IMF Again Discussing Plan to Replace the Dollar
It seems the IMF is once again discussing plans to replace the dollar as the world's reserve currency.
The International Monetary Fund issued a report Thursday on a possible replacement for the dollar as the world's reserve currency. The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system.
Oh, this must be the same way the Federal Reserve helps stabilize our economy here in the U.S....
SDRs represent potential claims on the currencies of IMF members. They were created by the IMF in 1969 and can be converted into whatever currency a borrower requires at exchange rates based on a weighted basket of international currencies. The IMF typically lends countries funds denominated in SDRs
"Potential claims?" Is anyone else confused at how this could help anyone?
While they are not a tangible currency, some economists argue that SDRs could be used as a less volatile alternative to the U.S. dollar.
Who are these "economists" anyway?
Dominique Strauss-Kahn, managing director of the IMF, acknowledged there are some "technical hurdles" involved with SDRs, but he believes they could help correct global imbalances and shore up the global financial system.
Central planning by some mega-international-bank will not help anyone anymore than the central banks have helped Greece, Spain, Ireland, Iceland, and the U.S.
"Over time, there may also be a role for the SDR to contribute to a more stable international monetary system," he said.
A more stable monetary system for Goldman Sachs, JPMorgan Chase, and their cronies. Ultimately the ordinary citizens of the world lose out.
The goal is to have a reserve asset for central banks that better reflects the global economy since the dollar is vulnerable to swings in the domestic economy and changes in U.S. policy.
Of course the dollar is "vulnerable" to swings, its fiat! Just like this reserve 'asset' would be.
Now, I want to be clear that I'm not saying that the US Dollar should remain the world's reserve currency (I don't think it should remain ANYONE'S currency...it's worthless), I'm simply pointing out that this IMF "alternative" is nothing better (it may even be worse). It is simply a way to push economic control further and further away from the people of the world. It's bad enough that today citizens have essentially no control over what their central bank does (and thus their respective economies). This scheme by the IMF would only lessen the influenc citizens have on their own currencies, countries, and economies. If the world needs a reserve currency, it should be a real asset like gold or silver, not an "asset" that is "not a tangible currency."
In addition to serving as a reserve currency, the IMF also proposed creating SDR-denominated bonds, which could reduce central banks' dependence on U.S. Treasuries. The Fund also suggested that certain assets, such as oil and gold, which are traded in U.S. dollars, could be priced using SDRs.
Does the world need more bonds (debt)? Who would the IMF be creating this debt on behalf of? What kind of control would ordinary citizens have over the IMF? (The answer to that last one is almost none)
Additionally, for those in the U.S., imagine the impact of a reduced dependence on U.S. Treasuries. If treasury yields rise in the U.S (and they will), the consequences on our budget and deficit will be astronomical.
Fred Bergsten, director of the Peterson Institute for International Economics, said at a conference in Washington that IMF member nations should agree to create $2 trillion worth of SDRs over the next few years.
SDRs, he said, "will further diversify the system."
I think such a scheme would 'diversify thy system' in the same way that Credit Default Swaps and Mortgage Backed Securities helped diversify investors portfolios from 2003-2008. Try not to think about how they also lead to the largest credit bubble, recession (arguably, depression), and financial disaster in at least a generation...they wouldn't screw up that bad again, would they? (Yes.)
I'll leave you with the best question of all, does the world need the IMF? (The answer is no.)
Friday Link Love (2/4/2011)
Another week down. This one is going to be short as I'm off to snowboard for the weekend.
- Very good article from Washington's blog about Egypt's "Emergency Powers" vs. US "Emergency Powers" (which are still in place from 2001). Great read, with great research as usual.
- Bernanke, meet Stephanie. Mish writes a great response to "Stephanie" who lives on a fixed income and wants to know what she should do. How great do Bernanke's actions look in this light?
- Maybe a little unrelated, but an interesting read about the USDA's new dietary guidelines. Health is another topic that interests me, and it sometimes finds its way (absurdly) into economics as politicians try to force health ideas and eating habits on us.
What is everyone else reading this week?
Ireland Collapses
The Irish Government collapsed today. Six Irish ministers have now resigned, leaving Prime Minister Brian Cowen to Schedule March 11 as the date for the upcoming general election. The Independent writes, in Irish government falls and calls 11 March poll
The Irish Government collapsed yesterday, with multiple ministerial resignations propelling Prime Minister Brian Cowen into setting 11 March as the date for a general election. His Fianna Fail party, which dominates the government, is widely expected to be largely wiped out in the contest, since under the Cowen leadership it has slumped to unprecedented depths in opinion polls.
