Monday, December 5, 2011

SDR to Replace USD?

There increasingly appears to be a sometimes subtle, sometimes not-so-subtle, international push for a reserve currency other than the endlessly indebted USD, China being only the most bold and malevolent proponent of such a move. "Zhou Xiaochuan, China's powerful central banker, has authored a proposal for international monetary reform that would replace the dollar with 'a super-sovereign reserve currency managed by a global institution.' Citing 'the inherent deficiencies caused by using credit-based national currencies,' he suggests the SDR [Special Drawing Right] could assume this role. In the view of Mr. Zhou, the way to enhance international monetary and financial stability is to have member countries gradually entrust their reserves 'to the centralized management of the IMF.' Before anyone gives any credence to the notion of having the IMF take on the task of issuing a new global currency, however, we need to remember that the original Bretton Woods system worked precisely because the dollar was convertible into gold at a fixed price." (Judy Shelton, in The Wall Street Journal, April 28, 2009)  What these international currency proponents are really after is a new gold-backed system to replace Bretton Woods in my opinion.  SDR's are not really a "currency", but that is perhaps the easiest way to think of them for the layman (like me).  From the IMF's website: "The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable [4] currencies of IMF members. ... In addition to its role as a supplementary reserve asset, the SDR ... The IMF holds a relatively large amount of gold among its assets, not only for reasons of financial soundness, but also to meet unforeseen contingencies."  So, let me get this straight.  The IMF believes gold should be held for "financial soundness" and "to meet unforeseen contingencies", the IMF issues Special Drawing Rights as a supplementary "reserve asset", and there is an international push for a reserve currency backed by something other than hot air.  Sounds to me like the USD's days are numbered as the world's reserve currency, and that everyone's portfolio should contain some gold.