International Forecaster Weekly

China the IMF and the Coming Global Currency

But what is the SDR? And why is it important? Why does China want it to act as a super-sovereign reserve currency? And what does that even mean?

James Corbett | June 13, 2015

"The SDR has the features and potential to act as a super-sovereign reserve currency."    Although you probably didn't hear about it at the time, those words may very well be quoted by future monetary historians as the real beginning of the first truly global currency. They were penned by Zhou Xiaochuan, the Governor of the People's Bank of China, on March 23, 2009 in an essay entitled simply "Reform the international monetary system."

    Savvy readers will already understand the context and significance of that comment, but just to bring everyone up to speed the London G20 summit was held on April 2, 2009, just one week after Xiaochuan's essay was released. You know, the "Summit on Financial Markets and the World Economy" that was held in the wake of the 2008 Lehman Brothers collapse? The one that was meant to kickstart discussions on re-ordering the global economy in the wake of this "crisis of capitalism" that nearly destroyed the planet? The one where the newspaper headlines were blaring "New World Order to Save Earth"? The one where the leaders resolved to "fund and reform our international financial institutions" and "promote global trade and investment" as the answer to the crisis they created? Yeah, that one.

    In that context, Zhou's unusually bold essay makes sense. The New World Order of international financial reform was very much in the air at the time. This was the G20 summit that established the Financial Stability Board, after all, the almost totally overlooked banker institution that (as we discussed two weeks ago) is quietly rewriting the guidelines on such things as bank bail-ins for central banks around the world to implement. So it only made sense that China--riding a wave of (Goldman Sachs-created) BRICS mania and a perceived need for radical new ideas after the false flag destruction of the American-led old world order--would propose a new world reserve currency. And the one that Zhou mentioned, and the one that is very much back in the headlines this year, is the SDR.

    But what is the SDR? And why is it important? Why does China want it to act as a super-sovereign reserve currency? And what does that even mean?

    Let's start with the basics. The SDR was created to deal with a structural deficiency in the Bretton Woods system, the world monetary order that was created at a conference in Bretton Woods, New Hampshire toward the end of WWII. The Bretton Woods system rested on the US dollar as a gold-backed reserve currency to which other currencies were pegged at fixed exchange rates. Very quickly the US fell into a balance of payments deficit while trying to maintain the US dollar at it's $35/oz. gold peg. By the 1960s it was apparent that this was not just a passing problem but a fundamental flaw in the Bretton Woods system. The world reserve currency producer (the United States) needed to keep the world supplied with dollars in order for the dollar to function as a reserve for central banks; hence the balance of payments deficit. However, in order to maintain confidence in the dollar and prevent a gold run on the US treasury, the US had to run a balance of payments surplus. This paradox, known as the Triffin Dilemma after the Belgian-American economist who first described it, led to a situation where it became apparent that the dollar/gold system would need to be supplemented by a synthetic reserve asset, another instrument that could serve as a proxy for gold and provide liquidity for central banks. That asset was the "SDR."

    "SDR" stands for "Special Drawing Rights." The bland and non-descriptive name, as economic historians note, is the result of a disagreement over whether SDRs were money (i.e. "paper gold") or debt securities. Either way, they were first issued in a $3 billion disbursement to IMF members on January 1, 1970, with each member receiving a share of the total in proportion to their IMF voting quota. These SDRs and the ones that have been created since (totaling about 4% of global reserve assets) are the "official SDR" -- a synthetic reserve asset that, these days, can be converted into one of four major currencies (dollars, yen, pounds and euros) before being used by central banks for foreign exchange operations and the like. As the IMF itself points out:

    "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. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations."

    When people like PBOC Governor Zhou talk about an expanded role for the SDR, however, they are referring to other ways the SDR could be used if the IMF members chose to do so. These ways include using SDRs as tradable reserve assets in themselves rather than synthetic reserves that must be converted before use. Some even advocate using the SDR as a unit of account that could be used to denominate sovereign bond issues, price internationally traded commodities like oil, and peg currencies.

