Time to review trends in reserves, against the backdrop of financial crisis, recession, and dollar gyrations. (I’ll try to be original, but Brad Setser has been more diligent than I in covering these issues over the past few months. [0] [1] [2])

A few observations:

• Known dollar reserves as a share of world reserves appear to be falling.
• Total dollar reserves have likely not declined as precipitously.
• Even with the decline in the dollar share, it is probably not as low as it was during the early 1990’s.
• The dollar share is (mechanically) linked to the dollar’s value.
• Known dollar reserves at end-2008 are less than predicted by a historical correlation.
• But this differential is infinitesimal compared to the “unallocated” share of total reserves.

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It’s not news that the US current account, trade balance and trade balance ex.-oil are all moving toward zero percentage points of GDP. As I’ve observed before, time will tell how much of this movement is durable (see Bertaut, Kamin and Thomas for skeptical look; see also Cline-Williamson); this in turn depends on whether the adjustment reflects standard macro effects, including a permanent downshift in US consumption growth [0], and how much reflects perhaps transitory effects like a credit crunch in trade financing (as speculated upon here). Here’s the trade balance situation for the US.

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