Isn’t It Odd

At the top of the agenda at the G20 meeting last week was a move to create an internation organization, the purpose of which would be to create rules to prevent financial irresponsibility of the sort that led to this mess.

Meanwhile, the very same governments  promoting this are engaged in gross financial irresponsibility of engaging in reckless spending and massive credit creation, not to mention just printing up money with no backing, even to the extent of risking damaging sovereign credit and destroying their currencies.

It is always useful to require the irresponsible to create new regulations to regulate what they will do regardless of regulations. Regulations to prevent what happened already existed. When it no longer serves their purpose they either ignore them or remove them. Just window dressing, that is all.

A Dollar Alternative?

The US is facing a grave danger of having the dollar repudiated.

Recent calls for replacements for the US dollar have been making headlines lately, but they’ve had little or no effect on the value. One very good reason for this is that replacing it is next to impossible over a short period of time. For those of you who want to see the dollar’s demise, time is the key.

If you understand the dollar’s function in the world, then clearly you see that there is no other national currency that could take its place, particularly the E.U. It is very much a David and Goliath situation. However, lurking in the background, largely unknown, is an alternative that already exists that does have the possibility of replacing the dollar, and it could be done in a fairly short period of time. The name of it is the SDR or Special Drawing Rights of the IMF.

Back when the IMF was first created, it was initially funded by member nations with gold deposits. This, because the world was on the gold standard. Gold was used as the backing for a system of credits for the purpose of making loans. When Nixon nixed the gold standard, there was no longer any need for those gold deposits, so they were then turned to the purpose of currency manipulation, mainly to prevent currency collapses. This was turned into a system of special drawing rights, which are credits based on a “basket” of currencies. In way, the IMF resembles a central bank because of this system.

The IMF claims that SDR’s are not money, but merely an accounting unit. This is like saying that credit is not money, true in the technical sense but untrue in reality. The analogy is like water and pressure where money is water and pressure is credit; neither functions without the other. China has apparently figured out that the IMF’s SDR’s are a ready made alternative since the money of any member nation can be converted into SDR’s which are apparently then transferable into any other currency. China in particular now wants to give the IMF a lot of money by buying a few hundred billion of its newly issued bonds, ostensibly to give loans to poor nations that are falling apart. Yet this would very effectively allow China to move a big hunk of its reserves out of dollars by buying those bonds with its dollars.

Very clever, but it can’t happen without the approval of member nations including the US. Now, if you’ve heard the recent comments by Tiny Tim last week, he said something to the effect that China’s proposal would have to be considered “with an open mind.” Which is not exactly saying no way jose. Meaning, if we go too far down the tubes, this will be something we might have to do with an imaginary gun to our head.

I’m not suggesting that this is likely to happen anytime soon. It is not a threat that is going to drive the price of PM’s up. More than likely a dollar crisis would first have to develop to initiate this move, at which point the dollar would already be significantly devalued. OTOH, it might be initiated by the collapse of another major currency like the Euro, which would over-value the dollar. A relief valve for this condition would be agreeing to the SDR which would then devalue the dollar indirectly and give political cover to the USG (we didn’t devalue, just agreed to the new IMF system).

The significance of this discussion is that those who take the collapse of the dollar, or its fall from grace as the reserve currency, as a given could very well be wrong. The fall could possibly lead to a semi-soft landing, which does not mean that PM’s won’t rise in price rather significantly. The truth is that it is in almost no nation’s best interest to see the dollar collapse in any circumstance. If the dollar is to be dethroned, to avoid massive collateral damage, it must be eased out gently.

In addition to Fed-watching, we now need to watch for news about the IMF and SDR.