Saturday, October 14, 2017

WSJ - Have You Heard of IMF Coin?

The Wall Street Journal now runs this article that once again talks about things we have been covering and talking about here for some time. Below are some excerpts.


Forget Bitcoin. Have You Heard of IMFcoin?

IMF would like its special drawing rights to have a digital future, and has spent the past year thinking of a broader role for it

"Forget Bitcoin, think IMFcoin. The head of the International Monetary Fund has been musing about the future of money, and thinks there is a decent chance it will come from the guardian of the world’s monetary system.

Christine Lagarde, IMF managing director, held up the organization’s special drawing rights (SDRs) as having a possible digital future at a Bank of England forum last week, and put what she said was a “question mark” over whether SDRs could replace existing international currencies. “It’s not a far-fetched hypothetical,” she said, and the IMF needs to be ready."

. . . .

"There is little chance U.S. politicians will want to give up what a French finance minister once called the “exorbitant privilege” of the dollar, no matter what Ms Lagarde, another former French finance minister, might suggest. (note: this comment is from the author of the WSJ article, the following sentence is attributed to Director Lagarde and the bold emphasis is mine) As she noted, the IMF would need a “geopolitical situation that would be propitious” for the changes she is speculating about to happen."

My added comments: I will just point out again that all this is something we have talked about here for some time now. This older article and this very recent article are examples.

At this point maybe I should explain what prompted me to write on this topic since it is now appearing in mainstream media and seemingly everywhere. I first began to think about this idea when I saw a demonstration presentation (see this video) that talked about the idea of an asset backed cryptocurrency that could be used by banks and central banks (and perhaps even the IMF) in the existing system some day. I began to to research this concept and discovered that the idea of using the SDR in a different way than it is used currently outside the IMF has been discussed at times over the years. I learned that even now there are so called "private SDRs" outside the IMF that can be used. However, these are not official SDR's used by IMF member nations. Instead they are more like someone simply owning an investment in the 5 currencies that make the current SDR basket in the same ratio as they are used in that basket. Not really an SDR and certainly not any kind of legal tender currency of its own. An 'SDR denominated bond' has to eventually be converted back into some kind of national legal tender currency to utilize the funds in the private sector.

But thinking about the concept, it seemed like it could be possible some day for the IMF to consider using the SDR in a new way (more like a real currency anyone could own) and that the new technologies arising in the fintech arena might be considered as part of that process. Also, I have followed Jim Rickards now for many years and he has never wavered in his prediction that the SDR would likely be put forward as a potential replacement for the US dollar in the next major global crisis which he also predicts will eventually arrive.

All this led me to dig into the topic of the SDR and try to find as much accurate information on it as I could in the event these forecasts do pan out. I created this page on this blog to archive what I could find and have written about here.

These articles include a lot of direct input from Dr. Warren Coats who at one time was the head of the SDR Division at the IMF. I am pretty sure you will not find a more informed expert on the SDR anywhere on the earth than Dr. Coats. 

I have always wondered and also speculated about whether the IMF might some day consider a "digital version of the SDR" given all that I mentioned above. Now we have IMF Director Lagarde talking about it openly in a public speech and this article in the Wall Street Journal discussing the idea. I feel like this is confirmation that the topic is important (as I have tried to emphasize here for some time) and that the information that has been presented here is pretty accurate as best I could make it. I don't claim to be an expert, but I have been fortunate to get direct input from some people who I do view as experts. 

So, a question that may arise is if I believe this is going to happen and also if it will be a good thing if it does happen. The only honest answer I can give is, "I don't know", to both questions. I don't have any reason to believe right now that we are close to some kind of digital version of the SDR (blockchain based or not) that would replace the US dollar. As far as I know, while we now can confirm the idea of a digital version of the SDR has been at least mentioned by Director Lagarde, there is no indication that the mechanics to actually implement such a thing currently exist at the IMF. 

To get to that point, all kinds of things would need to happen that have not yet happened as far as I know:

- the IMF would have to have some kind of system in place that could implement using the SDR in this way. This is a formidable task and would require a lot of testing etc. As far as I know, nothing has even been started along those lines (although some individual central banks are heading in that direction)

- changing the way the SDR is used like this would require approval of the IMF member nations

- the US retains veto power over any votes taken at the IMF along these lines

-  the only public statement I know of from the IMF on this is that they are currently studying whether or not to promote a broader role for the SDR in the monetary system. 

- no public report on this study has been released as far as I know

- the best information I have is that perhaps next year the IMF may go forward with some kind of promotion for broader use of the SDR based on their internal research, but as far as I know, that would more likely be the "private SDR" mentioned above and not the official SDR used by member nations

One statement that Director Lagarde is quoted as making in this WSJ article did catch my attention (in bold underline below):

"There is little chance U.S. politicians will want to give up what a French finance minister once called the “exorbitant privilege” of the dollar, no matter what Ms Lagarde, another former French finance minister, might suggest. As she noted, the IMF would need a “geopolitical situation that would be propitious” for the changes she is speculating about to happen."

That last sentence attributed to Director Lagarde is almost word for word what we have said here now for quite some time. We have said that absent a new major global crisis, these kinds of changes are more likely to take place over a long time period because of the difficulty in getting global cooperation from individual central banks beholden to their own countries and because the political will to make these kinds of changes does not appear to be present at this time. We speculated that under  severe crisis conditions, things could possibly change and lead to faster consideration of these kinds of changes. This statement attributed to Director Lagarde seems to confirm that analysis as best I can tell.

As to whether this kind of change would be good or not, I have no idea. I know that Dr. Warren Coats has a proposal on the table to use the SDR in a new way and we have covered that here extensively. I feel completely confident that Dr. Coats is deeply concerned that any kind of proposal to use the SDR as a global reserve currency be based upon strict rules (Currency Board rules) that would not allow the SDR to simply be created at will by the issuer (and likely stimulate inflation). If the SDR is proposed as a global reserve currency some day, I do hope that the proposal Dr. Coats has put forward will be the basis for such a plan because I know he has put years of study into the idea and understands that a currency must be stable in value over time to serve the public well.

All kinds of other questions have been raised such as whether the SDR should be fully or partially backed by gold for example. The IMF does own gold reserves so they could do that (but I think gold would need to be at a higher price). Dr. Coats prefers to see a basket of goods used rather than just gold because he believes that would be more stable over time.

I certainly do not know what would work best or if any of this will actually ever happen. The goal here is to try and accurately inform and educate readers on this topic so that whatever opinions they form will be based on accurate information. Some day a proposal to do this (use the SDR as global reserve currency) may be put forward. It is better to understand this topic than to not understand it if that day ever does arrive. I see a lot of misinformation on this topic for sure, so I try very hard to get the information presented here as accurate as I can. You can review all the information archived on this blog page.

Added note: I had several experts review this article and no significant changes were suggested to me.

CNBC runs this article on the same topic.

No comments:

Post a Comment