Is $USD going to be replaced by SDR as main World Reserve Currency?

[dixonge]

If it is in any way, shape, form or fashion related to Agora then it's questionable.

 

[VFK57]

I'm not 100% sure what an SDR is, so I'm guessing no, the USD will in fact remain important for a while.

SDR is Special Drawing Rights (a basket of world leading currencies) set by IMF in order to provide loans to International community in case of Financial crises or other temporary needs. Mr Rickards , so much criticized here, points out on our Fed Reserve Bank Balance sheet swollen to $4.5 trillions due to 2008 crises and following bail outs. Nobody denies that the Feds action helped to avoid a depression but if next Financial crises happen, the Feds cannot (in his view) to expand the balance sheet to $8 or $10 trillions as it may truly collapse the dollar). The IMF with their SDR could step in and bail out whatever crises may happen. Again, I am not sure how true all of it is but the IMF balance sheet is clear to act in case of similar to 2008 crises, therefor the SDR will be main reserve currency explains Mr Rickards. Portion of IMF assets are in physical Gold. That is as far as I understand it.

 

[Gone4Good]

I'm not 100% sure what an SDR is, so I'm guessing no, the USD will in fact remain important for a while.

Special Drawing Rights (SDRs) were created to solve a problem under a world monetary system that no longer exists. They're basically not used at all now for anything of any importance (but still find great purchasing power in the world of conspiracy theorists.)

Under the Bretton Woods international monetary system that existed from the end of WWII until 1971, exchange rates among world currencies were all fixed in relationship to the dollar. The dollar, in turn, was fixed at a set convertibility into gold.

Under Bretton Woods each member country needed to maintain reserves of dollars or gold which could be bought or sold in sufficient quantities to maintain their currency peg to the dollar.

In practice there wasn't enough gold or dollars to supply the world's need for reserves in an era of increasing global trade, so SDRs were created in 1969 as an alternative reserve asset.

This whole system collapsed a few years later in 1971 when the U.S. abandoned the gold standard.

SDRs are still around and total only about $200B in value. They are not a currency, though, in the sense that no one can use them to buy anything directly. Instead, SDRs represent a basket of 5 currencies (USD, EUR, JPY, GBP, and now CNY).

In order to use SDRs a member must find a willing partner country to trade their SDRs for one of the actual currencies represented by the basket. According to the IMF, such exchanges take "several days." So not the best mechanism for facilitating global commerce.

 

[VFK57]

This is Wikipedia SDR explanation:
https://en.wikipedia.org/wiki/Special_drawing_rights

 

[Gone4Good]

Nobody denies that the Feds action helped to avoid a depression but if next Financial crises happen, the Feds cannot (in his view) to expand the balance sheet to $8 or $10 trillions as it may truly collapse the dollar). The IMF with their SDR could step in and bail out whatever crises may happen.

So the Federal Reserve, backed by a $16T economy, can't expand it's balance sheet sufficiently to remedy whatever crisis we're imagining but the IMF, who gets about 15% of it's financing from the U.S., is somehow going to save the day with it's $750B lending capacity? And the currency they're going to use to bailout the collapsing US Dollar, the infamous SDR, derives 42% of its value from those very same U.S. dollars?

Call me skeptical.

 

[VFK57]

So the Federal Reserve, backed by a $16T economy, can't expand it's balance sheet sufficiently to remedy whatever crisis we're imagining but the IMF, who gets about 15% of it's financing from the U.S., is somehow going to save the day with it's $750B lending capacity? And the currency they're going to use to bailout the collapsing US Dollar, the infamous SDR, derives 42% of its value from those very same U.S. dollars?

Call me skeptical.

You statement is correct. However the main point here that China (2nd largest world economy which although slowing a lot lately still has much higher GDP growth rate 4.5 to 6% vs our 2 to 2.5%) started to trade with other countries in their own currencies, bypassing the dollar what reduces USD demand around the world. Then if Brazil (for example) needs a loan to import goods from S. Korea, Japan, China etc, they would go to IMF and take the SDR instead of many other needed currencies what is not even part of IMF currencies basket.

