1) Is today THE day that the US dollar ‘dies’ and is replaced?
Last week on 30 September, the International Monetary Fund (IMF) officially added the Chinese yuan to its basket of currencies comprising its special drawing right (SDR). This has enormous long-term implications for the US dollar.
Did that make the US dollar becomes worthless overnight? Of course not. In fact, the event did not even make major headlines. You won’t hear about it in the news. And it won’t cause the US dollar to crash immediately. This is a development with long-term implications, but in itself, it will not make waves. But that’s the point — the dollar will die — but with a whimper, not a bang.
The dollar replaced the British pound sterling as the world’s dominant currency last century. But it was a gradual process that took place between 1914 and 1944. It didn’t happen overnight, nor will SDRs replace the dollar overnight.
Since being added to the basket, nothing is noticeably different. Americans still have US dollars in their pocket, they still get paid in dollars. Those will be worth something.
But this was nonetheless a very significant turning point. Membership in the exclusive SDR currency club has changed only once in the past 30 years. The SDR has been dominated by the ‘Big Four’ (US, UK, Japan and Europe) since the IMF abandoned the gold SDR in 1973. This is why inclusion of the Chinese yuan is so momentous.
2) Do I need to dump all of my US dollars, stocks and other investments and get into gold?
No. I do believe you should own gold, and I believe it’s ultimately heading to US$10,000 an ounce.
But I don’t suggest putting any more than 10% of your investable money into gold, or any other asset for that matter. Some people say, ‘Jim Rickards recommends selling everything and going all into gold.’ I don’t say that, and I never have. You never want to put all your eggs in one basket.
A diversified portfolio includes gold, fine art, raw land, cash, bonds, select stocks and some alternatives in strategies like global macro hedge funds and venture capital. You need to be nimble in today’s unpredictable macroeconomic environment. We provide guidance on these in my newsletter, Strategic Intelligence.
3) What do you mean when you say the ‘New World Money’ is live? The SDR has been around since 1969…
It’s true, the SDR was invented in 1969. And there were a number of issues of SDRs in the 1970s. Indeed, the IMF has issued SDRs three times since their creation more than 40 years ago. Each time was linked to a crisis of confidence in the US dollar…
In 1969, the French and others recognised that the United States was printing too many dollars. At the time, foreigners could still exchange dollars for gold, and there was a run on Fort Knox. The IMF created the SDR to smooth the rough monetary seas, issuing 9.3 billion SDRs through 1972.
In 1979, US inflation soared out of control, past 14%. Oil-producing countries fretted the value of their dollar reserves was plunging. The IMF issued 12.1 billion SDRs through 1981.
In 2009, in response to the Panic of 2008, the IMF issued 182.7 billion SDRs during August and September. That was the first time the IMF issued SDRs in almost 30 years. That was in response to the global liquidity crisis, when it looked like the world’s central banks couldn’t act fast enough. So the IMF issued over $100 billion of SDRs (in US dollars).
But the Panic of 2008 changed everything. Central banks around the world expanded their balance sheets enormously to combat the crisis. The Fed’s balance sheet exploded from US$800 billion pre-crisis to about US$4 trillion today, for example. They won’t be able to respond the same way when the next crisis strikes, which I expect sooner rather than later. They’re out of powder.
The only financial institution with a balance sheet clean enough to respond to the crisis will be the IMF. The IMF acts like the ‘central bank of the world’. It will have to issue massive amounts of SDRs to hold the international monetary system together. The result will be the end of the US dollar as the leading global reserve currency. That’s why today’s developments represents such a dramatic change from the past.
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4) Do you expect a major market move now the Chinese yuan is finally added to the SDR?
I’m not forecasting that…but it wouldn’t surprise me if it happened. The economy is on the brink of recession. We’ve had a full year, four consecutive quarters, with average growth of about 1.2% and with some revisions that may even go lower. This is not just weak growth, it’s extraordinary weak, and dangerously close to recession.
Global trade has fallen dramatically. Stocks are in bubble territory, and volatility is returning. You never know what event will cause a crash, but it could literally come at any time.
The point is, it could be tomorrow…it could be six months from now. The real question is: What are you waiting for? No one can time these things…and when the trigger happens it’ll be too late. How many warnings do you need?
5) Will the new SDRs have a positive impact on the price of gold?
SDRs are inflationary. If you flood the market in dollars of SDRs, gold will spike dramatically, probably taking it to US$10,000. Will that happen immediately? Again, probably not. But the trend is in place. What are you waiting for? You can expect that the dollar will be devalued by 50–80% in the coming years.
6) Can I buy SDRs?
Officially, no, you can’t. The IMF is the only institution that can print and distribute world money. Only its member states that are within its elite ‘basket’ can freely exchange SDRs as currency. Typically, SDRs are used to take loans or make repayments made by the IMF. They are also used by its members’ central banks to sell in order to help currency reserves during times of economic crisis.
Now, it is true that a ‘private sector’ version of SDRs will become available, called M-SDRs. The IMF has published a technical paper introducing the concept of a private SDR market. In the IMF’s vision, private companies and corporations can issue bonds denominated in SDRs. Who are the logical issuers of the bonds?
Probably multinational or multilateral organisations like the Asian Development Bank and maybe big corporations like IBM and General Electric. Who would buy these SDR-denominated bonds? Mostly sovereign wealth funds. China will be substantial buyers.
7) What’s the next important step in this New World Money Development?
On 7 October, the IMF will hold its annual meeting in Washington, DC, to consider additional steps to expand the role of SDRs and make China an integral part of the new world money order. But there’s another looming development that has implications for the adoption of SDRs…
The return of the BRICS.
‘BRICS’ is an acronym for Brazil, Russia, India, China and South Africa, which are among the largest emerging-market economies and make up about 22% of global GDP. Five years ago, discussion in international monetary circles was all about the rise of the BRICS. It appeared the BRICS would mount a serious challenge to US dollar hegemony. Then the BRICS story went quiet in 2014–15. It looked like the BRICS story was fading in importance. But now that’s changing.
At the G-20 Leaders’ Summit in Hangzhou, China earlier this month, BRICS made a very interesting demand. They may be 22% of the global economy, but they only hold 14.89% of the votes at the IMF.
Any individual country or group of countries with 15% has veto power over certain major IMF decisions, including the issuance of SDRs. Only one country has over 15% today, and that’s the United States. The BRICS are now demanding that their IMF vote move closer to their share of the world economy, and past the 15% threshold.
If that happens, then the IMF will not be able to flood the world with SDRs in a liquidity crisis unless the BRICS agree. No doubt the BRICS will agree, but only if other steps are taken at the same time to destroy the privileged position of the US dollar in global payments and reserves.
The BRICS are back in town, and it has implications for the adoption of SDRs…and the US dollar.
For Markets and Money, Australia
Editor’s Note: This article was originally published in Money Morning.