Monday, April 21, 2014

Future of the IMF in Question?

Here is an interesting article written by Russian economist Valentin Katasonov about the current situation at the IMF and its future. The article is titled "The International Montary Fund might not live to see its anniversary".

We have tracked the stalled IMF reforms here on this blog and noted how we think this issue is important in relation to the potential for coming monetary system change. For major change to come from within the IMF, it has to be seen as a major global player. The inabililty to get the reforms passed has cast doubt on the IMF around the world.

We have also covered the growing frustration of the BRIC nations over all this. They expected these reforms to pass way back in 2012 and that by now another round of reforms would be coming that would continue to increase their influence within the IMF. Instead, here we are in 2014 and no reforms have been approved by the US (which holds veto power at the IMF). And prospects for approval seem dim during this election year.

Recently the BRIC nations issued a statement giving the US until the end of this year to approve the reforms. Included in that statement was the threat that if the approval is not done this year, it would be time to take steps to bypass the US and IMF and move on with other institutions. The BRIC nations have been steadily working on those institutions in what I call "Plan B" all along.

Until recently, we have not been given much insight into the details of these plans or any possible timing for implementation. But now we have articles appearing that indicate that in 2015 they will be ready to start moving forward without the IMF if that is what is required.

This article is interesting because it is written from the Russian point of view so you get to see how they think about all this. In addition, the article re-confirms the 2015 target date for the new BRIC led global financial institutions and that significant funding is being discussed to start up the bank. It lists two options for the BRICs including this one:

"Some believe that a kind of revolution could soon occur in the IMF: a decision on reforming the fund will have to be made without U.S. participation... But formally the Fund's charter in the form it has had since the Jamaica Conference in 1976 will not permit this. Such a revolution will in fact mean not a reformation of the IMF, but the creation of a new organization with a new charter on its foundation - and without the U.S."

Since the IMF charter will not allow a "revolution from within the IMF" the article then goes on to discuss the second option:

"There is one more possible option. It is already fairly well worked out and has every chance of success. This is the Currency Pool (Currency Reserves Pool) and the Development Bank of the BRICS countries. The main decision to create these organizations was made at the meeting of BRICS countries on the eve of the G20 summit in St. Petersburg in September 2013. The BRICS Currency Pool and Development Bank will have capitalization of 100 billion dollars each. Operation is planned to start in 2015. Currently such questions as the schedule of capital formation, the shares (quotas) of individual countries, and the location of the headquarters of both organizations are being decided. These international organizations of the BRICS countries could become crystallization points which attract other countries to themselves. Who knows: maybe in time they could become financial organization which could replace the International Monetary Fund and the World Bank."

"As we can see, in both options for getting out of the current dead end, the IMF has no place in the new world financial order."

It is pretty hard to miss the point being made in this article. This is a direct threat being issued to the US/IMF. Either give us what we want within the IMF or we are going to walk and be up and running by 2015 with our own system.

This would, of course, have huge implications for what we are following on this blog. If the US dollar continues to get bypassed in global trade deals and especially energy deals , it will be a key signal to us that change is at hand. If the petrodollar comes to an end, demand for US dollars around the world will drop sharply. The value of the US dollar will be impacted significantly.

It is looking more and more like the end of 2014 is a real deadline because the BRIC nations are taking actual concrete steps to setup their own system. They have the capital to fund it. Nations around the world that need access to capital will then have a new alternative to the IMF and the World Bank. This would introduce something new to the global financial system. Competition. The IMF and World Bank would no longer be able to dictate terms to countries they loan money to. Those countries could seek out a better deal from the new kid on the block (the BRIC bank).

We are convinced this is the real story to follow over the next couple of years. How this is resolved will likely tell us what to expect in terms of major monetary system change and its impact on the value of the US dollar as world reserve currency. Something that will impact the entire world one way or another.

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