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SDR's - Special Drawing Rights and the IMF

Discussion in 'Financial Cents' started by Ganado, Aug 17, 2016.

  1. Ganado

    Ganado Monkey+++

    This is one of the best explanations of how the world money markets are changing.

    Jim Rickards
    for The Daily Reckoning

    The Day The Dollar Died Part I

    Will history record September 4th, 2016 as the day the dollar died? Before continuing, let me make it clear that you aren’t going to wake up on September 5th to find anything noticeably different…

    The dollar won’t lose its reserve currency status overnight. It won’t be instantaneously inflated into worthless piece of currency, and we aren’t going to see immediate 90% hyperinflation. None of these things are going to happen.

    What I mean is that in the not-too-distant future, maybe five years, maybe three years, maybe less, we’ll look back and say, “That was the date when everything changed. That was the turning point for the dollar and we didn’t see it at the time.” But those who know what to look for will understand the significance of that date.

    It all has to do with the International Monetary Fund (IMF) and something called the Special Drawing Right, or SDR for short. World money is another term for it. The SDR is a kind of world money issued by the IMF, based in Washington. The U.S. Federal Reserve has a printing press to can print dollars. The Bank of England has a printing press to can print Sterling. The European Central Bank (ECB) can print euros. That said, the IMF can print SDRs.

    When I say print, of course, the money is digital and you won’t be using it to buy groceries or gasoline. SDRs will be digitally created and handed out to member states to serve as a new form of world money. I simply use the word “printing” and “paper money” as shorthand.

    On September 4th, does the dollar disappear, replaced overnight by SDRs? No. We are not there yet. But it will be a significant turning point. Before getting to the significance of September 4th, let’s look back in history a bit to frame the context…

    Let’s say, pound sterling, if you were sitting around the government ministries in London in June of 1914, you would’ve looked around the world and said, “All is fine with the world.” It was the height of the British Empire.

    Pound sterling was backed by gold issued by the Bank of England. It was the world money at the time. You could use a British gold sovereign, a one-ounce British gold coin, virtually anywhere in the world. And everything looked like it would maybe stay that way for the next hundred years.

    Then in a very quick sequence of events from the end of June to the end of July, the Archduke of the Austro-Hungarian Empire was assassinated by a Serbian terrorist backed by Russia. That event set in motion the events that led to World War I and the ultimate decline of the British Empire.

    When the war started, markets around the world crashed because the belligerents were liquidating their assets to raise money. The U.S. started shipping a lot of gold to the U.K. and Europe because Europeans were selling U.S. stocks to raise cash, convert it to gold to ship it back to Europe. It’s a fascinating story in and of itself. The point is, within a few months, gold was flowing out of New York to the U.K. because England initially sold U.S. securities to get gold.

    Today the gold has primarily been going from London to China. But in the summer and fall of 1914 it was going from New York to London and other parts of Europe who needed the gold to finance the war effort. Gold was flowing out of the United States at enormous rate. But by November 1914 it turned around because now the U.K. was desperate for war material. It needed to buy agricultural produce, cotton, steel, weapons, whatever the U.S. could produce. In those days of the classical gold standard, nations had to pay for it with gold, or with paper that could be redeemed for gold.

    Suddenly the gold started flowing back to the United States. By the late 1920s, the U.S. was the leading gold power in the world. Britain lost its world standing, unthinkable in June 1914. By the time of Bretton Woods in 1944, the U.S. had about two-thirds of all the official gold in the world because it had been a major manufacturing powerhouse and a major export powerhouse while the rest the world was fighting.

    The U.S. eventually entered both World Wars I and II. But World War II started almost three years before the U.S. got involved, World War I started nearly three years before the U.S. got involved. We had a long period of time as a neutral power in both wars to ship war material to allies for gold, which we did.

    At Bretton Woods in 1944, the U.S. dollar was enshrined for the next 30 years as not only the number one reserve currency in the world, but the only currency that was convertible to gold. All the other currencies were pegged to the dollar and the dollar was pegged to gold. The dollar became from then on the dominant reserve currency of the world up until today. Now that role is in doubt.

    Now here is the point: many people look at Bretton Woods and say, “That was the day the dollar replaced the sterling. From then on the dollar was the leading reserve currency, the U.S. had all the gold. Sterling went into a long decline.”

    That’s not what happened…

    The actual turning point was 1914, was 30 years earlier. You can look at the entire 30-year period from 1914 to 1944 as a long, slow displacement of sterling by the dollar. At the end of the process, the dollar was King and sterling was a very weak currency that couldn’t backup its obligations. It had been given to Commonwealth Trading Partners, but they didn’t want it. By 1944 the U.K. economy was flat on its back because of the war. But the process started in 1914 when the gold started flowing to the U.S.

