¿What is to be done about excess reserves?

Thursday, 29 August 2002

Hugo Salinas Price

On the first page of Mexico City’s weekly publication, “Acción”, dated August 26, we are informed that President Fox stated in a speech in Tlaxcala on August 16, that Bank of Mexico’s monetary reserves amounted to $45 billion dollars, a sum so enormous that “we hardly know what to (with them)”.

Many central banks of the world have the same problem – too many dollars in their reserves. “Acción” believes that we can do without $14 billion, and suggests that we should apply those dollars to public works, instead of allowing them to sit idle in the reserves.

The problem is, that these reserves are a product of exported U.S. inflation; in recent years there has been a gigantic expansion of credit in the U.S. This has produced purchasing power in dollars, and the dollars have been sent to foreign lands to buy goods and resources.

There is no way we can use these excess reserves accumulated by Mexico, without causing inflationary effects here. Inflation is inflation, whether it is home-grown or imported. If we use dollars to pay for public works, we will still get inflation in Mexico as a result.

These U.S. dollar reserves are contaminated; we cannot use them, and if we must take them in our trade, we should get rid of them by passing them on to foreigners – we must not use them at home. That is what Americans do.

One very appropriate use for Bank of Mexico’s excess dollar reserves would be to re-export them to purchase gold. That would be an excellent investment.

Another great measure would be for Bank of Mexico to use excess dollar reserves to purchase silver, which could then be minted into one ounce coins with no nominal value and put into circulation in parallel with the paper pesos; the Bank of Mexico could quote the legal tender value of the silver ounce every day – a floating value. Such a measure would raise the world price of silver substantially and it would help Mexican mining, along with that of Perú, Canada and the U.S., the main producers of silver.

Would this purchase of silver be inflationary? If dollars were to be exchanged for silver its price would rise; if it has not risen to date, this has been due to manipulation on New York’s “Comex” – entirely illegal according to some who know about these things. The rise in the price of silver would reveal the true value of the dollar – and that is why silver’s price has been manipulated: to hide the decomposition of the dollar.

In our opinion, “to inflate” means to create more and more money, whose value then falls and has the effect of raising the prices of goods; that is not the same as monetizing silver, which would raise the price of silver and thus raise the purchasing power of the minted coins. Surely the public, witnessing the increasing purchasing power of their coins, would act in ways that would greatly stimulate the economy. That stimulus, however, would not have the bad effects of stimulation by printing money and expanding credit: it would be based on the real and tangible value of minted silver as it reassumes its true value in the international marketplace.

It would be a prudent move on the part of Bank of Mexico, to purchase gold or silver, or both metals, for its reserves. The European Central Bank, for example, holds 15% of its reserves in gold, and revalues them monthly according to the quoted market price. Of course if Mexico did something like this it would displease the United States, and evidently the Bank of Mexico has decided that it is not advisable to stir up a hornet’s nest.

However, the fundamental problem of excess dollar reserves afflicts many Central Banks and it will have to be resolved at some point. We don’t know what may provoke a general run from the dollar as a reserve, but sooner or later the Central Banks are going to scramble for gold in exchange for their dollars. It will be quite natural and necessary for them to do so, and they will not be able to refrain indefinitely.