Tuesday, March 20, 2007

. Stephen Jen. "Currencies: March Madness", Morgan Stanley

"Global liquidity is likely to remain abundant", writes Morgan Stanley's FX economist Stephen Jen. Reserve growth is the key source of global liquidity:

Global official reserves are massive, and still growing. The world’s official reserves have just breached the US$5 trillion mark (US$5,130 billion, to be exact, for gross reserves and US$5,078 billion for the currency component). The world’s official reserves are growing at roughly US$75-80 billion a month, with China accounting for about 30% of these increases. While oil exporters and the Asian countries have roughly the same absolute size aggregate C/A surpluses (around US$400 billion a year), so far the Asian countries have accumulated these balance of payments (BoP) surpluses in the form of official reserves, while the oil exporters tend to channel their export proceeds into SWFs. In any case, compared to the total official reserves that prevailed at end-2005 of US$4,175 billion, the world’s official reserves have risen by close to US$1 trillion in a little more than a year: this is a major increase.

On the other hand, Jen seems to agree with Mohamed El-Erian's views on endogenous liquidity:

The 'real' sources (i.e., the world’s savings-investment surplus) of global liquidity remain robust: the Asian countries and the oil exporters continue to generate some US$800 billion worth of combined current accout surplus. Global long-term interest rates, as a result, have remained near a generational low. Unless 'endogenous money' collapses due to risk retrenchment, which I don’t believe will happen, global liquidity conditions could quickly rebound to support new risk-taking.

[HT: Brad Setser].

No comments: