The global pandemic which has fed into a global economic crisis has renewed an old debate within the IMF. Some have called for a new increased allocation of SDR's in an effort to boost global liquidity. The US was one of the first major nations to oppose any new increased allocation of SDR's and according to this article appearing in Livemint, has been joined by India. Below are a couple of excerpts from the article followed by some added comments.
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"IMF is contemplating redistributing the existing unused special drawing rights (SDRs) of rich member countries to low income countries in dire need for assistance. The move comes following opposition from countries like India and the US to the proposal by the multi-lateral agency to issue fresh SDRs to member countries to empower them to fight the economic fallout of the coronavirus pandemic.
Speaking at a webinar organized by Princeton Bendheim Center for Finance, IMF chief economist Gita Gopinath said the SDR allocation issue is being discussed and that there is no consensus on it at this point. “Let’s be clear what the SDR can do. When you do a general SDR or increase SDR allocations, most of it goes to the countries that don’t need it. Because it is proportional to your quota, it goes to the very large economies. It does not go to the low income countries in very large numbers," she said.
Gopinath said IMF is discussing an alternative mechanism with its members under which wealthy countries that don’t need it can loan their existing SDRs to low income countries. “There is certainly a lot of appetite for this second strategy and that’s something we are working on at the IMF," she added."
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My added comments: In recent months issues like this have moved to the back burner in the US due to the media focus on the pandemic, the economic fallout from the pandemic, recent tensions in race relations, and of course how all that will impact the upcoming US Presidential election.
Our view here is that we are not likely to see any new major dramatic changes at the IMF or at the major central banks at least until after the US elections. The US election contest is viewed as a close race that most likely will stay close with both sides claiming a path to victory. Institutions like central banks and the IMF are not going to want to "take sides" in this kind of environment because they don't know who is going to emerge in power. The safest play is to just try and keep the status quo functioning with massive injections of liquidity by the major central banks. This is now an established policy with the public and my take would be that the belief is that the present system can be "held in place" until the election to see who wins. (note that the current IMF strategy described above is to encourage the use of existing SDR's in loans between member nations rather than any kind of substantial increase in new SDR's)
How would we expect "who wins" to impact things?
This is a fairly easy forecast to make based on what we know at this time. If President Trump is re-elected, he no doubt will simply continue his America First populist agenda. He is not likely to defer important systemic changes to international organizations like the IMF or The World Bank. We can expect that he would not propose major monetary system changes until and unless the present system completely fails and there is no other alternative available.
If former Vice President Joe Biden is elected, we can expect a shift back to a more "globalist" policy approach. All of the policy initiatives that were disrupted by the election of President Trump likely return, but with a more progressive tone due to the makeup of the new base of the Democratic Party. A Biden Administration is far more likely to look to the IMF for major monetary system changes if the present US dollar based system falters.
This analysis is supported by a recent statement by the World Economic Forum that hosts its annual summit in Davos. The theme for its 2021 conference is - The Great Reset .
It is clear from the statement from the WEF that an economic reset is considered a key part of this initiative. It is clear that the thought leaders for the event will come from organizations like the IMF. Here are a couple of excerpts from the statement:
“In order to secure our future and to prosper, we need to evolve our economic model and put people and planet at the heart of global value creation."
. . . . .
"The announcement of the Great Reset was made by HRH The Prince of Wales and Professor Schwab during a virtual meeting, followed by statements by UN Secretary-General António Guterres and IMF Managing Director Kristalina Georgieva."
We can expect that a Trump Administration will be opposed to most of the policy proposals coming out of this Great Reset summit while a Biden Administration is likely to be much more favorable.
All this supports the analysis that we are likely to see a waiting game until the Novermber elections are over and a winner has emerged. The results of that election are likely to determine how much support the World Economic Forum gets from the US for its Great Reset proposal.
Interestingly, no matter which side wins the US election, many analysts from a broad spectrum of opinion anticipate a diminishing role for the US dollar as the global reserve currency in the future. Their differences of opinion on this are more a matter of timing. Some believe the US election may speed up the process for change away from the present dollar based system, while others still see a gradual pace of change unfolding over many years.
Our view here in this post is mostly short term. We don't see much major change likely until after the election. Our focus here will be to continue to monitor key news events and present content we view as educational for readers interested in these issues as we find it. Long term we will watch to see if those that say the present US dollar based monetary system is nearing an end are correct.
Added note 6-25-2020: Fox Business runs this article on the upcoming Great Reset Summit to be held in Davos next year that we talked about here just above. This article notes that this is a potential major news story somewhat under the radar. But not here.
Added note 6-25-2020: Fox Business runs this article on the upcoming Great Reset Summit to be held in Davos next year that we talked about here just above. This article notes that this is a potential major news story somewhat under the radar. But not here.