 

[Gone4Good]

You statement is correct. However the main point here that China (2nd largest world economy which although slowing a lot lately still has much higher GDP growth rate 4.5 to 6% vs our 2 to 2.5%) started to trade with other countries in their own currencies, bypassing the dollar what reduces USD demand around the world. Then if Brazil (for example) needs a loan to import goods from S. Korea, Japan, China etc, they would go to IMF and take the SDR instead of many other needed currencies what is not even part of IMF currencies basket.

If I'm reading this correctly, you're talking about two different scenarios, right?

Scenario 1) China trades directly with other countries in their own currencies

Scenario 2) Country uses SDR to finance imports

In Scenario 1, I'm not sure why we care. The U.S. supplies dollars to the world based on the demand for dollars consistent with stable domestic inflation and full-employment. If the demand for dollars falls, we supply fewer dollars. What's the big deal?

Scenario 2 also falls under the "what's the big deal category" but can get special mention for being unlikely. If Brazil needs to borrow in a currency other than it's own, it can generally do that on the global capital markets. There's no need to enlist the IMF unless a country is in crisis and can't get financing any other way. And when the IMF does lend a country money, it doesn't lend them SDRs which can't be used to buy anything. They lend in whatever currency the country needs.

P.S. the primary benefit to the U.S. from issuing the "reserve currency" is that the U.S. government gets interest free loans from everyone who's holding U.S. cash and we may also get slightly cheaper financing because of demand for U.S. securities.

So how much is issuing the global reserve currency worth? Here's what McKinsey says:

MGI finds that the United States may not enjoy much of a privilege at all. In 2007–2008—a "normal" year for the world economy, the net financial benefit to the United States was between about $40 billion and $70 billion—or 0.3 to 0.5 percent of US GDP. In a "crisis" year—such as the year to June 2009—MGI estimates that the net financial benefit fell to between—$5 billion and $25 billion because the dollar appreciated by an additional 10 percent due its status as a "safe haven."

So, as Shakespeare might say, hand wringing about the role of the U.S. dollar reserve status is "much ado about nothing."

 

[M Paquette]

Some people are just no fun, letting facts get in the way of truthiness. How's a fella supposed to work up some righteous indignation in the face of this?


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[kcowan]

If it is in any way, shape, form or fashion related to Agora then it's questionable.

Famed promoter of financial tripe.

It will never happen. The USD is the safest and most sound currency in the world. And it will be for the foreseeable future.

Betting against the USD is the easiest way to make a million (by starting with a billion)!

So, as Shakespeare might say, hand wringing about the role of the U.S. dollar reserve status is "much ado about nothing."

Yup

Some people are just no fun, letting facts get in the way of truthiness. How's a fella supposed to work up some righteous indignation in the face of this?

Came to the wrong place to stir up new followers...

 

[VFK57]

The Forum is a great place to discuss and/or ask for advise and guidance. Many discussions frequently have different opinions and advises. If we have majority opinion vs minority then you know what to follow. I am not a "promoter" or "the only truth" manipulator as some people here point out and fully aware of Agora Financials "influences on investments". However I did read the Currency Wars by Mr Rickards and it made sense to me. Saying that I wonder if other ever read that book or just follow a popular opinion?

 

[ERD50]

... Saying that I wonder if other ever read that book or just follow a popular opinion?

No, I haven't read that book, but after a while, you get a pretty good feel for what makes sense and what doesn't, and whether it is worth investing time in or not. And that doesn't mean just following popular opinion or not. Heck, 'popular opinion' says you need to hire a Financial Advisor, this stuff is far too complex to DIY. Yet, most in this forum reject that premise.

It's like all 'free energy' youtube videos and such. Sure, the laws of physics are just 'popular opinion', and this guy has the secret sauce, and you just need to keep an open mind.

I've read enough reasoned critiques in this thread alone to allow me to pass on this info without regret.

-ERD50

 

[petershk]

Yeah.
My own opinion is that I first need to understand the incentive of the author/source of something.

