Currency Wars_ The Making of the Next Global Crisis - James Rickards [120]
The IMF created the SDR in 1969 at a time of international monetary distress. Recurrent exchange rate crises, rampant inflation and dollar devaluation were putting pressure on global liquidity and the reserve positions of many IMF members. Several SDR issues were distributed between 1969 and 1981; however, the amounts were relatively small, equivalent to about $33.8 billion at April 2011 exchange rates. After that, no SDRs were issued for the next twenty-eight years. Interestingly, the original SDR from 1969 was valued using a weight of gold. The gold SDR was abandoned in 1973 and replaced with the paper SDR currency basket still in use today.
In 2009 the world again faced an extreme liquidity shortage from losses incurred in the Panic of 2008 and the subsequent deleveraging of balance sheets of financial institutions and consumers. The world needed money fast, and the leaders of the international monetary system went to the 1970s playbook to find some. This time the effort was directed not by the IMF itself but by the G20 using the IMF as a tool of global monetary policy. The amounts were huge, equivalent to $289 billion at the April 2011 exchange rate. This global emergency money printing went almost unnoticed by a financial press that was preoccupied with the collapse of stock markets and home prices at the time. Yet it was the beginning of a new concerted effort by the G20 and the IMF to promote the use of SDRs as the global reserve currency alternative to the dollar.
Dollars, euros and yuan would not disappear under this new SDR global currency regime; rather they would still be of use in purely domestic transactions. Americans would still buy milk or gasoline using dollars, the same way Syrians could do the same locally using their Syrian pounds. However, on globally important transactions such as trade invoicing, international loan syndicates, bank bailouts and balance of payments settlements, the SDR would be the new world money and the dollar would be a subordinate part, subject to periodic devaluation and diminution in the basket according to the dictates of the G20.
In addition to the direct printing of SDRs, the IMF has more than doubled its SDR borrowing capacity from a precrisis level of about $250 billion (equivalent) to a new level of $580 billion as of March 2011. These expanded borrowings are accomplished by loans from IMF members to the IMF, which issues SDR notes in exchange. The borrowings were designed to give the IMF capacity to lend to members in distress. Now the IMF is positioned to perform the two key functions of a true central bank—money creation and lender of last resort—using the SDR as its form of money under the direction of the G20 as its de facto board of governors. The vision of the creators of the SDR in 1969 is now coming to fruition on a much grander scale. The day of the global central bank has well and truly arrived.
Even with these expanded issuance and borrowing facilities, the SDR is still far from being able to replace the dollar as the dominant international reserve currency. In order for the SDR to succeed as a reserve currency, SDR holders will require a large liquid pool of in-vestible assets of various maturities that holders can invest their reserve balances in to achieve a return and preserve value. This requires an SDR bond market with public and private instruments and a network of primary dealers and derivatives to provide liquidity and leverage. Such markets can emerge piecemeal over long periods of time; however, the G20 and IMF do not have the luxury of time, because other