by Arrnica Dayannandan

Created on: February 08, 2009   Last Updated: June 19, 2009

It is none other than the very high volumes of foreign exchange reserves, in the form of US securities that have saved several Asian economies, during the global economic recession of 2008. So you must be thinking that may be Asian countries should consider continuing to maintain a policy of consistently increasing their vast foreign exchange reserves at the same or at a better rate. Isn't that justified? Well, no it is not.

It is exactly this extreme hoarding of foreign exchange reserves/ US securities that has given way to the global economic meltdown that the world faced in 2008. No arguing the fact that it is true that these reserves buffered Asian countries from unruly consequences during the 2008 economic crisis.

But the fact remains that the excessive hoarding of foreign reserves by Asian countries, went above and beyond the purpose of safety and security. It created steep global economic imbalances that led to a chain reaction, spreading like an inferno across the economies of the world, and bringing them burning down.

A major and undeniable fact that faces the Asian countries post the 2008 recession is the Asian persistence on huge forex reserves. This implied that dollars were being pumped into the US
economy like never before, in the name of purchasing US securities. The excessive supply of US dollars, made them cheaper in their home land, thereby eroding interest rates. So now that evasive little dollar was so much more affordable to borrow, all thanks to the attractive new lows in interest rates.

US stood spectator to an era of rampant and unprecedented borrowings that any proliferated, civilized and developed economy of its stature, may have ever witnessed. This meant all that borrowed liquidity was being pumped into other financial market segments, such as equities, commodities, and real estate. This boosted an artificially large bubble in these segments. What was liquid was becoming illiquid by the moment. As a result, it was only a matter of time when these bubbles were waiting to burst at any uncertain moment.

When poor nations have economic surpluses, rich nations accommodate for their poor compatriots by taking a trade deficit in their stride, in the name of compassion. However, this time around the ball was in the US court. Asian surpluses began breaking upper circuits consistently, while the US trade deficits were breaking lower circuits.

This gaping hole of economic disparity between the US and the Asian countries, coupled with the gigantic

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