A sufficiently well informed and well spoken/written person can make a reasonable argument about anything. A great example is Jonathan Swift's modest proposal where he lays out an incredibly rational argument that eating Irish babies is a great way to solve the population and starvation problems. It seems crazy today but at the time many people, even in British government didn't realize it was pure satire.

So... if someone gets some financial gain based on my action or advice they give, then I have to severely question it.

Second I need to look at the person's historical record on prediction. Currency, stock prices, economic moves, etc are notoriously difficult to predict. By notoriously difficult I mean no one in the history of economics has ever been good enough at doing it to generate massive wealth. There are a handful of extremely rich investors but they didn't get rich by predicting large scale economic trends and it's also very hard to tell luck from skill.

So against that backdrop anyone who projects a major economic trend with great confidence but profits from the actions others take rather than his own ability to predict is likely to only be correct by pure coincidence.

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[MichaelB]

Rickards is a lawyer, not an economist or trained financial specialist, although he did work with investment professionals in LTCM and apparently worked for many years with Wall Street businesses. His descriptions / analyses of economic conditions are plausible, but his projections and forecasts are pretty extreme and unorthodox, and the scenario he predicted in '09 has not come about, nor does it look likely.

 

[Sunset]

The Forum is a great place to discuss and/or ask for advise and guidance. Many discussions frequently have different opinions and advises. If we have majority opinion vs minority then you know what to follow. I am not a "promoter" or "the only truth" manipulator as some people here point out and fully aware of Agora Financials "influences on investments". However I did read the Currency Wars by Mr Rickards and it made sense to me. Saying that I wonder if other ever read that book or just follow a popular opinion?

I welcome the discussion.
However, Jim Jones had a great idea too and many folks followed his ideas, but it didn't end well for them.

So hopefully you think hard about the effects and results of "what if he is wrong" ?

I know, you are thinking, "sure BUT what if he is right?"

Well....

Anyone can think of a possible situation that "if correct" means action.
Here is one: Earth will be pulled into the Sun, so blow all your money and max out credit cards in the next week.
However, if I'm wrong you will be destitute for the rest of your life.

 

[Whisper66]

I
So hopefully you think hard about the effects and results of "what if he is wrong" ?

I know, you are thinking, "sure BUT what if he is right?"

As I understood his recommendation, you would have 10 % or less of your assets in actual gold (not paper bonds) as a hedge against the concerns he outlines. So not catastrophic if he's wrong.

I personally have not chosen to have any precious metals in my assets. But recognize many others do as a hedge against their own concerns. So not sure how far off this guy is from many.



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[Gone4Good]

Another way you can tell honest intellectuals from cranks is to see if their ideas, positions, and recommendations change as situations change.

Just to pick an example at random, if every single scenario is a reason to buy gold, then you have to question the wisdom of that recommendation and the authenticity of the source.

 

[dixonge]

I run into this article and not sure how true it is in regard to consequences of USD replacement by the SDR. What do you think?

James Rickards: Secret 'Shanghai Accord' kills USD and crowns SDR TRUNEWS with Rick Wiles

James Rickards ... currently serves as the capital markets advisor to the Director of National Intelligence and the Office of the Secretary of Defense.

LOLOL - I wonder if they know he is making this claim...

 

[Whisper66]

James Rickards ... currently serves as the capital markets advisor to the Director of National Intelligence and the Office of the Secretary of Defense.
LOLOL - I wonder if they know he is making this claim...

Considering how widely he publishes this claim I'd be surprised if they weren't aware of it. Have no idea how to verify it since there doesn't seem to be a simple list of advisors to that office that I can find.

For all the bashing this guy has gotten on this discussion thread, I'm surprised to see he's got enough acceptance to have made a presentation to a Senate Subcommittee. I did a quick search on a US Government website and found:

Testimony of James G. Rickards, Senior Managing Director, Tangent Capital Partners LLC, New York, NY, Before the Subcommittee on Economic Policy Committee on Banking, Housing & Urban Affairs United States Senate, March 28, 2012
Written Statement: Retirement (In)security: Examining the Retirement Savings Deficit




Actually is interesting (especially in hindsight) , 13 page read discussing from 2012 perspective the government plan to drop interest rates to near zero and the impact on retirement savings.

