Tuesday, July 1, 2014

Jim Rickards in Depth on the IMF and the SDR

In this interview Jim Rickards goes into a lot of detail about what he sees as the future role of the IMF as a global central bank. He covers a lot of ground and readers should find this interview interesting. Below we post the summary introduction for the interview and a couple of excerpts. We encourage readers to read this whole interview. After that we add some comments below.

May 29, 2014 Interview with Jim Rickards on ratio of paper money to physical gold, a monetary reference back to gold to restore confidence, a $7000-$9000 gold price, the debate over gold manipulation, hedge fund stops create cascades in the gold price, the $400B Russo-China energy deal and what it means for shifting geo-politics, the IMF “Central bank to the world” and how it operates, the next liquidity crisis, the final backstop for money after the IMF, the function of the BIS, and gold/GDP ratios.

"But then a funny thing happened on the way to abolishing the IMF. We had the global financial crisis in 2008, and all of a sudden, the IMF was back in the game. It became the de facto secretariat of the G20. I think of the G20 as the board of directors and the IMF as an agency that implements the will of the board of directors. Now, the IMF has its own board of directors, but interestingly, if you look at that membership, there’s a lot of overlap. The G20 countries and the 24 members of the IMF executive committee are, by and large, the same. The G20 was a group of heads of state that didn’t have a staff while the IMF was a ready-made staff, so ever since then (2008), the G20 summits and the IMF technical abilities, staff and analysts and, most importantly, lending facilities have worked hand in glove to deal with global financial crisis."

" The IMF doesn’t have a teller window where you can make a deposit, but it does borrow money. It issues notes. Interestingly, these notes are not denominated in dollars. They’re denominated in SDRs (Special Drawing Rights). So all of a sudden the IMF has one other feature that makes it really identical to not just a bank but a central bank, which is the ability to issue money. Of course, the Federal Reserve is a printing press; they print dollars. The European Central Bank is a printing press; they print euros. Well, the IMF is also a printing press. They can print these Special Drawing Rights or SDRs."

"So when you look at the IMF, you so see they have a leveraged balance sheet, they have assets and liabilities, and they can print money. That’s a central bank in all but name."

"It’s not called the central bank of the world, but it is the central bank of the world for the reasons I just described. The SDR, the special drawing right, is not called world money, but it is world money. If you started saying things like, ‘The central bank of the world just issued some world money,’ that would sound pretty scary to people, but if I say ‘The IMF just issued some SDRs,’ no one knows what the heck I’m talking about."

JW: Let’s talk about SDRs for a moment, because it is a bit of a mystery. The name is confusing. You and I can’t go to an ATM and withdraw a fistful of SDRs, and yet SDRs, as I understand your definition of money, fulfill that definition. It seems that they may play an increasingly important role as the dollar likely declines in its power in the world. Would you explain a little bit more about what an SDR really is and what role it’s playing and is likely to play in the world?
JRickards: Sure. There are three parts of a classic definition of money. When you ask ‘What is money?’ you can debate that all day long, but typically, people say it’s a medium of exchange, a store of value, and a unit of account. If all three of those criteria are met, then you arguably have money. Let’s just look at the SDR over that scorecard. We’ll start with the last one I mentioned, the unit of account. Well, it is a unit of account, because the IMF keeps their books in SDRs. If you go to the IMF website and click to find their financial statements, it’s in SDRs. When they borrow money and give you a note, what is the note denominated in? It’s denominated in SDRs. The U.S. Treasury has a standby commitment already in place that was slipped into some legislation in 2009 by Barney Frank wherein the U.S. has given the IMF a $100 billion line of credit. It’s like walking around with a credit card that you haven’t used where the line of credit is good. The IMF can, at almost any time, put in a borrowing notice and get that $100 billion from the United States. I say dollars, but in fact, it’s a dollar equivalent. If the IMF wanted the money, they would hand the U.S. Treasury a note denominated in SDRs. We would no longer have a dollar asset on the books of the Treasury. We would have an SDR asset, so it is a unit of account.
As far as the store of value is concerned, these are counted in the official reserve positions of countries around the world. Go to the website of the central bank of Russia, the People’s Bank of China or the United States, for that matter. You’ll find a certain amount of SDRs, and those are counted as money good or value, if you will, by those various countries.
The last one is a medium of exchange. Again, you can pay for things in SDRs. Now, individuals cannot, you’re right. You and I can’t get them at the ATM to pay for dinner or take a taxicab, but countries can use them between each other, and that’s the part that makes it a little more difficult to understand. In settling a balance of payments between two countries, SDRs can be used.
There’s actually a trading desk inside the IMF that has an SDR swap desk. I’ll give you a very simple example of how that works. I mentioned that in 2009 the IMF issued a bunch of SDRs. The way they issue them is in accordance with a quota. Remember, a quota is your share. If I have a 5% quota at the IMF and the IMF is issuing 100 billion SDRs, then I’m going to get five billion SDRs because that’s my 5%. A lot of countries got quotas and they didn’t need the SDRs. Let’s take Hungary as an example. Going back to the early 2000s, Hungarian banks and Hungarian customers were offered mortgages in two currencies. They could take it in local currency which is the forint or they could take them in Swiss francs because the European banks are very active in Hungary. Swiss franc mortgages were 2% and forint mortgages were about 9%, so most of the borrowers took Swiss franc mortgages at 2% assuming the exchange rate would be fixed, but it wasn’t. The forint collapsed, and all of a sudden the mortgage debt increased dramatically because the exchange rate changed and they were a lot of defaults there.
If you’re Hungary and the IMF hands you some SDRs, you say, ‘I don’t need SDRs; I need Swiss francs, because I have to pay these Swiss and Austrian intermediary banks back.’ If you call the IMF desk and say, ‘Give me dollars,’ the IMF will call a place like China and say, ‘Do you have a bid for SDRs?’ China says, ‘Yes, we do.’ China will send dollars, get SDRs in return, Hungary will get the dollar, sell them spot by Swiss francs and pay back the Swiss bank. That’s the way to turn your SDRs into something else if you need them. That’s the medium of exchange. So in all three counts – unit of account, store of value, medium of exchange – the SDR does qualify as money.

Additional comments: The SDR is an internal unit of account that cannot be used by private banks and citizens. The IMF has published papers that talk about how this is a limiting factor for using the SDR as a global reserve currency for everyone (see pps 20-28 "Supranational Reserve Assets")

However, I will ask you to think outside the box on this problem. Imagine if the IMF decided to link its internal currency (ultimately backed by its gold reserves) to an "external" currency that everyone could use. 

Earlier this year we wrote this article about a 1988 article in The Economist which talked about a theoretical currency like this (that everyone could use). They called it "the phoenix" in that 1988 article. Take a look at that article and then think about the GSD (Global Stability Dollar) that Klickex is working on

It does not take a leap of imagination to see how the GSD might become the external link for the IMF to its internal SDR. Something to keep in mind for the future if major monetary system change does happen and the IMF takes on the central role in it.

We encourage readers to study this Jim Rickards interview and then think about this reserve currency concept for the future. This is an article we hope you will also encourage your friends to read and think about.

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