SDR #25 – World Money

Some thoughts by Jim Rickards on “world money”.

US dollar should be strong but the FED depreciates it on an ongoing basis.
SDRs will be issued again by the IMF (US controlled) when a liquidity crisis happens because the FED is too overleveraged to do it again with US dollars.
SDRs that are gold backed as opposed to being backed by nothing (like the US dollar) is his preference although the original world money concept of a BANCOR had a larger commodity basket backing (that included gold).
SDRs are not money people will be carrying around.

Be defensive ! Do you understand the threat ??! I think all this means we should have some investments in commodities like oil, gold, potash, uranium, etc ???!

SDR #24 – US Foreign Exchange Stabilization Fund

Yes SDRs make up approximately 54% of the US Foreign Exchange Stabilization Fund Assets. I guess we all know that a SDR is a global reserve asset !? Right up there with US Dollars, Euro, Japanese Yen and British Pounds ?!

SDR1

But what about the liability side of the balance sheet ? IMF SDR Allocations are only a liability if the US were to leave the IMF and have to give them back. What are the odds of that happening ? Then there are those SDR Certificates. That is where the US Treasury hands over a SDR certificate to the FED and they get US cash in exchange. A pure monetization activity as normally the US Treasury would issue a US Bond in exchange for US Cash from the FED.

Of course there is this other IMF rule not accounted for that original IMF members can always cash in their original gold quota at the original price ! So the SDR Allocations liability really needs to be reduced by the market value of the US gold (less the original $35/ounze value) held by the IMF and which can be purchased back by the US at anytime, at the original price.

Just for fun let’s also dig up those US gold and silver reserves (held elsewhere at the US Treasury) and add them to the mix. The market price of gold was $1207.60/oz and silver $19.54/oz on 31 Dec13. When we do this we see that Gold makes up approximately 75% of US foreign exchange assets and SDRs get reduced to approximately 13% of the assets.

SDR2

Why would the US Treasury not count it’s gold/silver as part of this fund ?

I think our Perry class taught us that the US government pulled a “fast one” during the Civil War by taking all the gold from the US banking system and using it to fund their foreign trade, thus leaving the domestic USA to operate with a purely fiat currency.

Maybe those Euro dollars (US dollars outside the USA) will one day be backed by gold !?

http://www.treasury.gov/resource-center/international/ESF/Pages/finances.aspx

SDR #23 – Should the Euro Be the SDR of Europe ?

Steve Keen made a few observations on the Euro back in July 2012 that I must have missed.

http://www.debtdeflation.com/blogs/2012/07/26/the-euro-as-the-sdr-of-europe/

I would have to agree with him that:

The Euro is the national currency of a country that does not exist. Though there is a continent of Europe, as there is of America, there has never been a country of the United States of Europe, and there probably never will be. The Euro is therefore not a currency as is the American dollar, and yet it is forced to masquerade as one—badly—by the Maastricht Treaty, in which the countries of Europe abandoned the right to produce their own genuine national currencies”

However his concept that the Euro should stay as the SDR of Europe and that the national currencies get re-invented for domestic use probably needs alittle work ?

The Euro could be the cur­rency of inter-European and inter­na­tional trade, while “sub-Euros” cre­ated by each of the nations of Europe could be used for domes­tic trade and, impor­tantly, domes­tic finan­cial arrange­ments. The dis­ci­pli­nary aspects of Maastricht—which are cur­rently inap­pro­pri­ately directed at gov­ern­ment deficits and are ampli­fy­ing the downturn—would then be redi­rected at trade deficits within Europe instead (and matched by pres­sures to min­i­mize intra-European trade sur­pluses as well).

The Euro-Drachma, Euro-Peso and Euro-Mark could be intro­duced at one-to-one par­ity with the Euro, and all finan­cial assets and lia­bil­i­ties would be denom­i­nated in these national cur­ren­cies rather than the Euro. These national cur­ren­cies would then float freely for a period (say one year), after which they would be fixed in pro­por­tion to the Euro.

The obvi­ous deval­u­a­tion that would occur for the Euro-Drachma and Euro-Peseta would reduce their for­eign debts—and force the nations whose banks over-lent to them to deal with the con­se­quences. It would also end the cur­rency flight that is cur­rently occur­ring: a Euro-drachma would still be a Euro-Drachma, whether it resided in a Greek or Ger­man bank account.

The intro­duc­tion of such a sys­tem could pro­vide a rapid res­o­lu­tion to the cur­rent cri­sis. It could not be pain free, but it would be dif­fi­cult to imag­ine that it would impose more pain than is cur­rently being felt by Greece and Spain, or is about to be felt by other coun­tries once the con­ta­gion passes on to them.

If we set his system up I am guessing that a good Euro Allocation (like a SDR allocation) would go a long way to help in the adjustment process !

See my previous post.

http://overthepeak.com/wordpress/archives/4839