On Monday, November 2, it will have been seven months since leaders of the
Group of 20 nations met in London to expand the international currency known as
Special Drawing Rights. If you want to brush up on the background of this
international currency, our November 2008 newsletter, states, from the
International Monetary Fund's website:
The Special Drawing Right (SDR)
was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate
system. After the collapse of the Bretton Woods system in 1973, the SDR was
redefined as a basket of currencies, today consisting of the euro, Japanese
yen, pound sterling, and US dollar. The US dollar-value of the SDR is posted
daily on the IMF's website.
As we read the IMF's website
further, we learn that the IMF has
been trying to expand the number of SDRs in circulation for years.
There
are two kinds of allocations:
General allocations of SDRs have to be based on a long-term global need to
supplement existing reserve assets. General allocations are considered every
five years, although decisions to allocate SDRs have been made only twice. The
first allocation was for a total amount of SDR 9.3 billion, distributed in
1970-72. The second allocation was distributed in 1979-81 and brought the
cumulative total of SDR allocations to SDR 21.4 billion.
A proposal for a special one-time allocation of SDRs was approved by the IMF's
Board of Governors in September 1997 through the proposed Fourth Amendment of
the Articles of Agreement. This allocation would double cumulative SDR
allocations to SDR 42.8 billion. Its intent is to enable all members of the IMF
to participate in the SDR system on an equitable basis and correct for the fact
that countries that joined the Fund after 1981 - more than one fifth of the
current IMF membership - have never received an SDR allocation. The Fourth
Amendment will become effective when three fifths of the IMF membership (111
members) with 85 percent of the total voting power accept it. As of end-March,
2008, 131 members with 77.68 percent of total voting power had accepted the
proposed amendment. Approval by the United States, with 16.75 percent of total
votes, would put the amendment into effect.
When we consider
the fact that the quantity of this international currency remained unchanged
between 1979 and 2009, we begin to realize that the April 2 meeting was truly a
historic moment. On this day, with the stroke of a pen and the benefits of
modern electronic banking, the G-20 nations conjured another 250 billion in
SDRs and gave the IMF an additional US$750 billion to lend. Rightly did the
October 6, 2009, Council on Foreign Relations piece, "The IMF's Growing
Powers", state:
The IMF has gone from a $250 billion institution to a
$1 trillion institution. So the fund is much more relevant and central than it
was three years ago.
Additionally:
The late September
G-20 summit in Pittsburgh called for the International Monetary Fund (IMF) to
take on a major role in "promoting global financial stability and rebalancing
growth".
To the extent that that [the fund] suggested that the United States or Germany
or China policies are out of line or the overall policies are out of line, then
[the G-20] would have a discussion about that. Everything is tricky because
you're dealing with sovereign nations, especially to the extent that you're
focusing on the balance between domestic demand and foreign demand.
(Parenthesis and brackets his)
The writer notes, "Everything is
tricky because you're dealing with sovereign nations." To me, it seems the real
"trick" has been getting people to believe that it is only by handing over more
power to fewer people that "progress" can be achieved.
With the creation of the US Federal Reserve in 1913, the Bank for International
Settlements in 1930, the IMF and World Bank in the 1940s, and the Group of
Seven (G-7) leaders in the 1970s, we have seen financial instability increase.
So, why should we look to these same groups to achieve what has thus far eluded
their grasp? Does more government (debt) spending equal "recovery?" Should any
nation relinquish its financial sovereignty to those who are not elected by,
and therefore accountable to, its citizens?
We can contemplate the myriad times excessive debts have destroyed various
economies, or we can keep repeating the lie until we convince ourselves that,
this time, it will work.
As you recall, when US Treasury Secretary Timothy Geithner told a group of
Chinese students that China's investments in the US were "very safe", and that
the US was "putting in place the foundations for restoring fiscal
sustainability", the students laughed. Think about it. A group of students in
China could see the utter insanity of the political rhetoric of which our own
experts, pundits and financial authorities are so certain.
As you can see in the chart above, the hundreds of billions given to the
largest global banks in the world have not even been able to alter the
deflationary forces of contracting credit in the most rate- and loan-sensitive
areas of the US economy. If business continues to slow at the same time as a
nation's government spending plans produced a $1.4 trillion deficit - almost
three times the 2008 deficit of $459 billion - should we conclude that
investments in that country's debt are safe?
So, if US debt continues to spiral out of control, while business, academic and
government pundits repeat the mantra, "the stimulus is just starting to kick
in", wouldn't a wise person monitor the developments of the IMF's expansion of
its own currency - Special Drawing Rights?
Ellen Brown, author of Web of Debt, recently wrote "The Dollar Needs to
be Devalued by Half" [1] in which she references Jim Rickards' views on the
IMF:
According to Jim Rickards, director of market intelligence for
scientific consulting firm Omnis, the unannounced purpose of the G-20 Summit in
Pittsburgh on September 24 was that "the IMF is being anointed as the global
central bank". Rickards said in a CNBC interview on September 25 that the plan
is for the IMF to issue a global reserve currency that can replace the dollar.
"They've issued debt for the first time in history," said Rickards. "They're
issuing SDRs. The last SDRs came out around 1980 or '81, $30 billion. Now
they're issuing $300 billion. When I say issuing, it's printing money; there's
nothing behind these SDRs."
This hypothesis fits well with the
history of this international currency. Hundreds of millions of people around
the world have yet to understand the currency shift that has been unfolding in
front of our eyes over the past several months. As the October 1, 2009, Asia
Times Online article,
China moves into reserve position, attests, creditors are always better
positioned than debtors:
When the IMF decided on July 1 to issue $150
billion in SDR [Special Drawing Rights] bonds, the BRIC nations bought in, with
Russia and Brazil purchasing $10 billion each, and China taking the lion's
share, an additional $50 billion… This is the first IMF-issued bond that is
sensitive to the dollar. Beijing's purchase of IMF bonds represents a shift by
openly reducing dollar assets. The BRICs' underwriting of this SDR bond issue
is a clear step toward creating a global reserve currency. By buying one-third
of the issue, China becomes a creditor of the IMF, and gets more say in the
institution ...
China's economic leaders agree that the SDR should one day replace the dollar
as global reserve currency, even though the debate over when this occurs
continues.
China has given the developing world a new response profile. Rather than argue
with the IMF policy, make the IMF your debtor. The IMF has little choice but to
listen. At any rate, the United States and Europe cannot afford to purchase the
IMF's new SDR-issued bonds. China can. [Italics mine]
While
the US dollar has moved down dramatically since March of this year, hitting a
daily sentiment of 3 (100 is all bulls: 0 is all bears) several times in the
past few months, history doesn't happen overnight. With sentiment at such lows,
the US dollar should strengthen in the near term.
And if the dollar is set to strengthen while the NASDAQ 100 shows behavior
similar to late 1999, should investors take this as a warning shot across the
bow?
Now that it has retraced 50% of its massive decline in 2008, if the Dow Jones
World Stock Index starts selling of, hundreds of billions could be looking for
a way out of the equity markets and into shorter-term Treasuries.
Could a sharp decline in equity markets be the excuse global political leaders
use to push for an even greater expansion of the IMF's political and financial
clout? If so, what can we learn from the creditor-debtor relationships between
nations that have worked with the IMF over the past 30 years? What trends
should investors follow? With the enormous price swings in our markets, does
the buy and hold strategy open investors to additional risk?
In an attempt to stay ahead of the ever-changing, highly volatile trends that
are unfolding around the globe, we will look at these, and other, questions in
our November newsletter.
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