Monday, May 15, 2017

IMF - 50 Years After - SDRs Role in the Monetary System

At the recent spring meetings of the IMF, a discussion panel looked at what role the SDR has 50 years after its creation in 1967. The panel included some well known names including Catherine Schenk who did an analysis in 2011 on the potential for backing the SDR with gold. Also on the panel was Mohamed El-Erian who wrote this article on the SDR recently published at Project Syndicate. Below is the overview summary of the discussion and then some added comments.



In 1967, the IMF membership reached agreement on creating the special drawing right (SDR), the official reserve asset allocated and administered by the IMF. While to date the SDR has played a minor role in the international monetary system, the global financial crisis and its aftermath have spurred renewed debate over its role. This role includes not only its original function as an international reserve asset, but also other functions, such as the SDR as a vehicle for financing the provision of conditional liquidity, a denomination for financial instruments, and a unit of account. This seminar will examine how a greater role for the SDR in these areas would impact the functioning of the international monetary system, in today’s increasingly multipolar and financially interconnected global economy.
My added comments: If you listen to the panel discussion, it is pretty clear that while a possible expanded role for the SDR is being looked at and debated, there is no indication that a broadly expanded role is on the near term horizon. Having followed this for some time now the process moves very slowly. There are many reasons why this is the case. The tendency to maintain the status quo in any system is very powerful. Until the US dollar based monetary system is clearly demonstrated to have failed to the general public, it will be hard to change. Over time various small steps away from a US dollar based system may well take place such as the BRICS nations efforts to reduce use of the US dollar for trade and as a reserve asset. SDR denominated bonds may also be issued from time to time. But the process moves very slowly. Think in terms of years and even decades. The IMF announced several months ago they would setup an Advisory Group to study this. So far that group has released no public information that I am aware of. This new panel discussion is the first mention of an expanded role for the SDR I have seen since the Advisory Group was formed last fall.
What could alter the pace of monetary system change? The only thing I can see that might speed up any major changes would be another major global financial crisis in which the current US dollar based system is clearly perceived to have failed. That is possible, but has not happened so far and the timing for any such event is obviously unpredictable. Recently Jim Rickards did indicate to me that President Trump is somewhat unpredictable and might move forward with a review of the current monetary system without having to have a crisis prompt him to do so.

If a new crisis does arise, it is reasonable to think that proposals to use the SDR that are already on the table might be looked at first. Under crisis conditions, politicians and policy makers tend to fall back on accepted experts and potential plans that have already been thought out and put forward. This is why we have featured the Real SDR proposal from Dr. Warren Coats here quite a bit. It is simply more likely that his plan or something like it might be looked at first if any major change involving the SDR taking over from the US dollar were seriously considered. In this recent article, we talk about how ANY plan put forward has to have thought through a lot of detailed issues and questions that will arise. Since Dr. Coats has already done some of that in his proposal, it kind of gives it a "head start" on other ideas or proposals that involve using the SDR.
None of us can know if we will even have a major crisis soon that would prompt major change. Also, we cannot possibly know what major changes or plans might be considered for sure. For example. 2016 Trump campaign adviser Dr. Judy Shelton has hinted at the idea of "a new common currency linked to gold and silver" on her Twitter feed.

It just makes sense though, that if an greatly expanded role for the SDR is considered, Dr. Coats proposal is already out there now and ready to be discussed.

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