IMF Calls for SDR-Denominated Bonds
By Staff News & Analysis - February 11, 2011

International Monetary Fund director Dominique Strauss-Kahn (left) calls for new world currency … Dominique Strauss-Kahn, managing director of the International Monetary Fund, has called for a new world currency that would challenge the dominance of the dollar and protect against future financial instability … "Global imbalances are back, with issues that worried us before the crisis – large and volatile capital flows, exchange rate pressures, rapidly growing excess reserves – on the front burner once again," Strauss-Kahn said … "Using the SDR to price global trade and denominate financial assets would provide a buffer from exchange rate volatility," Strauss-Kahn said, while "issuing SDR-denominated bonds could create a potentially new class of reserve assets." – UK Telegraph

Dominant Social Theme: Since national fiat currencies are unstable, let us migrate to global ones …

Free-Market Analysis: Like a broken record, (does the cliché date us?) Dominique Strauss-Kahn campaigns around the world for a new currency. The latest wrinkle: SDR-denominated bonds. Bundle together a number of bankrupt national currencies and securitize them and you might indeed create an attractive international vehicle – at least from the point of view of the international financiers who work hand-in-glove with the IMF, World Bank, etc., anyway.

Of course, there already is a world currency. It is called gold. Strauss-Kahn is worried about the volatility of national currencies, so he proposes bundling them as a way to soothe current difficulties. But the world already has experience with a gold standard and it proved eminently workable for over a century before the elite – in its pursuit of the fiat Holy Grail (a bancor-like currency first proposed by John Maynard Keynes) discarded it. Now let us note that here at the Bell, we are no fans of the previous gold standard either. We would prefer a purely market-based standard, one presumably that would include silver as well and would arrange itself spontaneously, not as the outcome of a conference of wise men.

But Strauss-Kahn presumably fancies himself as the ultimate wise man. And he is nothing if not persistent, and by continually insisting on the possibility of a thing (a global SDR standard), he gradually reduces the level of apparent idiocy to something resembling muted irritation. No doubt this is the plan. Talk about anything long enough and people become inured to it and even tune it out. The strangeness passes and the concept, once foreign, becomes familiar and even – eventually (God help us) – inevitable.

We dearly hope that Strauss-Kahn is not successful in his quest. Any global currency would inevitably be based, sooner or later, on a global central bank. Strauss-Kahn – surprise! – has the IMF in mind as the operative party. The idea that the IMF, which has been responsible for so much economic misery and outright rapine, could evolve into the world's ultimate guarantor of credit is a chilling one. Nonetheless, he continues to make the arguments.

It is mostly volatility that Strauss-Kahn proclaims himself worried about, as the Telegraph informs us. He explains that money flows around the world in an unpredictable pattern and that countries need a more predictable external environment – such as the one the IMF can provide – in order to prosper. Somehow, adding currencies, such as the yuan, to a larger basked of currencies conveniently administered by the IMF could "add stability to the global system."

Strauss-Kahn wishes to build his new currency on the current tension between the US with its badly managed dollar reserve and the world's emergent BRIC countries that are generally resentful about the currency volatility to which Strauss-Kahn refers. But there is more. Strauss-Kahn wants to use a new and improved SDR as the benchmark to price other currencies.

That means financial media would start publishing currency tables that denominated the world's currencies against SDRs. The yuan or euro would not be priced against the dollar but against the artificially bundled currency. Presumably countries and large financial institutions would begin using the new reserve currency (for that is what it would be) as these days most transactions are electronic. It wouldn't even be necessary to "print" the new bundled currency. It could simply exist in cyberspace.

Strauss-Kahn inevitably draws support from countries like China and Russia. According to the Telegraph article, Russian President Dmitry Medvedev last month said BRIC currencies should be included in the SDR valuation basket. Nikolas Sarkozy has apparently expressed support as well, as has the Obama administration – supporting a transition "over time." And Strauss-Kahn's coy take? "I expect the global reserve asset system to evolve only gradually, and along with changes in the global economy."

Why is Strauss-Kahn promoting his plan now? Apparently in about a week Group of 20 finance ministers meet in France to discuss "changes to global economic governance." We're not sure how much traction Strauss-Kahn really has but there is no denying that he is doing everything he can to turn SDRs into a bankable "super currency." Securitizing the SDR would certainly find favor with the world's global financial class; quoting the world's currency values regularly in terms of SDRs would add legitimacy to the SDR as a currency-unto-itself. (And yes, we're aware that certain financial papers have already started to do so.)

Strauss-Kahn's putative world currency would be a growing horror. Like all these elite plans, it would start small and end up as a titantic disaster. The ultimate goal, we surmise, is the bancor itself, fully fungible (delivered via the printing press as well as electronic digits) and backed by the full faith and credit of the IMF which in turn is supported by the currencies of the major countries that are its constituents.

After Thoughts

As we attempt to point out on a regular basis, central banking is price fixing of the value and amount of money. And price fixing does not work, not ever. For Strauss-Kahn and the world's financial elite to be discussing the price-fixing of money on a global scale does not provide any kind of solution to the world's current financial crisis. It will only guarantee more crises, more corruption and more chaos. Of course maybe that's just the point …

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