World prepares to dump the USD/What's Wrong With The Idea of Special Drawing Rights(SDR)?

[Exarch]

The idea of using the IMF's special drawing rights was put forth by the chinese reformist and economist Zhou Xiaochuan early this yr:

Spoiler Alert, click show to read: 

Zhou Xiaochuan's Statement on Reforming the International Monetary System

Published March 23, 2009
Author: Zhou Xiaochuan
The People's Bank of China released this statement by Zhou Xiaochuan, the central bank's governor, on March 23, 2009. It calls for replacing the dollar as the dominant world currency and creating "an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run".
The outbreak of the current crisis and its spillover in the world have confronted us with a long-existing but still unanswered question,i.e., what kind of international reserve currency do we need to secure global financial stability and facilitate world economic growth, which was one of the purposes for establishing the IMF? There were various institutional arrangements in an attempt to find a solution, including the Silver Standard, the Gold Standard, the Gold Exchange Standard and the Bretton Woods system. The above question, however, as the ongoing financial crisis demonstrates, is far from being solved, and has become even more severe due to the inherent weaknesses of the current international monetary system.
Theoretically, an international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply; second, its supply should be flexible enough to allow timely adjustment according to the changing demand; third, such adjustments should be disconnected from economic conditions and sovereign interests of any single country. The acceptance of credit-based national currencies as major international reserve currencies, as is the case in the current system, is a rare special case in history. The crisis again calls for creative reform of the existing international monetary system towards an international reserve currency with a stable value, rule-based issuance and manageable supply, so as to achieve the objective of safeguarding global economic and financial stability.
I. The outbreak of the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system.
Issuing countries of reserve currencies are constantly confronted with the dilemma between achieving their domestic monetary policy goals and meeting other countries' demand for reserve currencies. On the one hand,the monetary authorities cannot simply focus on domestic goals without carrying out their international responsibilities; on the other hand,they cannot pursue different domestic and international objectives at the same time. They may either fail to adequately meet the demand of a growing global economy for liquidity as they try to ease inflation pressures at home, or create excess liquidity in the global markets by overly stimulating domestic demand. The Triffin Dilemma, i.e., the issuing countries of reserve currencies cannot maintain the value of the reserve currencies while providing liquidity to the world, still exists.
When a national currency is used in pricing primary commodities, trade settlements and is adopted as a reserve currency globally, efforts of the monetary authority issuing such a currency to address its economic imbalances by adjusting exchange rate would be made in vain, as its currency serves as a benchmark for many other currencies. While benefiting from a widely accepted reserve currency, the globalization also suffers from the flaws of such a system. The frequency and increasing intensity of financial crises following the collapse of the Bretton Woods system suggests the costs of such a system to the world may have exceeded its benefits. The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies. Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.
II. The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies.
1. Though the super-sovereign reserve currency has long since been proposed, yet no substantive progress has been achieved to date. Back in the 1940s, Keynes had already proposed to introduce an international currency unit named "Bancor", based on the value of 30 representative commodities. Unfortunately, the proposal was not accepted. The collapse of the Bretton Woods system, which was based on the White approach, indicates that the Keynesian approach may have been more farsighted. The IMF also created the SDR in 1969, when the defects of the Bretton Woods system initially emerged, to mitigate the inherent risks sovereign reserve currencies caused. Yet, the role of the SDR has not been put into full play due to limitations on its allocation and the scope of its uses. However, it serves as the light in the tunnel for the reform of the international monetary system.
