Wednesday, December 23, 2015

2015 - A Year of Quiet Steps Forward on the Path to Change

As we come to the end of 2015 we can now look back and see if much happened that could lead to monetary system change that would impact our daily lives. This is the main topic we follow here on this blog. The year has been interesting because there were some meaningful steps that could lay the groundwork for bigger changes later on. But these steps were mostly ignored by the general public and were not the focus of mainstream media attention. 

Earlier this year we wrote this blog article which listed some of the key roadblocks to the SDR used at the IMF becoming a true global currency. At the time none of the roadblocks listed had been removed. But now some key steps have fallen into place. One very quietly with virtually no media attention at all. Let's take a look using our earlier article as a guide.


Here are the first three points we listed in our earlier article.

"What has to be done to effectively use the SDR as a supra-national reserve currency? Which problems remain to be solved?"

1. The composition of the basket of the SDR 

A most important step for the SDR to become a global currency is to determine what the proper composition of the SDR basket of currencies shoud be. This is always a subject of great debate and change takes place very slowly. This fall we find out if the Chinese Yuan (and perhaps other currencies) get added in. Until this is resolved on a more permanent basis, it remains a roadblock to use of the SDR as a global currency.

2. Reform of the IMF 

"After years of neglect, the IMF has recently received international support for a revived activity. In line with this idea various suggestions have been put forward in order to strengthen its activities. Also to support the market of the SDRs, a reform of the IMF is needed. This reform would involve the activities to be carried out by the IMF, the funds at its disposal (currently inadequate), governance both in terms of governing bodies and majorities required for its activities to be carried out and of quotas and representation." 

3. Change and increase in SDR allocations 

There aren't near enough SDR's available for it to be used as a global currency now.
At year end 2015, we can now check these three items off the list. The decision to add the Yuan into the SDR currency basket has been made. Not only that, the allocation ratio for the new basket has been decided. The Yuan will move into 3rd place. The Euro takes a big hit downward while the US dollar stays at about the same ratio. Yes, all this is mostly symbolic for now. Symbols do matter however. Please notice that China moves up the prestige ladder and the US signals that the US dollar remains at the top for now.

Steps #2 and #3 are also important. While most of comments you see about this focus on the increase in voting power for China, the increased in the number of SDR's is very significant in our view here. For the SDR to ever function in the role Jim Rickards has been forecasting, there have to be a lot more of them. This step alone does not create the trillions of SDR's Jim Rickards forecasts will eventually be created, but it does move things in that direction. Again, symbols are important.

So, let's review what is left on the list from our earlier article:

4. Issue of SDR denominated securities (Bonds) *** This is a big one

"The issue of SDR denominated securities would be a good starting point to increase the appeal of the SDRs. One can make the hypothesis that initially the IMF itself, some Governments and special international financial institutions such as the World Bank could issue SDR denominated securities, which could then be followed by banks and non-financial firms."

5. The set-up of a clearing system 

"The experience with the ecu has clearly shown that the setting up of a clearing system is a crucial point. The establishment of a clearing system for the ecu facilitated its use and the growth of the market, proving to be the best way to build up liquidity. The Bank for International Settlements was called to act as clearing house. Similarly, but considering the different nature of the market of SDRs (public rather than private), it can be said that the setting up of a clearing system for central banks investing in SDRs would constitute a step of great importance."

There you have it. These are the steps to watch for in the future that would indicate we are moving further towards major monetary system change that could impact our daily lives.

Basically if we see changes that thrust the SDR used at the IMF into a more prominent role in the monetary system, it will be significant confirmation for Jim Rickards forecast on this

If we get a new major financial crisis that leads to this, it will be total confirmation of his forecast. We have just seen confirmation of three important first steps on the path to change in 2015, despite very little media attention to them.

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