1. In my view, countries are nuts to support their currencies at artificially high levels. There is no more economic utility in this than there is in a company executing a share buy-back program at artificially high share price levels. In both cases, it is usually the political/executive class who stands to gain. Setser's point is that we (i.e. the U.S.) should encourage this, as it is good for the U.S. No shit. Why they would listen to him though is beyond me.
2. Setser claims that a retrenchment of foreign lenders is ok because, well, America won't need them anymore, or at least not as much, for:
The US' borrowing needs next year might run to a trillion dollars. And he thinks somehow a depressed, indebted domestic population will be able to cough up? Really?[Retrenchment does not] necessarily mean that the US and others won’t be able to finance large fiscal stimulus.
Remember, the big if — a rise in the fiscal deficit only leads to a rise in the external deficit if private savings and investment do not change, so the extra call on savings from the deficit has to be met by the world. And right now private savings and investment patterns are changing — particularly in the US. Goldman forecasts private sector in the US will go from rough balance in q2 2008 to a large (10% of GDP) financial surplus by the end of next year. That means private savers in the US will be in a position to lend to the US government.
3. On the topic of countries running down their foreign reserves, more coverage here. It appears, betwen Russia, the Ukraine, South Korea and the like, net reserves are in aggregate down about $200b +/-. This is about what the US' monetary gold stocks (~8000t), accounting for the bulk of the US's "foreign currency reserves" would bring in at today's prices. Or, put differently, maybe what the Citi bailout will eventually cost.
Maybe we should all be buying the hrvynia.
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