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Many Fianna Fail members of the Dail, the Irish parliament, have announced they are not standing again, because they are unlikely to be re-elected or because they realise they will face years in opposition.
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This has led to predictions that Fianna Fail could drop from more than 70 seats to fewer than 20, a result which would represent a seismic change in Ireland's political patterns.
The bold above is mine. Reuters provides a good timeline of events leading up to the current state of affairs that interested readers may wish to take a look at.
The Wall Street Journal reports in Ireland to hold general election on March 11:
Both Fine Gael and Labour have also expressed their desire to alter the terms of the European Union and International Monetary Fund's EUR67.5 billion rescue package, particularly the 5.8% average interest rate. Ireland will contribute an additional EUR17.5 billion to the package.
But the government has said the interest rate is set and can't be renegotiated unilaterally by Ireland. Cowen insists the bailout was essential to stabilize the economy in the wake of the financial crisis that has ravaged the country since the collapse in the construction sector.
Come March, I believe we will see quite clearly that the interest rate is not set and can be renegotiated. In fact, hot on the heels of these news stories, is this gem about the IMF says interest rate on Irish loan to fall:
The interest rate that Ireland is paying on its International Monetary Fund loan is set to fall as part of changes being made to member countries' voting shares, the IMF said on Thursday.
IMF spokesman David Hawley told a regular news briefing that Ireland's IMF quota, which determines among other things how much a country contributes and can borrow from the IMF, was set to increase following governance reforms approved in 2008.
"Ireland is one of those countries whose quota stands to increase under this agreement," Hawley said. "As a consequence, the amount of its loan relative to its quota will fall, and that will have a bearing on the interest rate paid on its borrowing from the IMF."
Hawley said the rate currently stands at 3.1 percent.
He said the IMF was in the process of calculating the adjustments for each member country, but could not offer exact figures. The quota changes would probably affect several other borrowers, he said, but could not elaborate.
Looks like the rates may already be dropping. Is the IMF just trying to make the people of Ireland feel a little bit more comfortable with a lower interest rate? Is the IMF possibly scared about what the next government may decide to do about their debt burden, and thus, are already trying to ease some of the discontent in Ireland?
I believe that Ireland should tell the EU and IMF to shove it, and default on its loans from the EU and IMF as well as its loans from UK, German, French, US. This is surely Ireland's quickest way back to a healthy economy.
European Comission Chief, Jose Manuel Barroso, feels that Ireland has only itself to blame for the costly bailout:
"The problems of Ireland were created by irresponsible financial behaviour of financial institutions and a lack of supervision in the Irish market," Mr Barroso hit back in an angry exchange. "Europe is now part of the solution. It was not Europe that created this fiscally irresponsible situation and this financially irresponsible behaviour."
Ireland is certainly partly responsible for their own problems, but surely the banks that loaned Ireland money that can't possibly be paid back must take responsibility for their own actions as well!
If I loan someone $10,000 to start a business and they go bankrupt and can't pay me back, we are both at fault. That is a risk that I take when I loan out my money, and it is my responsibility to do my due diligence when selecting who to loan my money to.
Similarly, banks should do their due diligence, and should be prepared for the writedowns and losses that come when loans cannot be repaid. If a bank cannot handle the risk that it has willingly put into its own portfolio, then it will likely face bankruptcy like any other business that can't pay the bills.
In a heated debate at the European Parliament's second home in the French city of Strasbourg, Mr Higgins complained that the €85bn bailout package was "nothing more than another tool to cushion major European banks from the consequences of their reckless speculation on financial markets.
"Far from being a bailout, your IMF and EU mechanism makes vassals of Irish taxpayers to European banks and enslaves the working people of Europe to the markets, who lead you around by the nose," Mr Higgins said.
"It is a vicious weapon dictated by markets masquerading as benign."
Bingo. Joe Higgins, Member of the European Parliament for Dublin, Ireland, seems to understand what is going on here. I think the people of Ireland have figured it out as well, and the upcoming election will hopefully bring good news for Ireland, and likely bad news for foolish banks that lent to the over-indebted country.
It will certainly be interesting to watch what develops in the Eurozone after March...if the lid can stay on that long.