Thursday, June 25, 2015

Dr. Warren Coats (former IMF) - A Global Currency for a Global Economy

Readers of this blog know that there are two big questions we are following here on the blog. One is whether or not we will get another major financial crisis that leads to dramatic monetary system changes that happen relatively quickly.

The other major question is whether or not we will see the SDR currency used at the IMF eventually become a true "global currency". This question is separate from the first big question. We could see this unfold in the future whether we get another major financial crisis or not. Readers may wonder where this question comes from since nothing like a global SDR currency for use outside the IMF exists today. Let's take a look at some evidence for why this is valid question.

We have covered Jim Rickards forecast here that the next major financial crisis will be so big that the IMF will be the only balance sheet left in the world to deal with it. Jim talks about the SDR becoming a kind of "world money", but does not go into much detail as to how this might impact the average person. 

Our own research here has turned up significant evidence that it is possible that IMF rules could be changed so that in the future the SDR could be used as a global currency outside the IMF rather than just inside the IMF as is the case today. 

Readers may wonder if we just conjured up this idea using our own imagination? The answer is absolutely not. While all the sources of this idea cannot be discussed here on the blog, we can give you an example of how seriously this idea is discussed from time to time within the system.

Dr. Warren Coats is a former IMF Assistant Director in the Monetary and Financial Systems Department. Having also served as a Visiting Economist at the US Federal Reserve and The World Bank, I think we can qualify him as a credible expert on this topic.

In 2011, Dr. Coats wrote this very interesting article talking about a "real SDR" currency (A Global Currency for a Global Economy). You can view the entire article here or an asbtract version here (note: it appears this slide presentation is no longer on the . If you prefer a slide presentation summary of his ideas, you can view that here (note: it appears the slide presentation link is no longer on the internet as of 12-8-15). Here is another page with a shorter version of the slide presentation Here is a link to the pdf version.

For purposes of this blog article, we will note just some bullet points from the slide presentation and a couple of key quotes from the article. Here are some bullet points taken directly from the slides linked above:

Overview of Presentation 

The need for an international reserve asset • Key elements for expanding use of the SDR • Transformation to a Real SDR – Replace currency valuation basket with large goods basket – Introduce indirect convertibility – Currency Board rules

Increasing the use of SDRs 

Benefits of the SDR – Not a claim on one country (global) – More stable exchange rate – Supply can be increased without BOP deficit – Can supplement or replace dollar • Promoting use of the SDR – Continue large allocations – Encourage pricing and invoicing in SDRs – Encourage development of private SDRs – Develop clearing and settlement of private SDRs

Further measures to enhance use of SDRs 

Substitution account – Have plans ready to save dollar if dumped • A constant real value SDR – Replace currency valuation basket with goods basket – Pay inflation adjusted interest rate • Bancor – An SDR Currency – Not allocated but issued (sold)

• The new gold standard – 

Countries wishing to stabilize their own currency and reduce exchange rate risk would peg to Real SDR.

Now here is a quote from the concluding comments of Dr. Coats article:

"These shortcomings of the gold standard and the high resource cost of storing gold, would be overcome by an international currency issued and redeemed for eligible government debt at the market value of a large basket of internationally traded goods (a Real SDR currency board). Such an international currency would have a number of important benefits.
a) It would relieve the pressure on the United States to supply dollar assets to satisfy the demands by other countries for international reserves. In the extreme and over time it could replace the U.S. dollar as the unit of account, means of payment and store of value (reserve asset) for international transactions.
b) For countries pegging their own currencies to the Real SDR or using it directly, domestic prices would become more predictable both in the short and long term, thus promoting investment and growth.
c) Moreover, international prices would become much more predictable, facilitating the further extension of the gains from trade. A Real SDR could attract a large number of countries to peg the exchange rates of their currencies to the Real SDR, thus reestablishing a truly global currency for global trade.
d) Global liquidity would automatically become countercyclical and thus stabilizing. “This idea [of a commodity standard], which goes back to Keynes’ Treatise on Money, had interesting countercyclical features: world liquidity would automatically increase during global business downswings, which tended to depress commodity prices, and automatically decreased during business upswings, when commodity prices boomed.”
A number of technical issues would need to be addressed, none of which are insurmountable:
Which goods should be put in the valuation basket and in what amounts?
How should their market prices be determined and how frequently?
How frequently should the items in the basket and their weights be adjusted?
Should Real SDRs be issued actively or only passively?"
My added comments:
The above article is just one example that has turned up in researching this topic. While further research indicates to me that this whole concept could be taken further than even this article describes, this article does provide a clear example this is a serious topic of discussion inside the system.
I believe that with the digital technology that exists today, it is not unrealistic to think in terms of someday having a digital global currency (a "real SDR"). This might be a currency for use outside the IMF by the general public as well as by central banks and commercial banks. The currency might have backing based on a mix of commodities or a combination of the highest rated sovereign debt and along with a basket of commodities. There are many possible ways this could be setup and it might be something we don't see until after the existing sovereign debt problems are dealt with (writing off unsustainable debt and restructuring the rest at a global level). Another major financial crisis would likely speed up this process. In other words, we could see this used after a so called "reset" of the system.
If something like this does happen, the goal will be to provide the general public with a currency usable anywhere in the world from a simple mobile phone. A currency with system backing that is viewed as the most stable and reliable currency in the world by most people. It would be the currency all the major national currencies of the world would peg to for example (or at least those willing to participate if the BRICS end up going their own way).
Before all this could really happen, we have to find out if the BRICS are going to be in or out. We should get a clearer picture on this big question in the next few years as we see how the issues with the BRICS at the IMF are resolved. The idea and the technology exist to make this happen. The rest is undetermined right now. It will depend on how things unfold globally in terms of whether we get another major financial crisis and what the BRICS nations decide to do. We will continue to follow things here on both counts.

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