Monday, July 18, 2016

IMF to Study SDR Denominated Assets that Could be "Held by any Parties"

Recently, the IMF released this Report of the Managing Director (Christine Lagarde) to the IMF Board of Governors. The report is done by the Managing Director to make a recommendation "relating to a general allocation or cancellation of Special Drawing Rights (SDRs).



Regular readers here understand what SDRs are, but if you are new to this blog you may want to look over this page of articles on the subject of the SDR. In this report, I want to focus on just one item (#27) on page 15 of the report. Below I have pasted in this item (#27) and further below I have added some comments.

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27. A forthcoming Board paper will look into the evolution of the SDR and its potential future role in addressing some of the IMS’s vulnerabilities. In particular, the paper will analyze if greater use of the SDR—including SDR-denominated assets, which could be both issued and held by any parties—could help reduce global imbalances and mitigate the impact of financial market volatility. The outcome of this discussion could result in proposals to modify the existing framework set forth in the Fund’s Articles of Agreement for general SDR allocations or cancellations. The paper will also review whether there is scope for the SDR to strengthen the capacity of the GFSN (Global Financial Safety Net), complementing other work streams, including on the Fund’s lending facilities. 

(I added the underlines for emphasis)

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My added comments: Item #27 above caught my attention for a couple of reasons. First, we watch for any signs here that any kind of expanded role for the SDR is in progress. Secondly, we are interested in anything that may suggest that it is possible for the SDR to become a global reserve currency that regular citizens can own and not just banking entities and governments.

The paragraph above clearly indicates that the IMF is ready to begin doing research on how the role for the SDR might be expanded "including SDR-denominated assets, which could be both issued and held by any parties." We have already covered the fact that China has interest in expanding the role of the SDR including possibly issuing SDR denominated bonds. Now we have confirmation directly from the IMF that they are interested in looking at an expanded role for the SDR as well. 

A question that arises for me is: Who are the "any parties" they mention that might be able to hold SDR denominated assets? 

Are they only talking about banking and governmental entities that Jim Rickards talks about in this twitter conversation we had recently? 

Or could this mean that the IMF would consider allowing "any parties" (like you and I) to some day hold SDRs? 

I asked Dr. Warren Coats (former Chief of the SDR Operations Division at IMF) for this thoughts on this question and he clarified it for us perfectly. Here are his direct comments on it provided to me by email (underlines were added by me):


"The Managing Director’s reference to “SDR-denominated assets, which could be both issued and held by any parties” clearly refer to private SDRs, that is SDR denominated assets and liabilities created in the private sector.  These would be attractive to cross border transactors wanting to invest in or borrow instruments with more stable exchange value and to those trading commodities such as oil internationally, especially if those commodities are priced in SDRs. The IMF would not be directly involved and would have no control over private SDRs, but their development and proliferation would promote and facilitate the demand for and use of the IMF’s own SDR reserve asset. Thus the IMF is hopefully interested in encouraging the development of private SDRs."


Adding some intrigue to all this are some recent comments by Willem Middelkoop on his twitter feed here and here and here where he says he has been made aware of a plan to expand the role of the SDR "on China's request." These comments were made on his twitter feed shortly after he gave me this quote by email to use here for an earlier blog article:

"On a side note; Russia and Chinese leaders met twice during last week and called (again) for an end to the current (dollar-)system. From my contacts with Chinese insiders I know they really understand our problems well and are clearly preparing for The Next Phase (a monetary and geopolitical reset) "


Jim Rickards told me by email he will be watching the G20 meeting this fall in China to see what they may propose for ways to expand the role of the SDR.  We covered that in a recent blog article here.

We do also know that the BIS (Bank for International Settlements) uses the SDR for its unit of account already (since 2003) as we noted in this blog article

Clearly, something is going on related to some kind of expanded role for the SDR. It's hard to tell from all this if anything is likely to surface any time soon though or not. The IMF report implies that the IMF is just now starting a research paper on the idea which we assume would take some time to complete. We now know from Dr. Coats explanation above that IMF may be pursuing the idea of encouraging "private SDRs" (which are different from the reserve SDRs used within the IMF). 