2. A super-sovereign reserve currency not only eliminates the inherent risks of credit-based sovereign currency, but also makes it possible to manage global liquidity. A super-sovereign reserve currency managed by a global institution could be used to both create and control the global liquidity. And when a country's currency is no longer used as the yardstick for global trade and as the benchmark for other currencies, the exchange rate policy of the country would be far more effective in adjusting economic imbalances. This will significantly reduce the risks of a future crisis and enhance crisis management capability.
III. The reform should be guided by a grand vision and begin with specific deliverables. It should be a gradual process that yields win-win results for all.
The reestablishment of a new and widely accepted reserve currency with a stable valuation benchmark may take a long time. The creation of an international currency unit, based on the Keynesian proposal, is a bold initiative that requires extraordinary political vision and courage. In the short run, the international community, particularly the IMF, should at least recognize and face up to the risks resulting from the existing system, conduct regular monitoring and assessment and issue timely early warnings.
Special consideration should be given to giving the SDR a greater role. The SDR has the features and potential to act as a super-sovereign reserve currency. Moreover, an increase in SDR allocation would help the Fund address its resources problem and the difficulties in the voice and representation reform. Therefore, efforts should be made to push forward a SDR allocation. This will require political cooperation among member countries. Specifically, the Fourth Amendment to the Articles of Agreement and relevant resolution on SDR allocation proposed in 1997 should be approved as soon as possible so that members joined the Fund after 1981 could also share the benefits of the SDR. On the basis of this, considerations could be given to further increase SDR allocation.
The scope of using the SDR should be broadened, so as to enable it to fully satisfy the member countries' demand for a reserve currency.
Set up a settlement system between the SDR and other currencies. Therefore, the SDR, which is now only used between governments and international institutions, could become a widely accepted means of payment in international trade and financial transactions.
Actively promote the use of the SDR in international trade, commodities pricing, investment and corporate book-keeping. This will help enhance the role of the SDR, and will effectively reduce the fluctuation of prices of assets denominated in national currencies and related risks.
Create financial assets denominated in the SDR to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, will be a good start.
Further improve the valuation and allocation of the SDR. The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight. The allocation of the SDR can be shifted from a purely calculation-based system to a system backed by real assets, such as a reserve pool, to further boost market confidence in its value.
IV. Entrusting part of the member countries' reserve to the centralized management of the IMF will not only enhance the international community's ability to address the crisis and maintain the stability of the international monetary and financial system, but also significantly strengthen the role of the SDR.
1. Compared with separate management of reserves by individual countries, the centralized management of part of the global reserve by a trustworthy international institution with a reasonable return to encourage participation will be more effective in deterring speculation and stabilizing financial markets. The participating countries can also save some reserve for domestic development and economic growth. With its universal membership, its unique mandate of maintaining monetary and financial stability, and as an international "supervisor" on the macroeconomic policies of its member countries, the IMF, equipped with its expertise, is endowed with a natural advantage to act as the manager of its member countries' reserves.
2. The centralized management of its member countries' reserves by the Fund will be an effective measure to promote a greater role of the SDR as a reserve currency. To achieve this, the IMF can set up an open-ended SDR-denominated fund based on the market practice, allowing subscription and redemption in the existing reserve currencies by various investors as desired. This arrangement will not only promote the development of SDR-denominated assets, but will also partially allow management of the liquidity in the form of the existing reserve currencies. It can even lay a foundation for increasing SDR allocation to gradually replace existing reserve currencies with the SDR.