    These types of proposals are quite radical given that all international commodity trade, central bank reserve accumulation, international banking and financial institution operation, and national currency management has been based on the dollar reserve paradigm for nearly a century. It isn't a matter of merely flipping a switch and converting from a dollar-based system to an SDR system. It requires international coordination, the creation of international institutions capable of issuing, trading and managing SDRs, a track record for the SDR itself, and, of course, a careful consideration of what "basket of currencies" the SDR is redeemable in.

    As we've already established, the SDR is currently convertible into one of four major currencies: the dollar, the yen, the pound and the euro. But every five years the IMF conducts a review to determine whether the SDR currency basket really represents the world's most used currencies. The last review took place in 2010, when it was determined that the Chinese yuan, while accounting for a sizable and growing share of global exports, did not have the type of capital account flexibility to make the currency truly convertible. As a result, the yuan was not included in the basket that year. But the 2015 review is currently underway and all indications are that the yuan is well on its way to inclusion in the basket.

    So what does this actually mean? What will actually occur if the yuan is included in the SDR basket?

    For starters, such an inclusion would draw a surge of investment into Chinese assets. Estimates vary--from Standard Chartered's estimation that the inclusion would spur $999 billion of Chinese bond purchases by the end of the decade and AXA Investment Managers pegging the figure at over $1 trillion--but there is no doubt that the move would bring a tidal wave of investment into China.

    As Joachim Nagel of the German Bundesbank points out, this will also greatly increase yuan reserve holdings by banks around the world: "If the renminbi will be included in the IMF’s SDR basket, every IMF member is indirectly invested in renminbi[...]This will increase the probability of holding renminbi as a reserve currency in general. If you’re already exposed to something, then the decision to broaden your exposure is an easier one to take."

    Such a move would also be a major sign that the deacde-long fight for IMF reform--giving more power and a greater share of voting rights to emerging economies like China--will finally proceed, despite persistent foot-dragging by Washington.

    In the 2D chess game of world geopolitics, it is not difficult to see why the US would refuse to ratify these IMF reforms, or why a group of US senators is lobbying IMF president Legarde to disqualify the yuan from SDR inclusion because of the (false flag) Chinese hacks on US government computers. There are players in the system that buy into the globalists' own propaganda, namely that China and the US are genuine rivals.

    Now let's be clear: the current world monetary paradigm is based on the US dollar as the world reserve currency, and under such a system there is no doubt that the US government (and, by extension, its allies) would lose its current status on the world stage and its ability to indefinitely finance its $18 squijillion dollar debt (I lose count after hundreds of billions) through the printing press. As a result, there are players on the 2D chess board who would stand to lose out if the dollar was eclipsed as the world reserve currency.

    But as those who have been following my work for any length of time will know, I think there are in fact two chess games underway at the same time. The 2D geopolitical chess game outlined above where the US and China are rivals (exactly as portrayed in the media) and a 3D oligarchical chess game where the globalist financiers of the US are just as committed to the destruction of the dollar as the globalist financiers of China. And in that chess game, everything is going according to plan: the yuan is rising, the dollar is sliding, and the people of the world are being conditioned to believe that only international financial institutions and multi-national currency baskets can save us. The end goal? Global government under a global taxation grid payable in global currency, of course.

    To be sure we are still a long way from that final end game, but inclusion of the yuan in the SDR would be a crucial step toward legitimizing the SDR (and, by extension, the IMF) as a suitable replacement for the US dollar as a world reserve currency. The SDR, being a synthetic reserve asset, is probably not the global currency that the globalists eventually want to bring in, but it's perhaps a sign post of things to come: something that the average person will never see, but which will tie the world economy into international institutions behind the scenes.

    Time will tell if the IMF does give the go-ahead to the yuan for the SDR basket. A delay or even derailment of the globalist plan is always possible. But if they don't manage to achieve the global currency this go around you can bet they will be back again soon enough. Just ask Zhou Xiaochuan:

    "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."

    Better get your popcorn ready. Whatever happens this year, it's going to be an interesting ride.