Notes On Special Drawing Rights

Posted at 10:58 PM (CST) by & filed under General Editorial.

Dear CIGAs,

This is going to be interesting as the IMF does not have the power to create money like central banks do.

I had the privilege of writing the speech many years ago when SDRs were first introduced. The same problem with SDRs then is the same problem now – they are backed by nothing. SDRs are nothing more than pure paper and are incapable of offsetting the fear of such paper

Special Drawing Rights:

An international type of monetary reserve currency, created by the International Monetary Fund (IMF) in 1969, which operates as a supplement to the existing reserves of member countries. Created in response to concerns about the limitations of gold and dollars as the sole means of settling international accounts, SDRs are designed to augment international liquidity by supplementing the standard reserve currencies.

Investopedia Says:

You can think of SDRs as an artificial currency used by the IMF and defined as a "basket of national currencies". The IMF uses SDRs for internal accounting purposes. SDRs are allocated by the IMF to its member countries and are backed by the full faith and credit of the member countries’ governments

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Basically an SDR is an accounting transaction with an index mix of currencies originally devised to replace gold settlement of trade transactions with a faux currency unit.

Forget the media PR. Today it is in anticipation of large dollar and/or US treasury international sales hoping that rather than flooding the market with dollars in exchange for Euros, Swiss Francs, Cando’s and so on that SDRs would be sought after.

The problem with this reasoning is the same as it was at its last big introduction over 35 years ago. It is paper, worse an index against swaps, that lacks the ability to attract confidence required as we move into a hyperinflationary world. This was the meat of the objecting speech on the Senate floor more than 35 years ago and is the weakness today.

This is not in any way anti-gold even if it is advertised as paper gold as it was 35 years ago.

SDRs were another scheme that gave birth to gold going from $40 to $887.50. They flopped then (they did not form the international single currency then) and will fail again. Their only impact is short term based media and governmental hype.

It is clear that there is no practical solution to this global OTC derivative meltdown. SDRs exposed the fact that our financial leaders are now flailing in the breeze. They would be well advised to devise anything new rather than seek to recreate a failure.

If used for quantitative easing it would indicate the introduction of Zimbabwean style confetti money.

IMF poised to print billions of dollars in ‘global quantitative easing’
The International Monetary Fund is poised to embark on what analysts have described as "global quantitative easing" by printing billions of dollars worth of a global "super-currency" in an unprecedented new effort to address the economic crisis.
By Edmund Conway
Last Updated: 9:07AM GMT 16 Mar 2009

Alistair Darling and senior figures in the US Treasury have been encouraging the Fund to issue hundreds of billions of dollars worth of so-called Special Drawing Rights in the coming months as part of its campaign to prevent the recession from turning into a global depression.

Should the move, which is up for discussion by the summit of G20 finance ministers this weekend, be adopted, it will represent a global equivalent of the Bank of England’s plan to pump extra cash into the UK economy.

However, economists warned that the scheme could cause a major swell of inflation around the world as the newly-created money filters through the system. The idea has been suggested by a number of key figures, including billionaire investor George Soros and US Treasury adviser Ted Truman.

Simon Johnson, former chief economist at the IMF, said: "The principle behind it is that everyone would get bonus dollars and instead of the Federal Reserve having to print them, everyone gets them.

"The objective is to create a windfall of cash. However if everybody goes out and spends the money it could be very inflationary."

Simon Johnson, former chief economist at the IMF, said: "The principle behind it is that everyone would get bonus dollars and instead of the Federal Reserve having to print them, everyone gets them.

"The objective is to create a windfall of cash. However if everybody goes out and spends the money it could be very inflationary."

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