source: http://www.cfr.org/publication/18916/

now it seems like a pretty good idea to cushion against any further financial crises, so why hasnt it been taken up?
what's the go? look at how many unemployed there are cuz of the FC. what's stopping ppl from adopting the idea of an IMF SDR based global economy?

discuss

[Exarch]

after 2 days and still no opinions?
fellas, this is important, after all this from ~3 weeks ago:

Spoiler Alert, click show to read: 

World Prepares to Dump the Dollar
July 21, 2009 | From theTrumpet.com
American economists think the world can’t afford to let go of the dollar’s reserve currency status. The world is about to teach them differently.

Robert Morley

What do China, India, Brazil, Russia, France and Germany have in common? These countries most often can’t agree on anything. But they are united in one strange—and ominous—way. They blame the United States for wrecking the global economy. And they think the dollar is the wrecking ball.
One rock-solid, foundational belief underpins almost all economic theory in America: faith in the dollar’s unassailable status as the world’s reserve currency. Foreigners hold so many dollars that they can’t afford to stop buying them, the theory goes. Therefore the dollar’s status as the world’s reserve currency is sound. But the dollar is now coming under a concentrated attack. Are American economists about to get schooled?
Has a dollar-killer been minted?Angela Merkel summed up the dollar-skeptic viewpoint last year. “Excessively cheap money in the U.S. was a driver of today’s crisis,” she told the German parliament. And America’s solution—even more cheap money—was just setting the world up for another crisis, she said. It was just a matter of time.
The irony is that America is completely blind to the catastrophe heading its way. As the economic crisis unfolded at the end of last year, investors made a mad rush out of global stock markets and into other assets. The biggest beneficiary of the panic was the one market large enough and liquid enough to handle the trillions of dollars being moved: the U.S. dollar market. This caused the dollar to surge in value.
America grossly misdiagnosed the demand for dollars as a vote of confidence in the U.S. economic system. In fact, it was primarily a case of investors looking for a place they could quickly and easily get their money in—and out.
Now that the initial panic has subsided, the dollar’s international purchasing power has resumed its former downward trajectory. Since the post-crisis high in March, the dollar has fallen by a portfolio-shredding 10 percent.
America’s foreign creditors are again questioning the wisdom of holding so many U.S. dollars. And they’re looking for a way out.
“Leaders from Brazil, Russia, India and China are demanding a greater stake in the management of the global economy and challenging the dollar as the primary denomination for world reserves,” reported Bloomberg about the recent G-8 summit.
But is dumping the dollar just wishful thinking on the part of these nations? Or is there some tangible alternative? Well, how about this: Some think they’ve already minted a dollar-killer.
Russia’s president is pushing to remove the dollar and reinstate some version of a gold standard. Dmitry Medvedev unveiled a newly minted gold bullion coin that he said was a true “symbol of unity,” and “our desire to solve such issues.” It was a test sample of a new supranational currency referred to as the United Future World Currency. Samples were issued to each of the world leaders attending the G-8 summit.
“We are discussing the creation or, to be more correct, the appearance of new reserve currencies,” said Medvedev.
“Debate” about Bretton Woods is flowery code for an attack on the dollar.What is even more surprising is that the dollar assaults have come not only from perennial U.S. antagonists but also from its more democratic allies. At the G-8 summit, French President Nicolas Sarkozy called for a complete revamp of the global currency system, saying that the dollar’s supremacy is outdated. “[W]e’ve still got the Bretton Woods system of 1945,” Sarkozy stated on July 9. “Frankly, 60 years afterwards, we’ve got to ask: Shouldn’t a politically multipolar world correspond to an economically multi-currency world?”
Bretton Woods was the historic conference that laid the foundation for a postwar global economy centered on the dollar. “Even if it’s a difficult topic,” Sarkozy said, “There has to be a debate.” “Debate” about Bretton Woods is flowery code for an attack on the dollar.
India too seems to be moving into the anti-dollar camp. Suresh Tendulkar, an economic adviser to Indian Prime Minister Manmohan Singh, is urging the government to diversify its foreign-exchange reserves and hold fewer dollars. India holds over $250 billion worth.
Such a decision could break the U.S. dollar bond market.But the next blow to the dollar may come as a complete surprise to Washington policymakers. Since World War ii, Japan has been a stalwart dollar supporter and a close collaborator with Federal Reserve monetary policy. That may be about to end. For only the second time in 54 years, the opposition in Japan is close to taking over the government. Japan’s economy, like those of the rest of the world, is in severe contraction, and disgruntled voters are upsetting the balance of power and pushing for radical reforms.
Back in May, Masaharu Nakagawa, the chief finance spokesman for the opposition, told the bbc that he was worried about the future value of the dollar. He said that if his party were elected in the upcoming national elections, Japan would refuse to purchase any more U.S. treasuries unless they were denominated in Japanese yen instead of dollars.
Such a decision could break the U.S. dollar bond market.
Japan is America’s second-most important creditor nation—lending the U.S. billions of dollars each year. If Japan won’t lend unless America pays it back in yen, then China and other major lenders may quickly follow suit. This would eliminate America’s ability to use inflation to cheat on its debt payments. America’s debt burden would soar, interest rates would jump, and national default—Argentina-style—could be staring America in the face within months instead of years.
“America is making a terrible mistake which will result in the greatest fall in all of mankind’s history!” Tim Thompson wrote for the Trumpet in 2000. “As soon as America is no longer a safe place for foreign money, that money will be gone. And once the foreign money is gone, it will leave us with a mountain of debt that we cannot repay.”
What Japan is proposing could be the first steps of a great exodus from the U.S. bond market and consequently the end of the dollar as the world’s reserve currency.
America’s leaders seem blind to the looming dollar revolt. Global economies are in crisis. Unemployment rolls are soaring. People want answers and solutions. The jobless will demand action, and culpable politicians will look for scapegoats and distractions. The first step, blaming the U.S. and its currency for the global recession, has already begun.
A new global currency—and leveraging it to knock the U.S. down—will be the solution.
The highly trained economic theorists who keep telling us that foreigners can’t afford to stop supporting the U.S. are about to get reeducated at Reality U. •

