The SDR Issues a Death Threat to Reserve Currency
I offer one possible scenario for the latest communiqué from the IMF. These documents, by design, are difficult to interpret and digest. While the documents are made public, the language that is used is Orwellian in nature and combines words in such a way that the average person, like myself, is left scratching their head trying to understand what specifically is being said. The latest IMF memo could be pointing towards a “denominated financial market instruments” intended for use in the bond market, central banks only or a global currency that replaces currencies used in everyday transactions. The vague nature of the descriptions allows for one or more of these scenarios to play out or it could be pointing towards something completely different. This I can say with 100% confidence. Something is changing within the currency market, on a global scale, and the IMF is revealing the first piece of the puzzle.
For those not familiar with the SDR (Special Drawing Rights) it is a financial instrument issued by the International Monetary Fund (IMF). The SDR was originally intended for countries to use to conduct particular international transactions. The IMF is one of those agencies that operates in the background and doesn’t really enter into everyday mainstream media and makes rare appearances in the alternative media as well.
Let’s allow the IMF to explain the SDR and how it was designed to work and for what purpose:
The Special Drawing Right (SDR) is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.
The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations.
In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations. Source
Let’s start here with our assessment of the SDR and the IMF. Can you say money or currency? Apparently, the IMF can not. The SDR is neither a currency nor a claim on the IMF. If the SDR is not a currency and you can not use it to hold anyone accountable for your transaction gone wrong, then what is it? It’s a “supplementary unit of account” used for global trade. If you or I were to use that type of language in a business transaction we would be immediately arrested for fraud, extortion and possibly counterfeiting. This is how it’s done. You invent a magic bean, call it reality, assign a value to it – the value you believe it should have and then foist it upon nations and people through international monetary policy accepted by the member nations of the IMF. If gold were used for international trade this would not be necessary. It would simple, clean and understandable by all parties involved.
The SDR is an international unit of account that is made up of a basket of global currencies, five in total. The U.S. dollar carries the most weight in this basket, and therefore the most influence. The Euro is second in line (this is the one of the biggest problems BREXIT is causing), followed by the Chinese renminbi (yuan), Japanese yen and the British pound sterling (another problem BREXIT is causing for the global monetary system).
The respective weights of the U.S. dollar, euro, Chinese renminbi, Japanese yen, and pound sterling are 41.73 percent, 30.93 percent, 10.92 percent, 8.33 percent, and 8.09 percent.1 These weights will be used to determine the amounts of each of the five currencies to be included in the new SDR valuation basket that will take effect on October 1, 2016. Source
The “weighting” is important as it determines which country has the most influence in what happens with the SDR and the policies that support this global fiat currency. We, the citizens of the world, do not currently use this fiat currency. At present, this “denominated financial market instruments” is used at the global trade (country to country) level only. That may change in the not too distant future.
On July 15 the IMF made some changes to the SDR and it’s global use. It seems someone believes the U.S. dollar reserve currency status is causing too many issues, around the world, and the entire reserve currency system should change. The IMF is also readying for changes with the Euro due to BREXIT.
Following the recent diagnostic of the international monetary system (IMS), the IMF will explore whether a broader role for the SDR could contribute to its smooth functioning. The economic rationale for or against broader use of the SDR will be examined, focusing in particular on identifying any gaps and market failures the SDR could help address in light of the increasingly multi-polar nature of the global economy and growing financial interconnectedness.
This note sets out some initial considerations on this matter. The note sketches some key issues bearing on the role of the SDR in each of three concepts: (i) the official SDR, or “O-SDR”, the composite reserve asset issued and administered by the IMF; (ii) SDR-denominated financial market instruments, or “M-SDRs,” which could be both issued and held by any parties; and (iii) the SDR as a unit of account.
M-SDRs reduce foreign exchange and interest rate risk relative to single-currency instruments, but there are some drawbacks and challenges. The basket nature of M-SDRs would allow the volatility of returns to be lower than for a similar single- currency instrument. However, the SDR only represents one of many possible sets of portfolio weights, and issuers or investors could use existing instruments to replicate their preferred weights at a relatively low cost. There are also challenges to market development, including settling and clearing of M-SDR transactions, dealing with potential basket redefinition, and fostering secondary market trading in order to generate liquidity and market depth. Source
Let’s break this down and translate into language that people can understand. Following the recent diagnostic of the international monetary system (IMS), the IMF will explore whether a broader role for the SDR could contribute to its smooth functioning. The economic rationale for or against broader use of the SDR will be examined, focusing in particular on identifying any gaps and market failures the SDR could help address in light of the increasingly multi-polar nature of the global economy and growing financial interconnectedness. In simple terms the IMF is going to figure out what will be the best way to introduce this global “denominated financial market instruments“, to the world, without having everyone run to gold. It doesn’t fit their policies to find reasons “against broader use” of this global currency. It does, however, fit their policies if “economic rationale for broader use” are implemented. Broader use provides the IMF with more power and more control.
In the second paragraph it is an introduction of the new layers and uses for the SDR. This one global unit of account needs definition and variety in order to be used in multiple ways. Apparently you can’t use the same unit of account at the international level as a person would use on investing platforms, like the bond market. This note sets out some initial considerations on this matter. The note sketches some key issues bearing on the role of the SDR in each of three concepts: (i) the official SDR, or “O-SDR”, the composite reserve asset issued and administered by the IMF; (ii) SDR-denominated financial market instruments, or “M-SDRs,” which could be both issued and held by any parties; and (iii) the SDR as a unit of account. It appears there will be three different SDR units of account – the original SDR, O-SDR and the M-SDR.
Let’s take a look at the words used by the IMF to describe the M-SDR. This is the one, or so it appears, they are considering issuing on a much broader range to attract a more acceptance around the world as a global denominated financial market instruments. I am not saying this is the case, but if we read the words the IMF uses we can see what they have in mind. (ii) SDR-denominated financial market instruments, or “M-SDRs,” which could be both issued and held by any parties; “denominated financial market instruments” I may be wrong but that sounds like a currency or “unit of account”. The fact the word “instruments” is plural is significant. Every single word has purpose and meaning in these documents. It is not an accident this particular word is plural – how many varieties of the M-SDR will be issued? The IMF goes on to explain who can issue and who can use this new denominated financial market instruments – “could be both issued and held by any parties“. The M-SDR could address a host of issues, caused by the banks, to stabilize global markets during the time of transition away from the reserve currency system.
The dollar is going to change. Once these policies are implemented we may see a whole new dollar issued. How this will affect the value of the dollar is, for me, the real question. The changes that are on the table are a direct shot at the U.S. dollar. It has been explained to me, by someone I hold in very high regard, these changes will not effect the bond market. With all due respect, I have to disagree. The Chinese are currently doing their level best to issue an SDR Bond issued through China. This would replace a great many, if not all, the U.S. bonds held around the world for global transactions.