowance of overleveraging induced the housing bubble; whatever crowding that occurred probably did so on the business fixed investment side.
You've highlighted the fact that the combination of lax monetary policy and the buildup of contingent liabilities (see my previous posts on Akerlof-Romer "looting") are hard to fit in conventional Mundell-Fleming types of models. But I do think that expansionary fiscal policy made the dollar stronger than it would have otherwise been; that tax cuts induced more consumer spending than would otherwise have occured; and that monetary policy both stimulated domestic components of aggregate demand and fueled the housing boom, which offset the conventional dollar depreciation effect one would expect in textbook expositions.
don: I pick 60% because that was a guess that I heard from IMF types; I'm sure Brad Setser has a more refined estimate, but I think the last time I checked with him, 60% was not outside the realm of plausible estimates.
Posted by: Menzie Chinn at July 1, 2009 06:46 PM
In the fourth quarter Korea, Indonesia and a bunch of other economies were defending their currencies from sharp depreciations and depleted reserves at a rapid clip. In the first quarter a lot of Asian central banks (not just those who lost a heap in the fourth quarter) have begun boosting reserves. It wouldn't be surprising if reserves also begun to rose sharply in coming months as Asian economies seek to stimulate their economies by keeping their currencies relatively weak.
Posted by: Bob Sagget at July 2, 2009 07:15 PM
Menzie is at least doing a better job here at leading readers than most econ blogs, and certainly than most any journalism, where the thrust is either:
1. Something is bad news for the U.S. as America continues its around-the-clock generation of bad news from its able decline. China is doing fantastic, though, and will probably benefit from this new piece of bad news; heck, it probably even brought it about.
2. Something looks like good news for the U.S., but that's just a mirage which the writer will strip away to reinforce the ugly truth: America is screwed. At best something is really only barely "good" news and, besides, everything else for the U.S. is so bad that this tidbit of sweetness is like dropping a grain of sugar into an unflushed toilet. Oh, and most people will agree that this is way better news for China.
Posted by: PM at July 2, 2009 10:47 PM