Tracking US dollars in country reserves

Jeffrey Frankel is James W. Harpel Professor of Capital Formation and Growth at Harvard. He was appointed to the Council of Economic Advisers by President Clinton in 1996, and subsequently confirmed by the Senate.

His recent blog post on Dollar share in FX reserves of Central Banks is worth a read.

I am including the graph he puts in his article in this note. The US dollar (and the country) achieved international hegemony post World war II. A strong economy made a strong country and dollar became the "reserve currency". The world has come a full cycle. Arguments about - TINA - there is no alternative, will eventually have to face up to reality. When an alternative becomes a desperate enough need, it emerges.

US Consumers

An article in the New York Times today has this amazing chart. (If only we could track Indian data with this level of detail.) An interesting point that seems to emerge is that the American consumer has not REALLY stopped spending - just seemed to move from retail to wholesale! and despite record levels of unemployment, continues to eat and drink outside the home.

Clearly, old habits die hard. A bankrupt America, with high-spending consumers - and a government that continues to fight battles around the world. Prepare for a decade of political upheavals as America seeks to cling to its earlier pole position in the world, while the world starts to reject that role - the move from G8 to G20 is more than just a re-ordering of economic order.

Confused Economists

Krugman continues to blog on the inadequacy of the US fiscal stimulus. Alan Greenspan appears to see unemployment going to 10%, but does not "support another stimulus package". So what are we to make of this debate.

Greenspan's policies now stand discredited and the popular view is that his refusal to take the punch bowl away at an appropriate time was largely responsible for the mess the US and the world finds itself in. But what are we to make of Krugman's insistence that a higher fiscal deficit is the answer to the US problem. All that we learned of economics - especially in the context of India, seems now to have been turned on its head. It was always argued that small government is important - so are the rules different for the US and for other economies? Intuitively, if the answer to a problem caused by excess liquidity is to infuse more liquidity, I'm afraid I find this completely unsatisfying. But Krugman is a nobel prize winner, so must know his stuff.

In my defense, I offer three arguments
(1) If the economists really had the world modeled correctly, why are we in the mess we are in?
(2) I quote Fischer Black (1986)

In the end, a theory is accepted not because it is confirmed by conventional empirical tests, but because researchers persuade one another that the theory is correct and relevant.

(3)Emanuel Derman, in a presentation on quant finance in 2002 - had this to say on financial modeling

There is no fundamental theory in finance. There are no laws.
That s why many of the textbooks are so mathematically rigorous.

I recommend that we stick to the tried and tested - if the model does not seem to be sensible, stick to the sense and chuck the model.