Around the world, reserves of US dollars and Treasury securities have more than doubled over the past 5 years. It’s nice for us when we get to buy goods and pay in paper but what will happen when we face reserve reverse? And why, asks Eduardo Porter, do poor countries continue to fund our consumption?
The amount that poor countries are giving up by holding low yield Treasuries is not inconsiderable. Larry Summers calculates that India has reserves in excess of those required for prudent insurance in the realm of 100 billion dollars – if invested in higher paying assets those reserves could raise Indian GDP by 1-1.5%, more than double the amount that India spends on health care.