Interview With James Rickards: China Planning to Displace Dollar

Here is Jim Rickards latest interview with Epoch Times. It is chock full of discussion about major monetary system change coming. Here are some quotes related to China and the US dollar from the article.

"Epoch Times: Can China supply the world with a reserve currency?

Mr. Rickards: Not with the yuan. A: They don’t want to open their capital account. B: The yuan can’t possibly be a global reserve currency. It is expanding in use as a trade currency, but most people don’t understand the difference between a trade currency and a reserve currency. The trade currency is just a way of keeping score in the balance of payments mechanism."

"But to be a reserve currency means that countries that have reserves have to invest it in something, so you need a deep liquid pool of investable assets. China does not have that. There is no Chinese bond market. There are a few Dim-Sum bonds and a few other things, but there is no Chinese government bond market to speak of, and it would take 10 to 15 years to develop one."

"Epoch Times: So what are the Chinese up to?

Mr. Rickards: What China wants is the SDR [Special Drawing Right, a type of money for governments], because it’s not the dollar. It’s issued by the IMF [International Monetary Fund], and China is simultaneously lobbying for more votes in the IMF.

China is trying to use its willingness to lend money to the IMF to purchase SDR notes from the IMF to give the IMF money to bail out Europe. It’s trying to use that as a lever to get more votes. If it has more votes, it would be comfortable using the SDR as a reserve currency, because its use would be regulated by the membership and that would make China the second largest member after the United States.

The United States is opposing it, but Christine Lagarde [Head of the IMF], is pushing very hard to increase the Chinese role. It’s a complicated global game.

If you said to me, does China want to get rid of the dollar as the global reserve currency, the answer is yes. But most people think it’s that they want the yuan. They don’t. It’s the SDR."

My added comments:  JIm confirms many things we have posted on this blog. Jim also explains why China is not wanting the yuan to become the new global reserve currency. He goes on to say that "what China wants is the SDR". This is the IMF unit of account. But here is something for Jim to consider on that. The IMF has discussed the SDR as a reserve currency in articles like this one. Here is an interesting quote from this 2009 article on the IMF blog site:

"To combine the advantages of multiple and single currency systems, a basket-based reserve system, perhaps built on the IMF’s Special Drawing Rights (SDRs), could be envisaged." However, for the SDR to take on such a significant role, its liquidity would need to increase massively. While an increase in demand (from BRIC central banks) and supply of SDR assets (from the Fund) have recently materialized, the scale remains limited–about 4 percent of global reserves. Generating a liquid SDR market of the size needed to create a new reserve currency would be a major undertaking. 

The article goes on to say:

"An even more ambitious solution would be to move to a truly global currency, along the lines of Keynes’s “bancor”, that would circulate alongside countries’ own currencies and would offer a store of value truly disconnected from economic conditions and policies in any country. To achieve this, one would need to set up a global monetary institution that would issue the global currency depending on global economic conditions, and that could act as a global lender of last resort. It would need to have an impeccable (“AAAA”) balance sheet, and governance arrangements that engender widespread credibility and acceptability."

Now let me add one more thought. The IMF realizes the SDR is not well suited to be a global reserve currency as is. This article describes what they think would be suitable. The last paragraph quoted above is exactly what Klickex is working on with its GSD. Does that mean I think the GSD has been selected to become a new global reserve currency by the IMF at some point? Maybe. My current research indicates it is possible, but time will tell. If the GSD surfaces this year in several nations adopted by their Central Banks, we will have solid visible evidence supporting this theory. It could be that progress at the IMF will stall and the GSD moves forward on its own.

We'll keep an eye on it here, but it will be a drawn out process most likely due to the time it takes for regulatory approval in each country.