Friday, August 12, 2016

Willem Middelkoop - IMF’s ‘Substitution Fund’ to kick-start SDR as new global currency?

Willem Middelkoop (OMFIF Advisory Board) has published a new article intended as a current update to his book The Big Reset . This is an excellent and well documented piece that traces the history of various proposals to broaden the use of the SDR and also studies that have looked at anchoring the SDR to gold in some way in the past. 

Below are a couple of brief excerpts from the paper and then a few added comments.

"The Big Reset (2013) fully explains the need for a major reform of the world’s financial system. At that time of publication, most people still had no clue what form the unfolding financial endgame would take. A few years further on, and as interest rates have reached a level not seen in 500 years, many are now starting to agree major monetary changes are needed urgently. 

Two major problems need to be addressed. First we will need to find a new anchor for the world’s monetary system, and secondly, worldwide debt restructurings, comparable to debt jubilees in ancient times, have to be arranged. Debt jubilees are still a step too far in the current global mental state, hence full focus is on the structuring of a new anchor.

"Since the outbreak of the financial crisis, the Chinese have pressured the U.S. to change the current dollar-based monetary system. The Chinese, ever more in the driving seat of global finance, have made it very clear that the Special Drawing Rights (SDR or IMF-money) of the IMF is the preferred future international world reserve currency." 

. . . . .

"So there you go, to include a commodity like gold into the SDR as a six currency component could help to make the SDR, more neutral to global cycles and more representative of the shift in economic power witnessed over the last two decades.

The idea of adding gold to the SDR was also studied by professor Catherine Schenk in 2011. According to her study to, ‘re-introduce a role for gold in the international monetary system’ would,  ‘provide a counterweight to the impact of the depreciation/appreciation of the US$’, and could, ‘reduce vulnerability to the USD exchange rate’. (1)

Professor Robert Mundell, a special advisor to the Chinese government, is also in favor of bringing gold back to the monetary system: (9)

‘There could be a kind of Bretton Woods type of gold standard where the price of gold was fixed for central banks and they could use gold as an asset to trade within central banks. The great advantage of that was that gold is nobody’s liability and it can’t be printed. So it has a strength and confidence that people trust. So if you had not just the U.S. but the U.S. and the EU (area) tied together to each other and to gold, gold might be the intermediary and then with the other important currencies like the yen and Chinese Yuan and British pound all tied together as a kind of new SDR, that could be one way the world could move forward on a better monetary system.’    . . . . .  


My added comments: I only selected a couple of brief excerpts from this ten page article because I want to encourage readers to click here and read the full article. With some news expected to be announced at the G20 meeting on broader potential use of the SDR, this is a timely article.

Willem has sources in China that add weight to his statement that China wants to work with the IMF to encourage a gradual move away from the US dollar and towards the SDR as the global reserve currency. His new article has some information on the idea of an  "SDR Substitution Fund" that could exchange US dollars for SDRs. I think readers will find this interesting. Dr. Warren Coats (former Head of the SDR Division at IMF) told me this when he saw a preview draft of this article that Willem provided us:

"These are very interesting developments. My article "Implementing a Real SDR Currency Board" includes a review of the Substitution Account idea. The key issues that Robert (Pringle) and I focus on are the currency (SDR) anchor (what goes in the basket) and the link between the basket and the supply of the currency, I.e., the rules for issuing the currency. I strongly support currency board rules."

Willem also cites credible sources who advise China that support the idea of adding a gold component to anchor the SDR as you can see from the excerpted quote above. Also note the study on this done by Catherine Schenk (2011) documented by Willem in the excerpt above.

This is of interest because official Chinese (and IMF) statements do not mention gold as part of the process of potential monetary system reform using the SDR. However, we do know that China has been rapidly increasing their gold reserves which is circumstantial evidence that they see some kind of important role for gold in a potential future monetary system reset. There has been widespread speculation as to why China is building up their official gold reserves.

I can add that both Willem and Jim Rickards have told me that they expect these kinds of changes we are all watching for to unfold in a gradual process unless we get another major financial crisis. A new crisis could increase the urgency for major changes. Jim Rickards actually calls this "piecemeal engineering" as a way to describe events moving forward in small incremental steps. This is also consistent with what I hear from other credible sources like Dr. Warren Coats and my own research in reading official IMF and Chinese public statements. 

Many credible sources agree that in a new major global crisis the landscape would change and we could anticipate more urgent measures to make major changes more quickly. Any such crisis will be hard to predict in terms of timing (see IMF and BIS warnings here), so the best plan is to stay alert and informed as much as possible.

We will watch the upcoming G20 meeting closely to see what is announced and to see if any clues on the timing of any future moves to broaden use of the SDR turn up. In the July G20 communique (see #12 under Issues for Further Action), they say they look forward to the initial IMF study on this to be released in January 2017. For this reason, I would not expect any dramatic announcements at G20 beyond what we already have been told (see Item #8), but we will keep an eye on it. 

A big thank you to Willem Middelkoop for producing this excellent and well documented article and also to Jim Rickards for giving me his thoughts on what to expect at G20 as well. Also a thank you to Dr. Warren Coats for looking over this article and providing his thoughts. In my opinion, these are all high credibility sources who have been kind enough to share their thoughts with readers here adding important information to our knowledge base on this topic. They do this for no reason other than to try and help me provide good information for anyone who finds this blog and I greatly appreciate it. They give up valuable time in doing this as well. 

Added notes: World Bank today makes this announcement on its issuance of SDR denominated bonds. This is the type of thing Willem is talking about in his article and we watch for here. Here is a brief quote:

"The size of the World Bank’s new issuance program is 2 billion SDRs (approximately equivalent to USD 2.8 billion). The bonds will be denominated in SDRs and payable in Chinese renminbi (RMB)."

Here is Jim Rickards reaction on Twitter to this news from The World Bank.

In this twitter comment Willem Middelkoop confirms what we have said here about the potential timing for all this. We all agree that another major crisis could change the timing.

Dan Popescu adds his comments on the timing for monetary system change

I had the opportunity to do an interview where we discussed this article by Willem Middelkoop (starts around the 26 minute mark) among other SDR related items. I'll post this as a separate article later with some self critique. This is the first public interview I have ever attempted to do. I appreciated the invitation from Rory Hall at The Daily Coin to discuss the SDR and upcoming G20 meeting. I learned that I do not have a "radio voice" which is something you don't realize until you hear yourself :-)

Added Note for new readers: If all this is a new topic to you, see this page for more information on the SDR and all these related issues. I think this is some of the best free information available on the internet for non experts like myself who want to learn more on all this. 

Many of the articles on this page include quotes and insights from the experts mentioned in this article such as Dr. Coats, Jim Rickards and others. I will add this article to that page as well since it contains a link to this excellent information from Willem Middelkoop. If you have friends, relatives, neighbors etc. who want to learn more about the SDR, this page is good starting point for them. 


  1. Hey Larry,

    Been following your blog, thought this was of note:

    World Bank to issue SDR bonds in China



  2. Thanks Dave. That is significant news and directly relates to this new article by Willem Middelkoop.