Read here. Brad Setser has been posting a lot about the dollar, and in the last 24 hours about the news out of Korea that I mentioned yesterday. For a minute, I toyed with the idea of giving that post a clever title like, "It begins," but I thought that would be a little too dramatic. I wonder what Setser would have thought of such a title.
Let me be clear about where I stand. I don't think this should be over dramatized, which is why in the end I opted for a less clever, more boring title for that post. However, it does give one pause. And though Setser is not bashful about showing concern:
News about what any of these four central banks [Taiwan, Korea, Russia and India] intend to do is hardly marginal news in my book. Three of the four -- Russia, India and Korea -- have now indicated a desire to either diversify their reserves or to spend their reserves on "infrastructure." Some say Taiwan has made similar noises as well, though Taiwan's central bank officially denies any such intent.
But he ends with a ray of, well, I'll call it hope.
To my knowledge, at this stage, we have no real way of knowing whether Asian central banks are purchasing fewer dollar assets (relative to the increase in their reserves), or just purchasing fewer Treasuries. In one scenario, Asian central banks are buying euros and other currencies. In the other scenario, they are just buying a broader range of (higher-yielding) dollar-denominated assets, and doing their purchases in ways that the US data does not pick up as cleanly.
I'll call it hope because if they are simply diversifying their purchases of dollar assets, the news is far less troubling. We'll know eventually. Such things show up in the balance of payments in time. Of course, if they're not picking up other dollar assets, we'll see the signs.
My gut feeling? Foreign demand for dollar assets shifted dramatically from private assets to Treasury securities beginning in 2001. (I'll try to find a data link later.) This might be the pendulum swinging back, but like I (and Setser) said, we won't know with certainty for a while.
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