How are "foreign reserves" held by governments?

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In summary: You can also preserve your dollars in any other way you want. Deposit in a US bank account, sounds reasonable. Stash it in a vault, sure I guess that could work. Buy short term treasuries, I think is probably a popular way to hold "dollars". (You still have the question of how custody of treasuries works so I haven't really explained anything here)In summary, the foreign reserves of a government are dependent on its balance of trade. If a government has a good balance of trade, it will have more foreign reserves. If a government has a bad balance of trade, it will have less foreign reserves.
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Stephen Tashi

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If a (perhaps totalitarian) government holds a certain amount of, say, dollars in its foreign reserves then who keeps this government honest about the total? (I know the government can lie about its foreign reserves, but who keeps the actual amount limited?) Must the foreign reserves held by a government be kept in international institutions that are not controlled by the government?
 
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They can lie about it all they want, but they still need the actual dollars if they ever want to spend them.
 
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Office_Shredder said:
They can lie about it all they want, but they still need the actual dollars if they ever want to spend them.
I don't think assets of billions of dollars are kept as physical paper dollars or coins.

Presumably reserves are kept in some clerical way. So what limits the amount? If they were kept as records in a bank controlled by the government then what would keep the government's bank from inventing dollars?
 
  • #4
Stephen Tashi said:
I don't think assets of billions of dollars are kept as physical paper dollars or coins.

Presumably reserves are kept in some clerical way. So what limits the amount? If they were kept as records in a bank controlled by the government then what would keep the government's bank from inventing dollars?
Isn't it the same as any bank inventing any dollars for any account? What difference does the name on the account make?
 
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  • #5
anorlunda said:
Isn't it the same as any bank inventing any dollars for any account? What difference does the name on the account make?
I think the question is since money is moved electronically not physically, what prevents banks/central banks from adding 0’s to their electronic transfers. What/who is monitoring the inflows and outflows to prevent this?
 
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  • #6
Stephen Tashi said:
Presumably reserves are kept in some clerical way. So what limits the amount? If they were kept as records in a bank controlled by the government then what would keep the government's bank from inventing dollars?

Most dollars are held in a clerical way in the bank, but the actual dollars are basically tracked exactly. In practice most banks keep their cash at the federal reserve now. If someone wanted to move 5 billion dollars around, it would probably actually be effected by reserves at the fed moving from one bank to another (assuming they are moving the money to someone else at another bank).

Your hypothetical government probably can't even make a bank capable of pretendingit has us dollars because it wouldn't have access to fed deposits.
 
  • #7
anorlunda said:
Isn't it the same as any bank inventing any dollars for any account?
I doubt it's the same. The foreign reserves of a country (in dollars or other specific currency) are said to be depedent on its balance of trade. However the system works, a given country cannot simply increase the money supply of the currency of a different country.
 
  • #8
Office_Shredder said:
In practice most banks keep their cash at the federal reserve now.
It makes sense that the majority of the foreign reserves of a country in a given currency (e.g. dollars) would have to be (in some way) under the control of the country that issued the currency. I wonder how much of nations foreign reserves in dollars are kept in direct deposits in Federal Reserve banks - versus how much are kept indirectly? - e.g. can nations make a deposit in dollars in a Swiss bank and the Swiss bank must indirectly make a dollar deposit in the Swiss bank's account in a US bank.
 
  • #9
Stephen Tashi said:
It makes sense that the majority of the foreign reserves of a country in a given currency (e.g. dollars) would have to be (in some way) under the control of the country that issued the currency. I wonder how much of nations foreign reserves in dollars are kept in direct deposits in Federal Reserve banks - versus how much are kept indirectly? - e.g. can nations make a deposit in dollars in a Swiss bank and the Swiss bank must indirectly make a dollar deposit in the Swiss bank's account in a US bank.

I guess there are a couple options. The mega banks (ubs, credit suisse, maybe others?) Have us entities that are able to deposit dollars at the fed. I assume they take advantage of that, though I'm not sure what the rules are about passing assets around between your Swiss and US legal entities.

You can also preserve your dollars in any other way you want. Deposit in a US bank account, sounds reasonable. Stash it in a vault, sure I guess that could work. Buy short term treasuries, I think is probably a popular way to hold "dollars". (You still have the question of how custody of treasuries works so I haven't really explained anything here)

I think the more important thing is, when people say the money in your bank account is just a number on a spreadsheet, that is both technically true and also missing one of the largest engineering problems of humanity. The fact that all these financial institutions are able to relatively seamlessly transact electronically while actually making sure all the dollars are actually accounted for is a huge infrastructure that took a long time to develop.
 
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  • #10
Office_Shredder said:
The fact that all these financial institutions are able to relatively seamlessly transact electronically while actually making sure all the dollars are actually accounted for is a huge infrastructure that took a long time to develop.
It's ironic that keeping track of physical currency is probably less reliable than keeping track of abstract assets. This is due to counterfeiting and corruption in the printing offces of some governments.
 
