Why Currency Reserves Matter

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This goes in the “obscure but sort of important” folder. Eduardo Porter reports that developing countries are building up excessively large currency reserves, partly as “insurance against financial disaster.” Rather tragically, these countries tend to lose money on all the dollars they’re buying up—and it’s not like they can really afford to lose money here—and what’s worse, the money they spend padding their reserves is money they’re not spending on important things, like health care or infrastructure or other domestic investments.

So why are they all doing it? Dean Baker and Karl Walentin have argued before that it’s because everyone thinks the international financial system is rather volatile and no one wants to go through the same meltdown that countries in East Asia suffered in the late ’90s. But the fact that these poorer countries all have to incur very large costs because of a rickety system set up largely to benefit the richer countries indicates, as Baker and Walentin wrote, “a serious failing of international financial institutions.”

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It is astonishingly hard keeping a newsroom afloat these days, and we need to raise $253,000 in online donations quickly, by October 7.

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The upshot: Being able to rally $253,000 in donations over these next few weeks is vitally important simply because it is the number that keeps us right on track, helping make sure we don't end up with a bigger gap than can be filled again, helping us avoid any significant (and knowable) cash-flow crunches for now. We used to be more nonchalant about coming up short this time of year, thinking we can make it by the time June rolls around. Not anymore.

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