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Love affair with FX reserves

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The post-crisis world order is starting to look distressingly similar to the old one.

Swollen foreign-exchange holdings helped set the stage for the meltdown by suppressing interest rates and boosting mortgage lending in the United States.

Now those reserves are back on the rise. Stockpiles of hard currency recently topped their pre-crisis peak to reach $7 trillion. And China, the undisputed champion of currency hoarders, has passed the $2 trillion mark, up almost 20 percent in the last 12 months.

Reserve accumulation can be added to the list of bad habits that countries failed to wean themselves off during the crisis. Unless this trend is controlled, it will increase the risk of aftershocks.

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