Get Ready
for World Money
By James
Rickards
March 30,
2020 "Information
Clearing House"
- Since Federal Reserve resources were barely able
to prevent complete collapse in 2008, it should be
expected that an even larger collapse will overwhelm
the Fed’s balance sheet.
That’s
exactly the situation we’re facing right now.
The specter
of a global debt crisis suggests the urgency for new
liquidity sources, bigger than those that central
banks can provide. The logic leads quickly to one
currency for the planet.
The task of
re-liquefying the world will fall to the IMF because
the IMF will have the only clean balance sheet left
among official institutions. The IMF will rise to
the occasion with a towering issuance of special
drawing rights (SDRs), and this monetary operation
will effectively end the dollar’s role as the
leading reserve currency.
The Federal
Reserve has a printing press, they can print
dollars. The IMF also has a printing press and can
print SDRs. It’s just world money that could be
handed out.
The IMF
could function like a central bank through more
frequent issuance of SDRs and by encouraging the use
of “private SDRs” by banks and borrowers.
What
exactly is an SDR?
The SDR is
a form of world money printed by the IMF. It was
created in 1969 as the realization of an earlier
idea for world money called the “bancor,” proposed
by John Maynard Keynes at the Bretton Woods
conference in 1944.
The bancor
was never adopted, but the SDR has been going strong
for 50 years. I am often asked, “If I had 100 SDRs
how many dollars would that be worth? How many euros
would that be worth?”
There’s a
formula for determining that, and as of today there
are five currencies in the formula: dollars,
sterling, yen, euros and yuan. Those are the five
currencies that comprise in the SDR calculation.
The
important thing to realize that the SDR is a source
of potentially unlimited global liquidity. That’s
why SDRs were invented in 1969 (when the world was
seeking alternatives to the dollar), and that’s why
they will be used in the imminent future.
At the
previous rate of progress, it may have taken decades
for the SDR to pose a serious challenge to the
dollar. But as I’ve said for years, that process
could be rapidly accelerated in a financial crisis
where the world needed liquidity and the central
banks were unable to provide it because they still
have not normalized their balance sheets from the
last crisis.
“In that
case,” I’ve argued previously, “the replacement of
the dollar could happen almost overnight.”
Well, guess
what?
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We’re
facing a global financial crisis worse even than
2008. That’s because each crisis is larger than
the previous one. The reason has to do with the
system scale. In complex dynamic systems such as
capital markets, risk is an exponential function
of system scale. Increasing market scale
correlates with exponentially larger market
collapses.
This means
a market panic far larger than the Panic of 2008.
SDRs have
been used before. They were issued in several
tranches during the monetary turmoil between 1971
and 1981 before they were put back on the shelf. In
2009 (also in a time of financial crisis). A new
issue of SDRs was distributed to IMF members to
provide liquidity after the panic of 2008.
The 2009
issuance was a case of the IMF “testing the
plumbing” of the system to make sure it worked
properly. With no issuance of SDRs for 28 years,
from 1981–2009, the IMF wanted to rehearse the
governance, computational and legal processes for
issuing SDRs.
The purpose
was partly to alleviate liquidity concerns at the
time, but also partly to make sure the system works
in case a large new issuance was needed on short
notice. The 2009 experience showed the system worked
fine.
Since 2009,
the IMF has proceeded in slow steps to create a
platform for massive new issuances of SDRs and the
creation of a deep liquid pool of SDR-denominated
assets.
On Jan. 7,
2011, the IMF issued a master plan for replacing the
dollar with SDRs. This included the creation of an
SDR bond market, SDR dealers, and ancillary
facilities such as repos, derivatives, settlement
and clearance channels, and the entire apparatus of
a liquid bond market. A liquid bond market is
critical.
The IMF
study recommended that the SDR bond market replicate
the infrastructure of the U.S. Treasury market, with
hedging, financing, settlement and clearance
mechanisms substantially similar to those used to
support trading in Treasury securities today.
In November
2015, the Executive Committee of the IMF formally
voted to admit the Chinese yuan into the basket of
currencies into which an SDR is convertible.
In July
2016, the IMF issued a paper calling for the
creation of a private SDR bond market. These bonds
are called “M-SDRs” (for market SDRs) in contrast to
“O-SDRs” (for official SDRs).
In August
2016, the World Bank announced that it would issue
SDR-denominated bonds to private purchasers.
Industrial and Commercial Bank of China (ICBC), the
largest bank in China, will be the lead underwriter
on the deal.
In
September 2016, the IMF included the Chinese yuan in
the SDR basket, giving China seat at the monetary
table.
Over the
next several years, we will see the issuance of SDRs
to transnational organizations, such as the U.N. and
World Bank, to be spent on climate change
infrastructure and other elite pet projects outside
the supervision of any democratically elected
bodies. (I call this the New Blueprint for Worldwide
Inflation.)
The SDR can
be issued in abundance to IMF members and can also
be used in the future for a select list of the most
important transactions in the world, including
balance-of-payments settlements, oil pricing and the
financial accounts of the world’s largest
corporations, such as Exxon Mobil, Toyota and Royal
Dutch Shell.
So the
international monetary elite has been awaiting the
global liquidity crisis that we’re facing right now.
In the not-too-distant future, there will be massive
issuances of SDRs to return liquidity to the world.
The result will be the end of the dollar as the
leading global reserve currency.
SDRs will
perhaps never be issued in bank note form and may
never be used on an everyday basis by citizens
around the world. But even such limited usage does
not alter the fact that the SDR is world money
controlled by elites.
But
monetary resets have happened three times before, in
1914, 1939 and 1971. On average, it happens about
every 30 or 40 years. We’re going on 50.
So we’re
long overdue.
You’ll
still have dollars, but they’ll be local currency
like the Mexican peso, for example. But its global
dominance will end.
Based on
past practice, we can expect that the dollar will
be devalued by 50–80% in the coming years.
A
devaluation of this magnitude will wipe out the
value of your life’s savings. You’ll still have just
as many dollars, but they won’t be worth nearly as
much.
Individuals
will not be allowed to own SDRs, but you can still
protect your wealth by buying gold — if you can find
any.
Regards,
Jim
Rickards
for The Daily Reckoning
James G. Rickards is the editor of
Strategic Intelligence.
He is an American lawyer, economist, and
investment banker with 35 years of experience
working in capital markets on Wall Street. He
was the principal negotiator of the rescue of
Long-Term Capital Management L.P. (LTCM) by the
U.S Federal Reserve in 1998. His clients include
institutional investors and government
directorates.
Rickards is the author of The New Case for Gold
(April 2016), and three New York Times best
sellers, The Death of Money (2014), Currency
Wars (2011),
The Road to Ruin
(2016) from Penguin Random House. -
"Source"
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