This is the second in a series of three articles covering the Kemp Foundation forum on Exchange Rates and the US Dollar. In the first article, we featured the presentation by Dr. Judy Shelton. Her presentation stressed the need for change to the existing floating exchange rate monetary system and offered an idea on how US Treasury Bonds convertible into gold upon redemption might be a good step in the right direction.
Later in the forum, Dr. Warren Coats (former IMF) made his presentation about his proposal to use the SDR to replace the US dollar as the global reserve currency. He would change the way the SDR works now so that it would be issued under Currency Board rules and tie it to a "hard anchor". He explains how this would work in the video below (see his full paper on this here). After that is a bullet point summary of his presentation and a few added comments.
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Bullet Point Summary:
- Dr. Coats agrees the current floating exchange rate system needs help
- He proposes using the SDR to replace the US Dollar, but under different rules
- He wants to use Currency Board rules to issue the SDR's based on market demand and not the current IMF allocation quota system
- He wants to tie this new SDR to a hard anchor and not the basket of currencies used now
- His believes his SDR proposal would be an improvement to the SDR as allocated now by the IMF which he described as "clever but terribly flawed"
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My added comments: This is an important video for readers here to view. We have covered Dr. Coats proposal here before, but in this presentation he very clearly explains in detail how issuance of the SDR under Currency Board rules would work and why he feels it would be much better than how it works now at the IMF.
I believe this is important to understand because I think most people don't realize that Dr. Coats is NOT proposing to use the SDR in the way it is used now at the IMF. He wants the amount of SDR's issued to be determined by a Currency Board rule based on market demand for the currency rather than the allocation quota system now used at the IMF.
By using a Currency Board rule and using a hard anchor as a fixed exchange for the currency, Dr. Coats believes we can address the flaws in the current system in a way somewhat like the old gold standard was used in the past. He does not object to using gold as the hard anchor if that is what most desire. But he thinks using a broader basket of goods would likely be a more stable anchor than just gold by itself. He views the Currency Board rules as being more important than whatever is chosen as the hard anchor for the currency.
The key point is to understand is that Dr. Coats proposal does not give the IMF the right to issue the SDRs at its own will and does not allow for unlimited currency issuance. He makes that completely clear in his presentation. The currency would be issued based on market demand under Currency Board rule. I would also note that Dr. Coats proposal was the only one at the forum offered as a comprehensive overhaul of the existing monetary system.
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Added notes:
I asked Dr. Coats to review this article for accuracy which he did and offered this kind reply:
"See my corrections below. Many thanks for the wonderful service you provide"
(Dr. Coats pointed out a couple of changes to improve accuracy such as adding the word rule after Currency Board in the paragraphs just above)
Below is a quote from the Conclusion of Dr. Coats presentation paper for this forum:
"If the IMF’s SDR replaced its currency valuation basket with a basket of globally traded goods, its use for establishing values in contracts and for pricing globally traded goods and services is very likely to spread widely. If the IMF issued such real SDRs according to currency board rules, central banks are likely to increasingly replace the US dollar and other national currencies in their foreign exchange reserves with real SDRs.
If all or most countries pegged their currencies to the real SDR or used the real SDR directly (“dollarized”), the world would have returned to a gold standard like system of, in effect, a one world currency. The reduction in exchange rate risk and the cost of hedging such risks would make a material contribution to world trade and economic well-being.
The tighter monetary and fiscal discipline of such a global monetary system would significantly enhance the likelihood that the international monetary system and domestic monetary systems fixed to it would adhere to the rules of the game."
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Let's change our perspectives a tiny bit, shall we?
ReplyDeleteContrary to widespread opinion SDRs are not a/one basket of currencies, because there are several owners.
Today SDRs are a marketplace of currencies.
Several streams of political power are confluencing via printing presses to a political marketplace under a concertedly agreed quota.
In other words: the quota represents the political power of several printing presses.
Now, what would change if SDRs were used as WRC?
The power of several national printing presses (and the resulting economic independence of several nations) would have to be transferred to the IMF or alike.
It does not matter at all whether SDRs are linked to a basket of physical goods or precious metals. Every nation would instantly loose her economic independence. Who in the right mind would agree to such a transfer?
The debate about SDRs is a smoke screen. It's purpose is twofold: to buy time for the big players to facilitate the change to a new non-debt based monetary system and to conceal the progress on that.
[PDF] the international monetary system after the financial crisis
xxtps://www.ecb.europa.eu/pub/pdf/scpops/ecbocp123.pdf?
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xxtp://www.bis.org/publ/work456.pdf
"In this essay I have argued that the Achilles heel of that system is that it
amplifies the “excess financial elasticity” of domestic monetary and financial
regimes, ie it exacerbates their inability to prevent the build-up of financial
imbalances, or outsize financial cycles, that lead to serious financial crises and
macroeconomic dislocations. This view contrasts sharply with others that, so far,
have received more attention. To varying degrees, these emphasise the failure of
the system to prevent disruptive current account imbalances and its tendency to
generate a structural shortage of safe assets – the “excess saving” and “excess
demand for safe assets” views, respectively. "
conclusion: debt-based systems are structurally unstable!
Not a revelation, I know, but this opens space for the next question:
What would a non-debt based international monetary system look like?
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Believe it or not, if we can remove SDRs and credit-based systems from the list of possible International Monetary Systems, this leaves us, at least in my opinion, with only one solution: a store of value-based IMS, which needs a physical anchor to be stable.
In extremis: a bancor using the blockchain as a medium of exchange and a demonetized, physical reference store of value, marked to market daily: gold.
Zoellick 2010: xxtps://www.imf.org/external/am/2010/pdf/zoellick.pdf
A world reserve currency AND a world reserve asset!
Have a nice day.
Thank you for your comments. Just one thought to add. After researching this now for some time I have only found one proposal (Dr. Coats) out there fleshed out with details on how to actually try and make it work in the real world. I see lot of other ideas and random suggestions, but no details as to how we would get from where we are today to the new system. It's easy to to just say we should do this or that or that Russian or China will do this or that. But when you really research it, there is no actual detailed plan on how to implement it you can find (at least that I can find). For example, China (PBOC Official) tossed out using the SDR as global reserve currency in 2009. But they don't have any kind of actual plan how to do that (or even any global consensus to do it) as far as I know. There are tons of questions like how do people/nations convert their existing reserves/savings? How do you educate the public to any major changes? What exchange rate to convert from an old system to a new one? Who controls they supply of currency? How is that enforced? Who will the public trust? and many more. Dr. Coats actually attempts to deal with questions like this in his proposal which makes it unique from what I have seen so far.
ReplyDeleteFor sure I don't know how things may change in the future or if they will change much at all. But one reason I have featured Dr. Coats proposal so much is that I know it is an actual detailed plan that people who make policy decisions are aware of. So my guess is that they might turn to something like that if a decision to make major change to the existing system is ever made. But I would not rule out the kind of change you describe either. I honestly don't know if or when any major change will take place. Or what the change might be. Time will tell.