Can agree or disagree with his conclusions/recommendations but I don't see the evidence to suggest he's a kook or that his ideas are unworthy of consideration.


Ref:

Government search page - https://search.usa.gov/search?utf8=✓&affiliate=usagov&query=james+rickards

Link to his written statement - http://www.banking.senate.gov/publi...5B69836A6E068FD0.rickardstestimony32812ep.pdf

 

[Gone4Good]

For all the bashing this guy has gotten on this discussion thread, I'm surprised to see he's got enough acceptance to have made a presentation to a Senate Subcommittee.

Perhaps you haven't noticed that a certain segment of our elected representatives support gold buggery.

Actually is interesting (especially in hindsight) , 13 page read discussing from 2012 perspective the government plan to drop interest rates to near zero and the impact on retirement savings.

It is interesting that the style, tone, and substance of his Senate testimony bears zero resemblance to the article linked in the OP.

Can agree or disagree with his conclusions/recommendations but I don't see the evidence to suggest he's a kook or that his ideas are unworthy of consideration.

Except that he does seem to have two different presentations for two different audiences.

And now with the benefit of hindsight we can make some pronouncements about his more tempered recommendation before the Senate from four years ago:

Solutions are straightforward. The Fed should raise interest rates immediately by a modest amount of one-half of one percent and signal that other rate increases will be coming. The White House and Treasury should signal that they support the Fed’s move and support a strong dollar as well.

The Fed and treasury didn't take Rickard's advice to raise rates and talk up the dollar in 2012. So what happened? Did inflation rise and the dollar fall?

Nope.

CPI inflation continued a downward trend below the Fed's 2% target.

And the US dollar rallied by 25%.

Now we should stop to consider what would have happened had the Fed taken Rickard's advice and raised rates in 2012 and signaled much tighter monetary policy going forward. Would inflation have declined more and faster than it actually did? Would economic growth have undershot projections even more than it did? Both seem highly likely. More than that, it seems almost certain it would have pushed us into another recession.

So after being completely wrong, has Rickard re-evaluated his analysis? Has he changed his recommendations? Nope. Same old same old. Full gold ahead.

 

[VFK57]

Rickards points out to business cycles (growth vs Recessions) what is always cyclical. The last recovery started in 2011 and soon (nobody knows when) we might be in recession cycle again. Then if Feds have near 0% interest rate now, how they are going to fight the recession? Of course there are negative rates (like in EU currently), helicopter money (something new what I do not understand) or another QE in Feds arsenal. Could it trigger an inflation higher than Feds projected 2%? That is his explanation.

 

[Gone4Good]

Rickards points out to business cycles (growth vs Recessions) what is always cyclical. The last recovery started in 2011 and soon (nobody knows when) we might be in recession cycle again. Then if Feds have near 0% interest rate now, how they are going to fight the recession? Of course there are negative rates (like in EU currently), helicopter money (something new what I do not understand) or another QE in Feds arsenal. Could it trigger an inflation higher than Feds projected 2%? That is his explanation.

Is the recession we're imagining deflationary? Because that is the typical recession profile (higher unemployment and weaker inflation).

So if we have a deflationary recession at a time when inflation is already below the Fed's 2% target, why are we worrying about above target inflation in this hypothetical scenario?

And is the suggestion to raise rates now, potentially causing a recession, so that the Fed has more room to lower rates to fight the recession it will likely have caused?

 

[VFK57]

Is the recession we're imagining deflationary? Because that is the typical recession profile (higher unemployment and weaker inflation).

So if we have a deflationary recession at a time when inflation is already below the Fed's 2% target, why are we worrying about above target inflation in this hypothetical scenario?

And is the suggestion to raise rates now, potentially causing a recession, so that the Fed has more room to lower rates to fight the recession it will likely have caused?