source: http://www.thetrumpet.com/index.php?q=6347.4807.0.0

[Jexiel]

Because the Chinese are not going to suddenly dump their 2 trillion USD investment as long as the Obama administration assures them they will tame the fiscal and monetary monster they are creating. However, if the USD continues losing value you will see more countries jumping into the bandwagon.

[Exarch]

Because the Chinese are not going to suddenly dump their 2 trillion USD investment as long as the Obama administration assures them they will tame the fiscal and monetary monster they are creating. However, if the USD continues losing value you will see more countries jumping into the bandwagon.

It's not just the chinese, as you'd read in my 2nd post; it's the other BRIC and germany.

in any case, confidence in the USD has been irreparably damaged; noone's going to trust puttign their $$$ in the hands of someone who irresponsibly ed things up and pleading to promise 'never to allow it to happen ever again'.
no, aint gonna happen.

[Watchman]

I thought the shift away from the $US wasn't anything new ? Teh € has been getting popular as the alternative, I seem to recall.

[Exarch]

I thought the shift away from the $US wasn't anything new ? Teh € has been getting popular as the alternative, I seem to recall.

more info pls

[Comrade the Colonel]

this is old. The USD isnt going anywhere for a while.

[manofarms89]

isnt the australian dollar worst off then the usd?

[Justice and Mercy]

The Euro is favored because of Europe's sensible monetary policy. It's time for our leaders to stop trying to turn a crisis into growth. Let the recession hit, let the market fix itself. In the mean time, try and keep the value of the dollar stable.

EDIT: Sorry, in the middle of the thread I stopped thinking about the first post. My apologies for being off-topic. When I get a chance I'll reply to the topic at hand.

EDITED EDIT: I'd much rather America just fix it's own monetary policy than take on some international currency. Hell, read carefully, the question is already being asked "How could this new currency facilitate economic growth?"

I like the talk of "stable global currency", but I wouldn't trust the IMF to keep to those claims. Not enough to make a changes this big.

[Exarch]

The Euro is favored because of Europe's sensible monetary policy. It's time for our leaders to stop trying to turn a crisis into growth. Let the recession hit, let the market fix itself. In the mean time, try and keep the value of the dollar stable.

EDIT: Sorry, in the middle of the thread I stopped thinking about the first post. My apologies for being off-topic. When I get a chance I'll reply to the topic at hand.

EDITED EDIT: I'd much rather America just fix it's own monetary policy than take on some international currency. Hell, read carefully, the question is already being asked "How could this new currency facilitate economic growth?"