We have a number of very high credibility sources who are telling us that a bigger future role for the SDR may be coming. However, one of my most reliable sources recently told me to expect change to "move at a snail's pace" due to a lack of political will for major changes. Until we get more information, all we can do is report what we find (as we have here) and continue to follow events to see what actually does happen.

Added note: Because of the excellent information provided above by Dr. Coats for this article I will add this article to our page of articles on SDR's. A thank you to Dr. Coats for taking time to provide his comments on this for us. SDRs are a new concept for most people and the idea of "private SDRs" is even less well known and understood. Please note Dr. Coats explanation of the difference between private SDRs and IMF reserve SDRs above (see pages 168-170 for more on this)


Additional added note: I received the following request from Robert Pringle related to efforts to reform the current monetary system:

"The first and  biggest challenge facing us reformers is to show that the financial /trade crisis of 2008 and the subsequent great recession were caused  by - or can be traced back to - faults in the international monetary system. So it would be tremendously valuable if in the course of your reading and review of papers appearing on the internet you could continue to flag any that related to that issue."

Mr. Pringle went on to tell me that he feels it is important to establish a link between faults in the monetary system and the 2008 financial crisis before trying to propose any specific reforms to the system (SDRs,gold,etc). Policy makers have to believe reforms are needed for any changes to move forward. Right now, all the available evidence I have suggests that Western policy makers do not see any urgent need to reform the present system.

So, if readers here see any credible information that fits the description Mr. Pringle gives above (faults in the monetary system being a cause for the 2008 crisis), just let me know and I will forward it on to him.

Thank you: To Jim Rickards, Willem Middelkoop, and Dan Popescu for a retweet link to this article on their Twitter feeds. Helps a lot with broader distribution.

Added update 7-24-16: IMF announces more details of its study on broader use for the SDR here and here. Also explains the different types of SDRs (as Dr. Coats also explained above). The IMF also recently released a video on basics of the SDR, perhaps in expectation of increased public interest?

14 comments:

  1. "...private SDRs, that is SDR denominated assets and liabilities created in the private sector."
    Misleading! Shouldn't it say: Private assets denominated in SDRs created by the IMF. Such are not private SDRs! The idea of Google et al. creating SDRs is a wet dream only.
    And what a wonderful store of value these SDRs will be... depending on the printing presses of all participating currencies and the IMF, a centrally governed body. Why not separate store of value function and medium of exchange function and let them both float?

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    1. Dr. Coats was Head of the SDR Operations Division and I am confident he knows what he is talking about in regards to private SDRs. Here another article that explains the difference between official SDR reserves (created by IMF) and private SDRs (assets based on the value of the SDR rather than a national currency) if you are interested in looking at it (see pages 168-170 in particular):

      http://www.bis.org/publ/bppdf/bispap58h.pdf

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    2. They are talking about official SDRs used in a private market outside the framework of the IMF. So there are no private SDRs. Only official SDRs used in the private sector. In a tiny part of the private sector. And there is a reason why the SDRs are not very popular and never have been: Like the $ they are, if used as a reserve currency, subject to Triffin's dilemma and need to be inflated to serve their purpose but an inflating reserve currency cannot be stable. Say hello to bubbles and busts and eventually to worthless paper. There is also a political dilemma between the owner of a printing press and the IMF. Look at the EU! Same dilemma: interest of all versus interest of one country.
      SDRs are a non solution! We need the separation of SOV and MOE. IMO.

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  2. I like your information which is very useful for me. Thanks.

    San Francisco Currency Exchange

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  3. Glad to see some comments on this. Perhaps this from the NY Fed will help explain the difference between official SDRs and private SDRs:

    https://www.newyorkfed.org/medialibrary/media/research/quarterly_review/1981v6/v6n4article5.pdf

    Quote from the above link (dated 1981):

    from page 29: "The official and private SDR are two distinct instruments. The official SDR is the creation of the IMF and is governed by the rules of that institution."

    from page 30:

    "Like the official SDR, the private or commercial SDR is composed of the same five currencies in the same proportions (as of 1981 when this article was written) . . . . But whereas the official SDR exists almost entirely within the framework of the IMF, the private SDR is used in the international financial markets. Instead of being governed by the rules of the IMF, the private SDR is subject to the conventions of the marketplace. Any party may hold a private claim denominated in SDRs. The main difference is that the claim will not be treated as an SDR by the IMF. This means the IMF will not exchange the claim for currency--that is the responsibility of the issuer."