The only worry here that inflation may go out of control while you are right that in times of recession and higher unemployment, it is usually deflation not inflation. However Rickards points out that there is still shadowy Gold standard going on in major Central Banks. US still keeps 8,130Tons of Gold, combined EU Gold vaults have over 10,000 Tons, China officially has 1,700 Tons but unofficially (if take a portion of China imported and produced Gold goes to PBOC) it is closer to 4,000Tons, Russia 1,415 Tons etc. If people / Banks are willing to pay good price for something well above jewelry demand, why Central Banks not selling it and some keep active purchases?

 

[Whisper66]

Perhaps you haven't noticed that a certain segment of our elected representatives support gold buggery.

If I understand the term "gold buggery", it's a derogatory name used by those who support the current fiat monetary system for those who support the old gold standard. I have no interest in what is used as the monetary basis so honestly don't care about who supports what on that topic.

The point of my post was to honestly consider the question in an earlier post about if our government knew of Rickards claims to be capital markets advisor to the Director of National Intelligence and the Office of the Secretary of Defense. The question interested me. The fact that this claim has been made so widely and that he was testifying in front of congress supports the likelihood that he is not just some kook hiding away somewhere making bogus claims that the government is unaware of. I assume by your lengthy response that you disagree with that point. Fine.

It is interesting that the style, tone, and substance of his Senate testimony bears zero resemblance to the article linked in the OP. Except that he does seem to have two different presentations for two different audiences. And now with the benefit of hindsight we can make some pronouncements about his more tempered recommendation before the Senate from four years ago:......The Fed and treasury didn't take Rickard's advice to raise rates and talk up the dollar in 2012. So what happened? Did inflation rise and the dollar fall? Nope.

Gee....a financial outlook that didn't pan out ....I am shocked. If I decided to bash every person whose guesses on the country's future outlook don't pan out...I don't think I'd have time to do anything else.

Now we should stop to consider what would have happened had the Fed taken Rickard's advice and raised rates in 2012 and signaled much tighter monetary policy going forward. Would inflation have declined more and faster than it actually did? Would economic growth have undershot projections even more than it did? Both seem highly likely. More than that, it seems almost certain it would have pushed us into another recession.

Now there's is a good, safe prediction on a financial outlook. Safe since we didn't take those steps so the data isn't there to refute it. Oh yes, we can guess based on history and our pet theories but that's the best we can do. Unfortunately history is often different than the present and our simple models / conclusions may not apply well to a complex financial world system if we miss some key factor. So different people may come to different conclusions based on the same data. Oh well, I think it's time for me to move onto other topics. Not learning much new here.

 

[Gone4Good]

Gee....a financial outlook that didn't pan out ....I am shocked.

Perhaps you should take a closer look.

Because it is not one financial prediction that didn't pan out. It is the SAME financial prediction that hasn't panned out since he started making it going back to at least 2009. And that hasn't deterred him from making it again and again.

And he's been making his predictions with the most hyperbolic language possible . . .from the OP "When economic collapse comes, there will be “money riots”, people will burn down banks, governments will respond with a neo-fascist police state and martial law."

These aren't financial predictions. It's scare mongering. And it's scare mongering designed for a specific purpose. And what purpose is that? I'll let Rickards speak for himself . . .

"A minimum of 10% assets in physical gold ownership is a great hedge against these emerging currency wars."

So pulling it all together. Rickard makes financial forecasts that always conclude the economy is about to collapse. He never changes those forecasts when the economy doesn't collapse because he's not in the business of making accurate forecasts. He's in the business of selling Gold. And economic forecasts of economic collapse are good for selling gold.

 

[Sunset]

The only worry here that inflation may go out of control while you are right that in times of recession and higher unemployment, it is usually deflation not inflation. However Rickards points out that there is still shadowy Gold standard going on in major Central Banks. US still keeps 8,130Tons of Gold, combined EU Gold vaults have over 10,000 Tons, China officially has 1,700 Tons but unofficially (if take a portion of China imported and produced Gold goes to PBOC) it is closer to 4,000Tons, Russia 1,415 Tons etc. If people / Banks are willing to pay good price for something well above jewelry demand, why Central Banks not selling it and some keep active purchases?

Canada has nearly finished selling off all of it's gold.
A country does not need to store gold, if it needed to "buy" something it could trade steel ore, minerals, oil. All of which have a world value.