    Nothing that happens on September 4th, 2016, will produce an overnight calamity for the dollar. But it’ll be a key turning point, not unlike November 1914 when the gold flow reversed out of England to New York. Then the dollar began its long ascent and sterling lost its dominance. If you had been a large investor in the U.K. and had seen that turning point, you would have gotten out of sterling assets and converted to dollar assets. You would’ve made a fortune and avoided enormous losses.

    The point I’m making about September 4th is that it could be one of those dates in history that people will point to as a similar turning point. Except this process probably isn’t going to take 30 years. It could take 10 years or less. No one knows exactly what’s going to happen. We do know enough to say this will be one of those times when a very small number of astute individuals will know it at the time.

    They’ll be able to look at September 4th and see it for what it is, the end of the dollar. 10 years from now it will become apparent that this was the time to get into gold, energy, silver, hard assets, land, fine art, and other assets that will preserve value. It won’t be apparent to most people until years into the future.

    Another good example of a turning point that not many recognize at the time is Pearl Harbor. The U.S. suffered thousands of casualties and a good percentage of its Pacific fleet was destroyed or badly managed. It was enormous setback for the United States. But an astute observer would have concluded that, given our vast resources and manufacturing capability, it was just a matter of time before we would overwhelm the Japanese Empire.

    A sharp analyst could have said, “No, this is a turning point in world history. This is the end of the Japanese Empire, this is the rise of the American Empire.” It would have been the perfect time to bet on America and against Japan. But few people were thinking in those terms when the U.S. Pacific fleet was in ruins on December 8th, 1941. It’s important to see these historic turning points for what they are.

    Tomorrow, I’ll look specifically at September 4th and why I think it’ll be one of those historical dates few will recognize for what it is. But I want to give you the chance to understand exactly what’s going on. The dollar replaced sterling over a 30-year process. Now we’re looking at the process of replacing the dollar with SDRs. And it could start September 4th.

    The Day The Dollar Died, Part II
    There is a concept, advanced by a philosopher named Karl Popper. Karl Popper decades ago called piecemeal engineering. What he meant by this is if you’re one of the power elites in the world — a political leader, finance minister or head of a globalist institution who wants to run the world or tell other people how to live their lives — you can’t do it all at once.

    Many have tried. Caesar, Napoleon, Hitler, the great dictators in history have tried to do everything at once. But they were all defeated because they invite retaliation and pushback of various kinds.

    Popper said that if you want to change the world, you must do it slowly, one piece at a time, in ways that people don’t notice. An analogy is something called the ratchet. A ratchet tool is a tool that only turns one way. You can turn it one way… but you can’t turn it back. It’s an irreversible process.

    Now let’s take that concept of piecemeal engineering and apply it to the elimination of the U.S. dollar and the rise of the special drawing right (SDR), because that’s what we are looking at in the future.

    The SDR was invented in 1969 and there were a number of issues of SDRs in the 1970s. During the ‘70s we had massive liquidity crisis, borderline hyperinflation, a quadrupling of oil prices, and a stock market crash. The dollar almost collapsed between 1977 and in 1981. The situation was so bad that in 1977, the United States Treasury borrowed money in Swiss francs. Nobody wanted U.S. dollars, at least not at an interest rate the U.S. was willing to pay.

    That was when the IMF issued SDRs to provide liquidity to the world at a time when the dollar was collapsing. That was the last time prior to 2009 when the IMF issued SDRs.

    But it moved the ratchet forward.

    Then there was a 30-year period from roughly 1980 to 2010 which has been described as the age of King Dollar. They didn’t need SDRs because the banking system was doing its job.

    But in 2009-2010 two things happened. First, in 2009 the IMF issued SDRs for the first time in almost 30 years. That was in response to the global liquidity crisis when it looked like the world’s central banks couldn’t act fast enough. So the IMF issued over $100 billion of SDRs. Few people are even aware it happened.

    But it moved the ratchet forward once again.

    At the time, I went on CNBC and said, “What they’re doing is testing the plumbing.” The SDR hadn’t been used since 1980. The IMF needed to make sure the system still functioned, like an air-conditioning or plumbing system that hasn’t been used in years.

    It did, and the system worked perfectly. Now they know the system works.

    And we won’t be seeing anymore 30-year gaps of the kind we had between 1980 and 2009. In January 2010, the IMF issued another paper really speculating on the rise of the SDR as world money or a global currency. It was really a blueprint for the permanent establishment of the SDR. In other words, not a special, temporary SDR issue in case of emergency — but making the SDR a permanent global reserve currency.

