Nations across the world are back on track to continue to accumulate trillions in foreign currency reserves after a slow down attributable to the financial crisis. Currency reserves give nations the ability to protect their currency in crisis--by selling their reserves in exchange for their own currency they restrict the supply of their currency and stabilize its value. But many nations hold far more reserves than necessary for that function.
Excess reserve accumulation depreciates the value of their national currency and artificially strengthens the currency purchased for reserves. As 60% of all reserves are held in the form of dollars (followed by Yen, Euros and Pounds), reserve accumulation means an artificially stronger dollar. Reserve accumulation thus allows accumulating nations to sell more exports to the US as well as other developed nations and pursue export-led growth.
This rapid accumulation of dollar reserves directly contributed to the subprime debacle by lowering interest rates and spurring excessive debt through the constant demand for dollar-denominated assets. To be more precise:
"This is not to say that reserve accumulation was the only cause for the current crisis. Yet the core issue remained the Chinese [and others] willingness to fund America’s consumption and borrowing habit. Without this support, interest rates in the US would almost certainly have been substantially higher, acting as a circuit breaker for the developing debt-consumption bubble."
The accumulation of vast currency reserves also drains durable demand from the global economy in that nations could have used the wealth dedicated to reserve accumulation to develop their own domestic economies rather than funding unsustainable debt levels in the US and throughout the developed world. There is an urgent need for a new legal framework to channel reserve accumulation into more productive uses.
In a new law review article, entitled Taking Economic Human Rights Seriously After the Debt Crisis, I propose that the IMF, World Bank and the WTO be reconfigured to pursue economic human rights to foster macroeconomic growth and stability. In particular, I argue that these global institutions channel the $10 trillion in currency reserves into low cost development loans to foster economic human rights through a massive effort to create health, education and other infrastructure throughout the developing world. This would be giant leap forward for global economic development and growth as the fractional reserve banking of currency reserves could support $100 trillion in development loans, aimed at the most deeply disempowered people. Naturally, the most deeply disempowered populations hold the greatest economic potential. Thus, this proposal would spur growth worldwide.
Here is the abstract:
"The debt crisis of 2007-2009 and its continuing economic fallout reveal costly flaws in the current legal construction of globalization. Most notably, the system of dollar based currency reserves led to excessive debt in the US and diminished durable consumption worldwide. Vindication of economic human rights can sustain consumption and support macroeconomic growth and stability. Even before the crisis, economic human rights demonstrably facilitated economic growth and stability. Unfortunately, economic human rights suffered from deficient legal enforcement mechanisms and billions of global citizens suffered from deficient economic development as a result. Yet, the nearly $10 trillion in currency reserves proves that the world economy holds sufficient wealth to mobilize these human resources. This paper suggests that the IMF, the World Bank and the WTO place economic human rights front and center in terms of all facets of their operations. It also argues that these global institutions be reconfigured to expand the issuance of special drawing rights as an alternative reserve currency. Currency reserves could be banked with the IMF and leveraged (through fractional reserve banking) to fund massive development lending to actualize economic human rights."