Monday, November 2, 2015

Former UN Official: A Special Moment for SDR's?

In a recent article on Project Syndicate, former UN Under Secretary Jose Antonio Ocampo says he thinks it may be time for the SDR (Special Drawing Right) used at the IMF to take on a more prominent role in the global monetary system. Obviously, if this were to happen, it would be a key event of the type we watch for here. Below are some key quotes from the article and then some added comments.


. . . . . . . 

"The only way to stabilize the system would thus be to place a truly global currency at its center. This was the idea behind John Maynard Keynes’s proposal in the 1940s to create a supranational currency, called the “bancor.” And it was the motivation behind the 1969 creation of the IMF’s Special Drawing Right (SDR), which was supposed to become “the principle reserve asset in the international monetary system.”

. . . . . . .

"The SDR has been in the news again lately, owing to debate about whether the IMF should add the Chinese renminbi to the basket of currencies that determine the unit’s value. Given the renminbi’s growing international role, it seems abundantly obvious that the currency should be part of the SDR basket. Now, the discussion should focus on how to enable the SDR to reach its potential as an instrument of international cooperation."

"The first step toward making SDRs a more active force in global finance would be to remove the division between SDR accounts and normal IMF operations. As long as that partition remains in place, SDRs will function, at best, like a credit line that can be used unconditionally by the holder – a kind of overdraft facility, not a true reserve asset."

. . . . . .   "With emerging and developing economies in deepening trouble, there is no time to waste. Some five decades after Triffin first identified the problems with the US dollar’s reserve-currency status, the SDR’s moment has, one hopes, finally arrived."

My added comments:

Readers here will recognize that this article contains several key points that relate to a potential major change in the global monetary system that we have talked about over the past two years. Here is a bullet point list:

- the article talks about a "truly global currency" and references the Bancor concept from John Maynard Keynes as a "supranational currency." This is not a new idea as we wrote here on the blog in early 2014

- the article calls for a significant increase in SDR's - "issuing more SDR's would enable the IMF to finance more lending"

- the article talks about a change in the rules governing the use of the IMF - "remove the division between the SDR accounts and normal IMF operations"

- the article talks about a change in the formula for the way SDR's are allocated (in line with the 2010 IMF governance reforms giving more power to emerging nations)

-the article says now is the time for the discussion to focus on "how to enable the SDR to reach its potential as an instrument of international cooperation"

All of these points are significant in relation to the SDR taking a more prominent role in the global monetary system. Anything that increases the number of SDR's and also changes the rules at the IMF regarding how SDR's can be used is important in moving towards major changes in the monetary system. We have written a number of blog articles on the SDR and its potential for an increased role in a future global monetary system which you can find here.

Long time readers here know that these are not new ideas and have been talked about for a long time. This article suggests that for some reason the time may be at hand for the SDR to take on a more prominent role. However, we continue to see no indication that these kinds of changes are imminent unless we do see another major global financial crisis unfold. Absent a crisis, there is no urgency at the present time that we can see for the SDR to take on this new more prominent role. 

The US Congress is controlled by those who do not view a global currency as anything they are interested in. There is nothing on the political horizon in the US to suggest that control of the US Congress will change any time soon. For the SDR to take on the more prominent role talked about in this article, the US (including the US Congress) would have to be completely behind it.The BRICS nations often talk about bypassing the US at the IMF, but nothing ever comes of that talk. Instead, they seem to just move slowly forward with their own institutions (the BRICS Development Bank and the AIIB). 

We will continue to monitor this issue of course. Readers here know that Jim Rickards has long forecasted that the SDR will take on a more prominent role in the future and this article supports that view. But Jim Rickards sees this happening as the result of a new global financial crisis. Until and unless such a crisis arrives, we don't expect to see any major changes like this unfold over the short to medium term for the SDR. Instead, we would see these changes unfolding over the much longer term (years to decades) if no major crisis unfolds.

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