    But there’s a problem. In order to be a global reserve currency, the IMF can’t just print money to hand out. To create a reserve currency it needs to create an SDR-denominated bond market.

    The reason the dollar is the world’s leading reserve currency is because there’s a very large liquid dollar-denominated bond market. Investors can go buy 30-day 10-year, 30-year Treasury notes, etc. The point is, there’s a deep, liquid dollar-denominated bond market to invest in that creates a lock-in effect. There is currently no equivalent bond market in SDRs. It will need to create one before SDRs can be considered a global reserve currency.

    Well, last July, the IMF published a technical paper introducing the concept of a private SDR market…

    In the IMF’s vision, private companies and corporations can issue bonds denominated in SDRs. Who are the logical issuers of the bonds?

    Probably multinational or multilateral organizations like the Asian Development Bank and maybe big corporations like IBM and General Electric.

    Who would buy these SDR-denominated bonds? Mostly sovereign wealth funds. China will be substantial buyers. The point is, these issues are coming

    Now the deployment of the SDR is coming closer to fruition…

    The SDR has been composed of four currencies — the U.S. dollar, British pound sterling, the euro and the Japanese yen. But that’s about to change…

    At midnight on September 30, the IMF will include the Chinese yuan in its basket of currencies. That will be a major event in monetary history. The IMF is welcoming China to the club.

    For many people in the West, Americans in particular, this is just some technical IMF procedure. But that’s not how the Chinese look at the world. The Chinese are all about saving face and gaining face. One way to gain face in the Chinese concept is by gaining prestige. Being included in the IMF’s exclusive club of currencies affords them that prestige, even though westerners tend to think of it as a mere technical readjustment.

    Yesterday I said September 4, 2016 could well go down as the day the dollar died. Why did I pick that date instead of September 30, the official date when the yuan is included in the IMF’s basket of currencies?

    Because September 4 is when the leaders of the world’s larger economies will gather in Hangzhou, China for the G20 annual summit. This will be China’s coming-out party. This is China saying, “We are an equal partner, maybe more than the equal partner of the United States of America and Europe. They will no longer dictate the world’s financial system.”

    The symbolism and the visuals at the upcoming meeting will be spectacular.

    The IMF is essentially told what to do by the G20. If you think of the IMF as the central bank of the world, think of the G20 as the Board of Directors of the central bank of the world. It’s the committee that runs the world. This is not a conspiracy theory. It’s a fact.

    And it’s important to realize that one G20 memo calls for “expanding the role of the IMF’s SDR (Special Drawing Rights).”

    The pace is really picking up. The SDR bond issues I mentioned above are probably going to happen within the next couple of weeks. Between now and Labor Day we’ll see announcements about multibillion SDR bond issuance coming from the Asian Development Bank, some major Chinese commercial banks, the Asian Infrastructure Investment Bank, etc.

    The point is, so these issues are coming. And over time, the SDR market will grow. It will not compete with the dollar-denominated bond market anytime soon, but the groundwork is being laid. Every time an institution invests in SDRs, they’ll be indirectly supporting the yuan. And it’ll help move the world that much further away from the dollar. This will have vast implications for anyone who holds their wealth in dollars.

    The mechanics are too far along, the piecemeal social engineering was too well thought out, the ratchet is locked in place. It won’t be reversed. The next time there is a financial crisis, which I expect sooner than later, it’s not going to be the Fed that bails us out. It’s going to the IMF and the SDRs.

    Then the ratchet effect will be completed.

    In 10 years many people are going to look back and point at September 2016 as the point in time the dollar era ended. They can’t see it now.
    GOG, smithcp2002, arleigh and 4 others like this.
  2. VisuTrac

    VisuTrac Ваша мать носит военные ботинки Site Supporter+++

    @Ganado I liked your posting the information but I really don't like the information itself.

    I've read Rickard most recent books. Those pages will keep one awake at night.
    Ganado and Yard Dart like this.
  3. techsar

    techsar Monkey++

    I concur with VT's assessment...perhaps gives one added incentive to acquire some pm's as a hedge.
    john316 and Yard Dart like this.
  4. duane

    duane Monkey++

    Thank you for posting this here. Read Rikard often and while he speculates a lot, he is very astute in his observations. I don't know if gold is the answer, prefer lead, LTS food, useful tools, and land myself, but his statement that things are coming to the end game are probably right on. I do not think that creating a new infrastructure, free sh** for everyone, free medical care and a few of Hitlery's other promises can be financed by the 1/10 of 1 % so with her coronation scheduled for next year, Rickard's thoughts about one possible outcome are well worth thinking about. As the Sheriff mentioned about the riots in Wisconsin, since the collapse in 2008 the US has spent 1.5 trillion dollars on the problem and the situation there has gotten worse. Throwing more money at it will not solve the problem.
    GOG, john316 and Ganado like this.
  5. Ganado

    Ganado Monkey+++

    @duane I'm the same. I'm not convinced metals are the answer, gold silver or otherwise. I am convinced we will see a 35% reduction in our buying power in the US by the end of the year and another 35% next year. For a total of apps 50% over 2 years. This will continue until we start manufacturer in our own goods again.

