De-Dollarization is Now Assured – SDR Bonds Have Been Approved
This just hit the wire and confirms what we have been discussing for the past couple of weeks. The World Bank (International Bank for Reconstruction and Development, IBRD) has approved the People’s Bank of China to issue the SDR Bond. This is a major first step in delivering a realistic blow to the dominance of the U.S. dollar as world reserve currency. It is no secret that China has been making international moves to make the Renminbi (RMB) a more attractive currency on the global stage. This latest move solidifies the RMB as a world currency.
There has not yet been set a launch date for the first issuance of this new SDR Bond, however, in previous communiques there has been discussion to launch as soon as the end of August.
A lot of you are probably thinking “big deal, who cares”. Well, once this bond reaches it’s 3rd, 4th issuance and the demand begins to grow the impact this will have on U.S. Treasuries could be significant. The United States is the largest debtor nation in the history of the world and the U.S. Treasuries are the financial instrument that creates and maintains that debt. Once all these U.S. Treasuries begin flowing back into the U.S. economy that has the potential to create a lot more inflation that we are currently experiencing. That is merely one aspect of the overall. So, yes, it’s a big deal.
One of the main characteristics of this new SDR Bond is it will be issued in SDRs and redeemable in Renminbi (Yuan). The significants of this can not be overstated. This means that an investor in America who purchases the new SDR Bond will now have exposure to the RMB and hold fewer dollars in their portfolio. These investors can then use those SDR Bonds as collateral to make other purchases. The renminbi will now be on a level playing field as the other currencies that make up the SDR Basket of currencies. Currently the SDR Basket of currencies is made up of US dollars, Euro, Japanese Yen, British Pound Stirling and as of October 1, 2016 the Chinese Renminbi.
This is a big deal and has the potential to forever change the U.S. dollar and the bond market. Nay-sayers will be quick to point out these bonds were tried in the past. While that is true, the economic times were not as they are today.
As Eric Dubin, The News Doctors, described the beginning phases of this new bond “will be like flicking grains of rice into the bond market“. While I wholeheartedly agree with this sentiment, over the coming months and years the impact will be very real. As the AIIB, BRICS Bank, New Development Bank, PBOC and other banks around the world begin, in earnest, to convert their bond holdings to the SDR Bond the market will begin evolving and once it reaches critical mass the hordes will rush in, just as they always have in the past.
According to World Bank
The size of the World Bank’s new issuance program is 2 billion SDRs (approximately equivalent to USD 2.8 billion). The bonds will be denominated in SDRs and payable in Chinese renminbi (RMB). The precise timing of issue and individual bond terms will be based on market conditions at the time of issuance.
During the 1970’s we did not have Quantitative Easing, Zero Interest Rate Policy nor Negative Interest Rate Policies. We also did not have derivatives, nor “too big to fail” banks. So, yes the SDR bonds first appearance was a failure, however, everything has changed and the world looks and acts a lot different than back then.
World Bank explains further
“This is a landmark development for China’s bond market and for the SDR as an international reserve asset,” said World Bank Group President Jim Yong Kim. “We are very pleased to support China’s growing role in global financial markets. World Bank issuance of SDR bonds in China will support the G-20’s objective of expanding the use of SDRs and help promote the development of China’s domestic capital market. It will also increase Chinese investors’ access to foreign currencies in the domestic bond market, while opening up new opportunities for international investors seeking high-quality investment products in the country.”
Since I am a betting man my money is on these bonds being supercharged right out of the gate. My bet is there are nations around the world looking for an alternative to the U.S. Treasury and world reserve currency system. Change has arrived. The dollars days are numbered. How long it will take for the dollar to transform is yet unknown, however, what is known is this – China is on the rise, China has the wealth, the gold and support of the banking cabal around the world. What China also has is more than $1 TRILLION in U.S. Treasuries that she will begin converting to SDR Bonds over the next several months and years. Count on it.