  • #11
Stephen Tashi said:
It's ironic that keeping track of physical currency is probably less reliable than keeping track of abstract assets.
Not just due governments, but definitely no wonder that too much physical money is considered troublesome these days.

Also no wonder that some ... people ... are desperately trying to maintain/invent non-traceable ways to transfer (and: launder) money/value.
 
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  • #12
Stephen Tashi said:
I doubt it's the same. The foreign reserves of a country (in dollars or other specific currency) are said to be depedent on its balance of trade. However the system works, a given country cannot simply increase the money supply of the currency of a different country.
I've been thinking about that. Anyone, country or individual foreign or domestic, can own assets. The assets can be physical and have some degree of liquidity. Gold bullion is a favorite. Assets can also be in the form of bank accounts both foreign and domestic, or in investments both foreign and domestic. Each form of asset storage has its own risks.

Where it makes a difference is the floating exchange rate between currencies of different countries. Is that what you have in mind with this thread?
 
  • #13
I think he's literally asking if they can change a number on a spreadsheet to increase the amount of money they have, and if they did, how would anyone know.

It doesn't sound like anyone really knows the answer here (and neither do I), but as others implied it has to be via monitoring. At the very least, institutions that sold them the dollars in the first place know how much they bought, so if they try to turn around and sell more than they bought, it'll be known. Systems such as this manage/facilitate international transfers:
https://en.wikipedia.org/wiki/TARGET2

There's no fundamental difference between the Bank of Zimbabwe doing this and Wells Fargo, just the obvious practical difference that Wells Fargo is much more directly subject to US govt monitoring/regulation. But internationally people have to be confident in the system integrity (whatever the nuts and bolts are), or they wouldn't use it. The burden of proof will be on the Bank of Zimbabwe to demonstrate there's no funny-business going on.

[edit] I use Zimbabwe as an example since I am a Zimbabwean multi-billionaire (yeah, yeah, I know it's an obsolete currency), but they are indeed struggling regarding currency holdings/exchanges/domestic use:
https://www.theatlantic.com/international/archive/2016/05/zimbabwe-money/481518/
https://www.news24.com/fin24/economy/zimbabwes-central-bank-rules-out-return-to-us-dollar-20220207
 
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  • #14
anorlunda said:
Where it makes a difference is the floating exchange rate between currencies of different countries. Is that what you have in mind with this thread?
No. What I have in mind is that countries (and I presume individuals) can hold financial assets in a particular currency and have them remain in that currency. For example, a dictatorship that needs to import products from the US will want to hold assets in dollars. However, it won't be able to hold huge dollar assets in actual paper dollars or coins. So how does it keep its dollar assets and what prevents its banks from arbitrarily setting the dollar assets that are held?
 
  • #15
Stephen Tashi said:
However, it won't be able to hold huge dollar assets in actual paper dollars or coins
Why not? I searched
US currency held overseas

First hit

https://www.google.com/url?sa=t&sou...UQFnoECBAQAQ&usg=AOvVaw34MS7PZ7f2Osd2XpNuUoBy

"Although the amount can’t be precisely tracked, the Federal Reserve Board of Governors recently estimated that foreigners held $950 billion in U.S. banknotes at the end of the first quarter of 2021, or about 45% of all Federal Reserve notes outstanding, including two-thirds of all $100 bills.

EDIT I know this doesn't answer the OP question, but I thought it is interesting and surprising.
 
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  • #16
gmax137 said:
"Although the amount can’t be precisely tracked, the Federal Reserve Board of Governors recently estimated that foreigners held $950 billion in U.S. banknotes at the end of the first quarter of 2021, or about 45% of all Federal Reserve notes outstanding, including two-thirds of all $100 bills.
For example, China has claimed to have about 3 trillion US dollars of foreign reserve. However, I don't know whether that reserve is literally "in dollars".
 
  • #17
Stephen Tashi said:
For example, China has claimed to have about 3 trillion US dollars of foreign reserve. However, I don't know whether that reserve is literally "in dollars".

Sadly, this is a tough number for the media to talk about. China's foreign reserves, *in all currencies* is worth about 3 trillion dollars. The US dollar portion of that is worth about 2 trillion.

I think the majority of their reserves are held as treasuries.
 
  • #18
The crime of bank fraud often centers on people claiming assets that aren't real. The question is how is bank fraud detected? It still seems to me no different for an individual than for a foreign government.

But for it to be a crime, you must use the falsehood to secure a loan or something of real value. Just bragging and boasting is not enough to make it a crime.

Even Elon Musk had to show proof that he really had $44 B at his disposal to get his offer of buying Twitter taken seriously. Some of the money was in the form of pledges to lend to him.
 

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