I like the talk of "stable global currency", but I wouldn't trust the IMF to keep to those claims. Not enough to make a changes this big.

i look forward to it J&M
we sure could use some of your economist's insight

[Viking Prince]

First you might want to do some reading on the IMF web site.

Factsheet - Special Drawing Rights (SDRs)
The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.

Today, the SDR has only limited use as a reserve asset, and its main function is to serve as the unit of account of the IMF and some other international organizations. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions.

SDRs will not remove or even change the nature of the dollar in international finance. There are a basket of currencies used and they are valued in USD.

There is no need for SDRs to replace USD in contract language, but if the Chinese wish to do so, they can try. Remember that every contract has two sides. If Wallmart wants to and agrees to use such a valuation for their purchase ageements of Barbie doll imports, that is between WallMart and the manufacturer. The problem is settlement will still need a soveriegn currency or a basket of currencies to be used (SDRs are such a basket). Then WallMart will need to purchase a hedging agreement to lock in the USD value of the contract if the purpose is to have a stable price for imports into the USA. This just adds administration to the whole process. We already do this when purchasing and selling in smaller national markets such as Honduras if one party does not wish to lock in a USD value on the contract.

But the issue is not really with the purchase agreements. The issue is with the exposure the Chinese have with their huge balance of trade surplus with Europe and the USA. What is China to do with the USD and Euros? They can buy goods and services and not run a trade surplus or they can purchase assets such as sovereign debt. The Chinese and any country holding US Treasuries are free to sell them and purchase sovereign debt from other nations or to exchange the dollars for local currency on the international market. There is no investment system available for SDRs and there is no sovereign basis for any debt instrument to be issued in SDR terms. This would create a great deal of stress on the international system. The reason that the USD and the EURO are used is to minimise the stress created by hedging various currencies. The only reason that the USD was mentioned is to isolate one nation in the debate.

What the Chinese are really saying is that they want to continue to create a trade surplus with the rest of the world and they want the rest of the world to take all of the risk on the Chinese investment currency fluctuation risk. This is not going to happen. All parties with longterm trade positions take on currency fluctuation risks.

[Khora]

If you catch my drift...

I suppose it depends upon whether the EU can sort out the Treaty of Lisbon and move further towards fiscal convergence, but the Euro seems to be becoming an increasingly attractive option for a reserve currency in favour of the dollar.

[Generaal Van Heutsz]

what's stopping ppl from adopting the idea of an IMF SDR based global economy?

The idea that a worthless piece of paper is still a valid medium of exchange. Once the world realises that all the dolars they posses buys them almost nothing will they start dumping it and you better expect that daysooner rather than later.


So many new dollars have been created/lend into existence that there isn't enough produced in the US to make good for all those dollars.


Americans still think they are doing the world a favour by consuming everything and give some worthless pieces of paper in return and the world doesn't yet get it but that will change....

[Exarch]

from whut i understand
SDR backed by a basket of currencies would cushion a lot of countries against something like the US housing bubble bust/FC whcih as we can see-is causing one helluva lot of trouble worldwide.

it'd definitely be much more stable

the downside of course is that the USG can no longer keep running massive deficits in order to fund massive military spending

[Viking Prince]

from whut i understand
SDR backed by a basket of currencies would cushion a lot of countries against something like the US housing bubble bust/FC whcih as we can see-is causing one helluva lot of trouble worldwide.

it'd definitely be much more stable

the downside of course is that the USG can no longer keep running massive deficits in order to fund massive military spending

Basket currencies are no different than a single currency. The question is why are you using it? If China wishes to use SDR’s for the purchase of imports and the sale of exports, then what? Somebody still needs to invest trade surplus funds in foreign markets.

What about the other side of those transactions? Somebody will then need to hedge the SDR against the local currency. If the local currency is the USD or the Euro – this is a wasted transaction. If it is the Australian dollar – they are already doing the same against the USD based contract.

