Contributed by: filbert Friday, June 08 2007 @ 08:34 AM CST
The world is experiencing an unprecedented glut of savings, driving down real interest rates. It is a good time to borrow rather than lend, and to buy equities rather than bonds. This has implications for central banks, corporations and individual investors.
China is investing $3 billion, a tiny fraction of its $1.2 trillion of reserves, in Blackstone, a U.S. private equity company. More such equity investments will surely follow. India, OPEC members, and other developing countries with large foreign exchange reserves should emulate China’s strategy.
Foreign exchange reserves are typically invested in bonds of G-7 countries, above all in U.S. Treasury bonds. Former Treasury Secretary Larry Summers estimates that developing countries are holding more than $2 trillion of reserves in excess of their needs to combat currency volatility. If this excess is invested in equities rather than bonds, the resultant gains could exceed $100 billion.
[*1] http://www.cato.org/pub_display.php?pub_id=8272