Thursday, May 4, 2017

Repost: Kemp Foudation Presentation by Dr. Warren Coats

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.


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" 

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.

Added notes: 

For a deeper dive into Dr. Coats Real SDR proposal, go here.

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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