SDRs - Good or Bad?

[psionl0]

Special Drawing Rights or SDRs are not a major part of the global economy ATM. There are only a few hundred billion dollars worth of them around. However, their role could increase significantly depending on how political or economic events unfold in the future. China has already gone on record calling for SDRs to become the new international currency.

With this in mind, I decided to find out a little bit more about it. Initially, most of my information comes from a WIKI so some of my "facts" may be way off (correct me if so) but this is what I have learned so far:

• SDRs were created by the IMF in 1969 as a supplement to international gold and $US reserves.
• As the $US was tied (internationally) to a certain quantity of gold, the value of an SDR was set equal to 1 USD.
• Currently the value of an SDR is set as the weighted sum of the USD, GBP, JPY and EUR.
• SDRs are purely fiat and backed by nothing at all (not even IOUs).
• SDRs are created by the IMF and allocated to member countries on an individual basis.
• Each member country is expected to maintain its initial allocation of SDRs
• If a member country's SDR reserves falls below its required allocation then it has to pay interest.
• If a member country has more SDRs than required then it receives interest.
• The interest rate on SDRs is the weighted mean of interest rates in the member countries.
• Individuals (human or corporation) have no access to SDRs at all
• If a member country wants to spend its SDRs it must first exchange them for one of the 4 currencies it is based on.
• for the USD to remain as an international currency, the US must be prepared to continue increasing the supply of its currency and go deeper into debt (not too sure about that one).

To me, it seems equivalent to the IMF issuing credit cards to member countries each with its own credit limit (except that they also get interest if they have a positive balance on their credit card). Change a couple of rules, print some IMF notes and suddenly we have a brand new international currency. Obviously the US has the most to gain (or lose) if SDRs replace the USD as the international currency. However, for other countries, it is not necessarily just about having a different international medium of exchange.

There may be some strong positives in having an international currency that is not dependent on the well-being of the country that creates it. However, the biggest problem with having SDRs as the international currency is that it gives the IMF a lot of power to meddle in the internal affairs of a member country. They could create new SDRs and give them to any member country they liked (or refuse to). I wonder how the IMF would use this power if a member country tried to re-implement a gold standard or abolish fractional reserve banking.

Any thoughts?

 

[kevsta]

I don't know enough about this to comment on my own behalf, but some of the guys I follow do. Rickards said:

When asked about how the world will transition to SDR’s, Rickards responded, “...You’ll see big companies like Caterpillar and others that have global operations start to issue bonds in SDR’s. They’ll be underwritten by Goldman Sachs and others and you will see Goldman Sachs, Morgan Stanley and Credit Suisse and others start to make markets in SDR bonds. You will start to see a repo market so you can leverage it up.

This will all happen little by little, but the blueprint has already been laid. You know we’ve done a lot of interviews on King World News, Eric. Let’s plan one for a year from now and mark my words, a year from now the SDR market will have taken significant strides toward becoming a market with a full range of maturities of investable assets and basically the new reserve currency of the world.

The question is: Is that any more stable than the dollar? In the long run it’s really no more stable, but in the short run it may work to paper over. I mean we papered over the depression in 2010 with dollars. We may paper over the depression in 2011, 2012 with euros. Eventually they are going to try to paper it over with SDR’s, but at the end of the day it’s all just paper.”

full audio here if you want to skip the intro and ads, the interview starts at 1.00 min in.

my question would be:

1. how is printing up trillions of new paper going to change anything fundamentally? if this is a real and workable solution, surely they don't even need to bother with the IMF and SDRs, all they need to do is seize every instance of the Monopoly game and use that money to save the printing costs?

just sounds like more Ponzi Extend & Pretend to me.

 

[psionl0]

how is printing up trillions of new paper going to change anything fundamentally?

As I summed up above, SDRs act more as a line of credit than a fiat currency. If you like, it is like a bank account (with the IMF) that has an overdraft facility.

Yes, we are talking about DEBT again.