Wednesday, April 1, 2015

Pop Quiz: Test Your Knowledge about SDR's

More and more we see the SDR used at the IMF mentioned in news articles. This year the SDR basket will be reviewed to decide if it needs to be updated. Jim Rickards is on record as predicting that the SDR will become a new global reserve currency (a kind of "world money" as he calls it).

Most people in the US have never heard of an SDR or know very little about it. One purpose of this blog is to provide some education on things like this. After all, if the SDR really does become a "world money" some day, we probably need to know what it is and how that might impact us. In that spirit I have prepared a pop quiz on SDR's which you can take just below. First a list of SDR related questions. Below that you can find the answers. Just for fun, see how many you can answer.


1- What is an SDR and Why Should Anyone Care about it?

2- What is the SDR "basket" of currencies (what 4 currencies are in it)?

3- What is the ratio of the currencies in the SDR basket (how much weight is given to each of the 4 currencies)?

4- What was the original value of the SDR when it was created?

5- How often is the SDR currency basket normally reviewed by the IMF?

6- What new currency is likely to be added to the SDR currency basket this year?

7- What is the exchange rate between the SDR and the US dollar?

8- Can individuals own SDR's?

9- What happens to the US dollar weighting in the SDR basket when additional currencies are added in?

10- Has anyone ever done a serious study about adding in gold to the SDR valuation basket?

Bonus Question: What are the two "kinds" of SDR's per the New York Fed?
Scroll down to see the answers

Answers: (you can use this as a cheat sheet if you like)

1- The fullest answer to this question can be found in our earlier blog post. Click here to read it

2- Euro, Japanese Yen, British Pound, US Dollar

3- Euro 37.4%, Yen 9.4%, Pound 11.3%, US Dollar 41.9%

4- .888671 grams of gold (until 1973)

5- Every five years (but can be done sooner with Board approval)

6- Chinese Yuan/Renminbi (Australian and Canadian dollars are also candidates)

7- The exchange rate changes daily. On 4-1-2015 (today) one US dollar could be exchanged for .724763 SDR. Note that one year ago you could only get .64719 SDR's for one US dollar. This shows how the exchange rate changes when a currency goes up or down. In this case the US dollar strengthened so its exchange rate went up.

8- No. Individuals cannot currently own SDR's. (from IMF Q&A link)

"It can be held and used by member countries, the IMF, and certain designated official entities called "prescribed holders"—but it can not be held, for example, by private entities or individuals."

9- This is an interesting question. We will find out later this year if new currencies are added to the SDR basket. One would assume that the US dollar weighting would have to drop to make room for new currencies. This is another indicator that the US dollar is losing sole global reserve status.

10- Yes. A study on the impact of adding a 5% gold component to the SDR basket was done in 2011. You can look at it here. Here is some info on the author of the study.

Bonus Question: If you got this one right you are truly an SDR expert. In the early 1980's, the New York Fed issued an interesting report called "The SDR in Private International Finance."  It states this about the two "kinds" of SDR's:

The Official vs. the Private SDR

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

But there is another "kind" of SDR used by large private entities. It is not officially recognized or governed by the IMF. It uses the SDR basket to determine its value however. Here is how the NY Fed described the "private" SDR:

"Like the official SDR, the private or commercial SDR is composed of the same currencies (back then there were 5 currencies) in the same proportions. It, too, functions as a means of payment and as a unit of account. But whereas the official SDR exists almost entirely within the framework of the IMF, the private SDR is used in the international fianancial markets."    . . . . . . . .     "Any party may hold a private claim denominated in SDR's. 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."


Last thought question: If the SDR cannot be owned by individuals, how could it become a kind of "global money" some day?

Using your imagination, it is not hard to see how this "private SDR" could someday be the precedent that leads to the use of a new global currency that individuals can actually own. Going further, with the new technology available today, one can imagine how such a global currency might be digital and instantly convertible into other major national currencies in real time. So perhaps some day we will see Jim Rickards "global money." Maybe even with a twist that allows you to own some yourself and use it as money. Time will tell.


  1. Is the private SDR the same weight as the GSD?

  2. No. the "private SDR" mentioned in the NY Fed article is valued based on the official IMF SDR currency basket weighting. A potential GSD would be valued based on a much broader portfolio of Tier 1 level assets, not just four national fiat (credit based) currencies. I don't anticipate seeing the GSD any time soon at this point in time.