    I believe this explanation from the NY Fed is consistent with the private SDR as described by Dr. Coats. One is recognized officially by the IMF, the other isn't. The private SDR simply uses the SDR currency basket to derive its valuation and exchange rate back into national currencies. The IMF is not involved in issuing these SDRs nor will they exchange them for national currencies. Official SDRs can ONLY be issued by the IMF under IMF regulations.

    I appreciate your comments and understand your concerns with converting to the official SDR as global reserve currency. Many critics believe it could lead to uncontrolled issuance of such a currency. Dr. Coats also has concerns about that which is why he proposed using a Currency Board operating under strict rules if the SDR were to be used as the global reserve currency. The topic is more complex than many people present it in my view which is why I encourage people to actually read the various proposals for monetary system change (like Dr. Coats Real SDR Currency Board for example) before forming an opinion on what they feel would work best. It may not change your view, but I think its worth the time to understand the various proposals out there. I give some examples here:

    http://lonestarwhitehouse.blogspot.com/2016/06/monetary-system-reform-various-ideas.html

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    1. Thank you Larry, this may surprise you: we already have a new monetary system!
      It's in the shadows of a world currency at the end of its life line. In the works since 1962 the euro today is a floating currency that has severed its link to the nation state and to gold as well. It was designed to weather the storm of the dying hyperinflating dollar and is already marked to market.
      Here, the euro solved TWO problems. 1. It severed its link to the wealth reserve function of money. And 2. it severed its link to the Triffin Dilemma.
      So what do you think will happen, if the ECB bids for gold as a last resort?
      As the gold price rises, the euro's monetary reserve assets rise in both value and confidence. Please take your time to make sure you understand how the balance sheet of the ECB is structured AND WHY. Store of value function and medium of exchange function are separated for a reason: When a single medium is used as both store of value and medium of exchange it leads to a conflict between debtors and savers.
      If you denominate both transactions and savings in paper currency not only will savings be inflated away, eventually both will be wiped out on the dollar's collapse.
      Not so with the € structure! Now please substitute paper currencies with SDRs.
      Transacting in SDRs (paper) will work fabulously well. But can you see that saving in SDRs won't work and NEVER WILL? That SDRs or any paper currencies for that matter are not a viable global solution for the savings of the people? The experts may come up with amazing concepts and plans of a new and just monetary system. What they conveniently forget is this: the euro makers had a plan and a vision, too. You will see it as soon as the dollar dies! Golden times are awaiting!

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    2. Thank you. Always appreciate interesting comments. If you have any links related to the information you mentioned please feel free to post those so anyone can view them if they would like to. I have also gotten some emails from some readers on the concept that the Euro is marked to market for gold whereas the US has not done that --- Yet.

      The concept of allowing gold to revalue higher to help stabilize the system is definitely one I see out there as a viable idea to consider as possible in the future.

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  4. If I understand what anonymous is saying, the Euro store of value is backed by gold, but the transactional function is paper/digital.

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    1. Thanks Doug. I have had email comments from other readers along the same lines as anonymous. I am happy to have them post links for more information on this view if they so desire. One thing that is helpful is if people can provide links that support that the concept they are talking about can realistically be achieved. Unless there is some kind of secret plan that I am not aware of any proposals for monetary system change are likely to come from the IMF, BIS, etc. because those are the institutions currently in charge.

      If things change in the future and those organizations are not the agents for change, that would be great information to know about. But it helps to have links to a credible information source that supports that.

      For example, I have many readers who believe we will return to a gold standard in the future. I don't rule that out as possible, but right now I find no proposal on the table at any institution that is currently in charge to return to a gold standard. In fact, the best information I have right now is that there is no momentum to change the current system at all to anything very different than what we have now. This is why I think another major crisis would have to unfold for things to change much any time soon. Under major crisis conditions, things could certainly change quickly so I do watch for that.

