SDR #28 – The Magic Seven

Time to get back to the SDR theme. 2015 is anticpated to be a year of major change for the composition, convertability and use of the SDR.

When Managing Director of the International Monetary Fund Christine Lagarde gave the speech last year where she mentioned the number 7 numerous times, the internet caught fire with theories and analysis of what exactly was meant by the term “magic seven”. Contrary to popular opinion, it had very little to do with the occult, and more to do with the forthcoming composition changes to the SDR valuation.

The move away from the USD as the primary reserve currency used in the global financial system will be the largest change and transition in how the world functions in most of our lifetimes. The balance of payments system which supports the United States dollar is stricken with imbalances, as presented in the Triffin Paradox.

For the SDR to gain legitimacy as a global unit of account, the composition of the basket has to be expanded to include a more balanced representation from the largest economies. It is debatable whether China is now the largest economy on Earth, or the second largest, but either way the inclusion of the Chinese currency, RMB, in the SDR composition later this year is widely accepted as inevitable.

There are two possible meetings where this might get publically discussed/announced. The World Bank Spring Meeting from April 17-19 in Washington, DC or the World Bank Annual Meeting from October 9-11 in Lima, Peru.

The RMB is the seventh most traded currency in the world. So we can expect that if the SDR is going to include the Chinese currency, all which come before it will also be added to the basket as well.

There are a few metrics and standards which we can reference to define the top seven currencies in the world. For our purposes here, we will use the data of the Bank for International Settlements, as measured and segmented into the following categories:

• International Debt Securities – Currency Composition
• Global Foreign Exchange Market Turnover – Currency Composition
• Global Foreign Exchange Derivatives Market Turnover – Currency Composition
• Exports and Financial Inflows – Exporters

In all categories the following seven currencies dominate the top positions:

1. USD – United States dollar
2. EUR – European Union euro
3. YEN – Japanese yen
4. GBP – Great Britain pound
5. CHF – Swiss franc
6. CAD – Canadian dollar
7. RMB – Chinese yuan

The top 4 make up the current composition of the SDR. With all the hype surrounding the RMB, and its internationalization for inclusion into the Special Drawing Right, the remaining 2 currencies have somewhat been forgotten.

The article below is worth a read, if you are a SDR junkee. I only wish I knew what the SDR changes meant for me, as an individual. Maybe nothing or will it be some inflation (declining $Cdn) or more deflation (rising demand for $Cdn)?

SDR #27 – No One Saw It Coming !?

My last SDR post was somewhat premature !? On 12 Dec this happened !

The year is coming to an end and as expected the 2010 IMF Quota and Governance Reforms have not been passed through the US Congress. True to her word, Christine Lagarde has been quick to respond to the lack of movement on the reforms and has issued a press release.

Things will now begin to escalate across a broad spectrum, with instability in the USD expanding and global stock markets adjusting dramatically. We can also likely expect increases in the valuations of gold as the liquidity crisis deepens and global money seeks liquidity outside of the dollar. The propaganda promoting US instability will increase internationally and the script stating alternative sources of liquidity must be utilized will begin to be distributed to global media outlets.

Even more talk about oil being sold/valued in SDRs !?

With the recent drop in oil prices and the inevitable fragmentation of OPEC, the instability theme is being built on so when the time comes the acceptance of oil and other commodities being denominated in SDR’s will not be challenged.

Everywhere a dollar based institution has been established will see change as the system transitions and the multilateral emerges. By July, 2015, the renminbi will be added to the SDR basket composition and from that moment SDR bonds will begin to re-liquify the international financial system… The current deflation of commodities will be temporary and the new SDR commodities exchange will “correct” the imbalances in the system.

As the QE policies of central banks handled the exchange of low liquidity bonds from charter banks back to the balance sheets of the central banks themselves, the SDR bond system will orchestrate a sort of QE in reverse as the central banks exchange the low liquidity assets on their balance sheets for SDR assets, which will be considered high liquidity assets.

They will say no one saw it coming.

SDR #26 – The Death of Money

We are not hearing very much news on the IMF front. We have heard in 2014 of the IMF making a special “SDR valued” loan to the Ukraine and we know that in 2015 decisions will be made around the SDR basket, potential changes to SDR quotas, etc. The last round of SDR quota changes however still remain blocked by the effective veto vote of the US. I suspect there is a lot of behind the closed door work going on ?!

To keep us aware of where the SDR fits in the hierarchy of money this is an interesting interview on financial sense with Jim Rickards from April 2014.

“Sovereign banks bailed out the private sector, but now who’s going to bail out the sovereign banks because they are all—all the major ones anyway—are insolvent now on a mark-to-market basis. Well, who’s bigger than a sovereign? The answer is the IMF.”

“This is not well-known, but they have a printing press also. They can print special drawing rights, so-called SDRs… Just to be clear: you and I are not going to have SDRs in our pockets. We’re still going to have US dollars. It’s just that the dollar will cease to function as the global reserve currency. It will be a local currency…but it won’t be used for the big things [like]…the price of oil, settlement and balance of payments between countries, rescue packages, and probably the financial statements of the hundred largest corporations, [which]…in the not too distant future they’ll actually publish their financial results in SDRs, not in dollars.”

“People use the phrase, ‘kick the can down the road’…it’s more like kicking the can upstairs. So, going from private debt to a sovereign debt bailout was kicking the can upstairs… And the reason is that the central banks used up their balance sheets—used up their capacity—to deal with the last crisis. So they’ve got nothing left to deal with in the next crisis. So it’s going to have to go to the IMF because they have the only clean balance sheet left in the world. Just to give you a concrete example…the Fed is leveraged 80:1. The IMF is only leveraged 3:1, which means the IMF has a lot of headroom to issue new money and they will. I’ve had private conversations with senior people and they say they will do it.”

“What the elites are trying to do is they’re trying to engineer higher inflation to make the debt worth less, keep a lid on interest rates so they don’t get even more debt on top of it, rob the savers—do it through the banking the system—and print the money at the IMF. So it’s all kind of one big thing that they’re working on…again this is not speculation, there are academic papers on financial repression, there are official IMF papers on SDRs. This is all out there and I’ve researched it and put it all in The Death of Money.”

So what do you think the future holds for the US Dollar and SDR ?