China is not sticking the trade surplus in mattresses. The only reason to advocate the use of the SDR’s is to minimize the risk of continuing to maintain a trade surplus against the USD and the Euro by adding other currencies to the basket. Why should the Chinese be given this risk free? What is in it for the rest of the world that has the trade deficit with China? Why transfer this risk?

The purpose in keeping this risk where it stands is to insure that the trade system balances in the long run. If China wants to purchase Manhattan with the foreign currency or half of Tokyo -- that is their option. If China wants to invest in US Treasuries of EU sovereign debt -- again that is their decision. If they wish to purchase Boeing aircraft, Caterpillar heavy equipment, GE nuclear plants, or Hershey’s Kisses -- again that resolves the issue of what to do with the surplus currency. But if China wishes to continue to accumulate a huge and nearly perpetual trade surplus, this is only counterbalanced by China carrying the risk of currency fluctuation on their reserve positions.

Also -- China can accomplish the same thing as SDR's for a reserve function by simply applying the basket ratio to the reserve currency portfolio. They can do this without any prodding of the international community.

[Generaal Van Heutsz]

What the americans just don't see to grasp is the fact that the chinese are doing you a huge favor, giving you all sorts of goods and services and still not asking anything in return except for worthless paper. If the chinese stopped building up this trade deficit they would be far better off, they could keep all this stuff they make for themselves or just enjoy a lot more free time.

[Admiral Piett]

What the americans just don't see to grasp is the fact that the chinese are doing you a huge favor, giving you all sorts of goods and services and still not asking anything in return except for worthless paper. If the chinese stopped building up this trade deficit they would be far better off, they could keep all this stuff they make for themselves or just enjoy a lot more free time.

Um, they are not by any means doing us a favor. Americans are the ones that import all of their goods.

[Exarch]

Basket currencies are no different than a single currency. The question is why are you using it? If China wishes to use SDR’s for the purchase of imports and the sale of exports, then what? Somebody still needs to invest trade surplus funds in foreign markets.

i understand that the SDR'll be backed up by different currencies such as the euro, the yen, the pound and the yuan and commodities besides the USD, so it wont just be china but the whole world who'll be shielded by any major crisis in any one country.

[Viking Prince]

i understand that the SDR'll be backed up by different currencies such as the euro, the yen, the pound and the yuan and commodities besides the USD, so it wont just be china but the whole world who'll be shielded by any major crisis in any one country.

I think this was already addressed earlier, but I will have another go at it.

The purpose of a currency is to be a medium of exchange. For example, firms based in the Euro region, euro based contracts are more stable than a SDR based contract. If you are a firm doing business in a country that is not included in the SDR basket, then this is less than usless. Now instead of hedging one currency against risk, you have a whole basket of currencies. As world trade stands at the moment, the USD, the Euro, and the UK Pound are adequate to meet the exchange risks of the bulk of the importers of finished goods.

These contracts can be supplier or purchaser driven however. One example: I remember managing currency risk in the 1970's. The firm bought drill pipe and supplies from a Dutch supply yard that only would deal in local currency. We chose to do business because of price and our ability to hedge against the Pound. We were already headging the Pound against the Dollar for financial statement purposes as well as a multirude of other currencies. If I could do this in the 1970's -- I am certain the Chinese can do this today without the need to force the entire world financial system to rework currencies.

China just wants to be seen as a player and this is just a foray to establish themselves.

[Viking Prince]

So what about the Chinese exports to Europe in exchange for "worthless paper" to use the words of the prior post? The paper is not worthless, but merely a medium of exchange, clever Peter Schiff quotes not withstanding.

The Chinese are not holding the actual or even a digital version of currency in some sort of giant digital trash can. Companies sell products in exchange for the USD and then convert the currency into local currency. The USD are then transferred through the banking system and used by others to purchase imports. The excess currency is held in reserve or converted to investments in foreign economies. The investment is usually in the form of sovereign debt since this is usually easily converted to currency and does not have the same investment risks as private debt and equity instruments. There is very little kept as cash deposits.