      I tend to focus on the proposals for change that more likely to actually be implemented as things stand right now. But if there is verifiable information that a return to the gold standard is being planned by monetary officials for example, I am happy to see links to that posted here for readers to know about. Sometimes I see some things along those lines out of China, but not from the PBOC or any official body in China so far. No western official that I know of has made any such proposal and as best I can tell US official are quite happy with the current US dollar based system. There is also a "free gold" view that takes the view that gold will revalue to stabilize things whether we get an official gold standard again or not. I don't dismiss that as being possible, but there is no official proposal that I know of right now to revalue gold higher. Of course, the marketplace can do that on its own regardless of what officials may propose. I just try to follow events and see what actually happens.

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    2. Hi Doug,
      the euro store of value is an asset. That's the critical observation. The more paper is printed (and devalued) the more the value of the asset is increased, in this case gold. The sheet remains balanced.
      Now think of all CBs using the ECB-structure, all countries with their own currencies or one universal currency; the point is the political and fiscal discipline formerly experienced only under the strict gold standard is now baked into the structure of the euro and money printing will not tip the balance as long as the asset(s) is/are marked to market (mtm). Gold as an asset is superior to every other asset for only two reasons: 1) it has (nearly) no industrial use. Therefore there is no industrial demand that could change the dynamics of supply and demand! With stable supply and stable demand, it will be the most stable asset. 2) It already sits on the balance sheets of most CBs, mainly as a reinsurance against a loss of confidence. In this case it could be revalued higher to restore the confidence of the populace while restoring the solvency of the nation.
      So can you see how the new monetary system is already here? We just cannot see it yet. At least most of us. The dollar system cannot be saved and once a final crisis of confidence is killing the dollar the ECB will bid for gold and its structure will be expanded to other CBs and take over.

      That's it from me. Bye.

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    3. Thanks anonymous for the more detailed explanation. Correct me if I am wrong, but I think this is the basic idea behind the "free gold" concept I mentioned above. I will certainly continue to follow events and see how all this turns out (assuming we get a final resolution in my lifetime :-). I'm 60 years old. Many people feel the present system is not sustainable for too much longer (less than 5 years). Well see what happens.

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    4. What most people don't get about "Freegold" is that it isn't a concept anymore. The Euro exists. The ECB balance sheet is designed for an asset standard and works just fine! It's no longer a theory that could work some day. It's live!
      So if you're looking for facts, I just gave them to you. The existence of the SHFE alone should ring a bell. Why trade physical gold if it's useless?
      Why create a gold contract size of 1g, if you do not plan to revalue it a lot higher? Why building vaults for phys. AU all over the world? For allocated gold or for unallocated precious metals in an asset standard world? Facts!
      But they have to act in secret. They have to fake and obscure their actions to sidetrack the masses. And SDRs are such a sidetrack. Anyway.
      I thank you for reading my stuff and I thank brilliant FOFOA for giving me an extra lens for viewing reality. If you want to read one of his best essays about SDRs, you will find him here:
      fofoa.blogspot.com/2013/10/special-drawing-rights.html

      Have a nice day.

      P.S. I guess, we should watch 09/30/2016 very closely... ;-) Just a guess.

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    5. Thank you for the additional comments and the link. Readers can look at the link to gain more information. I note this in your comments:

      "But they have to act in secret. They have to fake and obscure their actions to sidetrack the masses."

      This is what I mean about it being hard to verify. If this is true and some kind of secret plan is underway, it's hard for the average person to verify this other than by looking at the kind of circumstantial evidence you mentioned. At this point no current monetary officials have confirmed such a plan exists as far as I know although many rumors do exist along these lines.

      However, that does not mean it does not exist (since it would be secret if it did exist). Time will tell us as events unfold and that is what we watch for here. Your comments are appreciated and the link is welcome so that readers can read the information for themselves and form their own opinions. And we will watch for any significant events that might take place around 9-30-2016 since you mention that date.

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  5. http://www.swfinstitute.org/research/reformcurrencychina.php
    Bancor suits better after dollar

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