    So I prepare for expensive times by gardening and storing stuff. Its going to be a lean 3-5 years.

    The good news is they can't tank the usa completely because them there would be no customers for china.

    I did see today that the USD and the zim are valued 1:1. if you follow currency you know this is a huge change
    john316 and Bandit99 like this.
  6. Bandit99

    Bandit99 Monkey++

    @Ganado I think you are spot on. This scares the hell out of me and I really don't know what to do about because even though the author says 'metals, land, art' (never thought of art) I not sure I agree with it One thing is certain, as soon as world goes off dollar things will cost more, a lot more. I have been figuring 30% but your prediction of 35% immediately and 50% over 2 years is very possible which would lead to, more than likely, very, very hard times. 4 September 2016, mark my calendar. Geez, as if Hillary coming to power isn't bad enough we'll have to face this also... This will change the world as we know it, completely and forever.

    What the hell is a 'Zim?' Isn't that the Zimbabwe currency?
    Ganado likes this.
  7. Ganado

    Ganado Monkey+++

    @Bandit99 yes

    Don't let it scare you. they need consumers. we just have to be smart about buying and bank at state regulated banks not at the big national banks which have derivitives.

    You can find state regulated banks by seching the corporation commission of your state and looking for bank licensing
  8. Bandit99

    Bandit99 Monkey++

    I have never used the big name national banks. Due to being overseas for so many years, I use Pentagon Federal Credit Union because there are better setup for overseas people but I do also keep cash in my brokerage and IRA accounts; I got out of stocks and went to cash as much as I could a few years back when it became obvious it was crooked and rigged. I need to move that money out of there for certain...to where is the big question? I do use a credit union here in Idaho also as it is easier to get things done locally sometimes with a bank that is local. I might move the brokerage cash there. Gold at $1352 today... It will be interesting to watch it come 4 September...
    Ganado likes this.
  9. Ganado

    Ganado Monkey+++

    It's not official till October 1 and it prolly won't happen all at once. his reports were pretty good speculation given all that we don't know that happens behind the scenes.

    The thing we need in America is to manufacture goods again so we are not so dependent on the trade deficit
    Yard Dart likes this.
  10. Ganado

    Ganado Monkey+++

  11. VisuTrac

    VisuTrac Ваша мать носит военные ботинки Site Supporter+++

    Until we can reduce our cost to below what it cost to mfg the same product below what it costs to mfg overseas, and ship it here and pay duty on it and transport it across the country .. it's not coming back here. We are now a Walmart world .. Cheap price wins.

    There will always be speciality or niche manufacturers here in US/Canada that will be immune from offshore due to technology, skilled workers and quality. But widgets, screws, nails, ...etc, can be made by anyone standing in front of a machine pushing a button are not coming back. Hi-tech manufacturing employs less people due to automation. So the production manufacturing factories that use to employ maybe a couple hundred, now only needs a few dozen to produce the same gross revenue.
  12. Bandit99

    Bandit99 Monkey++

    Yeah, you nailed it. There has to be a BIG reason now for companies to come back stateside especially since they are rooted so deep in the third-world countries and can be more competitive from there and certainly not so regulated. Believe it or not, 'speciality or niche' manufacturing has risen quite a bit in the states but the problem is, as you stated, they don't produce enough jobs. Many continue to say that the Service economy will revive the US workforce and economy; I say BS. I was told long ago by a Economics Professor from Amherst University that economics is a black art, no one can really say why and what it will do. But, it sure seem to me that we have been in this Service industry at least a generation now and all I see are people out of work and out of hope.
    Ganado and GOG like this.
  13. ghrit

    ghrit Ambulatory anachronism Administrator Founding Member

    Which once again points me toward reduction of financial burdens (including taxes) on the producing industries in the hope that they will re-establish manufacturing operations stateside. The overseas operations will continue, but we can hope that the new plants will make the product more competitive with way lower shipping costs.
  14. Bandit99

    Bandit99 Monkey++

    That would certainly do it. For example, the Irish gave 5-year free tax status and a bunch of incentives to any new companies that set up business in Ireland. And, it worked! Dell jumped on the offer as did many other companies. They became the 'Tiger of Europe' even though they now are nothing but a kitten due to bad fiscal management.
    Ganado likes this.
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