Is the IMF about to displace the US dollar as global reserve?

See the latest Australian dollar analysis here:

Macro Afternoon

Via FTAlphaville:

There’s growing evidence that markets think central banks have reached the limits of their capabilities. Even if they haven’t, it’s what markets think that really matters. Gillian Tett recounts this point really well in her column today. Read that here.

As she notes:

But it might also reflect something else: some investors no longer think that a shot of cheap money works in the face of medical uncertainty, a global recession, looming corporate defaults and weak political leadership. Either way, the key point is this: Thursday’s crash not only pushed March 12 2020 into the history books; it also undermined the image of central bank omnipotence. If President Trump thinks he can reverse the rout by demanding more Fed action, he is gravely mistaken. Prepare for more market spasms.

But how much more unconventional can we get? Discussion about MMT/helicopter drops — aka permanent QE — is almost consensus thinking these days. Meanwhile, we’ve already discussed the possibility of digital CBDC stimulus being rolled out, arguably the extreme end of unconventional policy. But is there hope a different institution such as the IMF can come to help?

Back in 2009, George Soros campaigned vocally for a one-off expansion of special drawing rights (SDR) allowancesHe got it. 

What are SDRs? The best way to view them is as a virtual currency the IMF issues and controls for the purpose of conducting its lending operations and for balancing monetary deficits and surpluses between nations. SDRs exist in accounting form only. In their purest form, a country with a surplus of SDRs has the right to use its allocations to draw upon the freely usable currencies of other IMF members. Consider them a precursor to bitcoin and a global virtual float that can facilitate an FX swap when it’s most needed. For a long time they were dubbed “paper gold” for this reason.

Andres Arauz, Ecuador’s former minister of knowledge, who is now a senior research fellow at the Center for Economic and Policy Research (CEPR) and an economist at UNAM is known for thinking unconventionally. Here he is on a panel with yours truly (from 58:00 onwards) discussing ideas about how to decolonise money and de-dollarise petrol.

But he’s got some fresh thoughts on the matter of stimulus, especially with regards to how countries on the periphery can be helped. Here’s his submission (with our emphasis):

Politicians are ignoring fiscal limits and arbitrary thresholds to public spending in order to fight the spread of coronavirus and to try to cure those that are ill. The global economy is sure to take a severe hit in all spheres.

As always, countries in the periphery will be the hardest hit because they don’t have the ability to freely issue currency without it contributing to even greater crises. The Global South will face severe balance of payments issues in the next weeks. The pandemic is disrupting global trade and beggar-thy-neighbor policies are profuse and, in this case, seem justified.

It would be naive for the countries of the Global South to wait for monetary aid from those also affected. It would be completely naive for the Global South to sit and hope that the reserve-issuing countries of the North will “invest” some of that liquidity to the Global South amidst a generalized market panic. 

It is time for the IMF to act, like it did in mid-2009. At that point in time, the IMF issued 183bn SDRs, which at the time amounted to $287bn. While on paper, those SDRs are promises against local currency promises of each member-country, in reality the IMF creates them out of thin air.

Most of that amount went to rich countries who just parked the SDRs in the most remote and inaccessible part of their balance sheets. In contrast, all of Africa got about USD 16 billion worth of fresh SDR and all of South America received about USD 15 billion.

However, for many countries of the Global South, those newly created SDRs were crucial for their balance of payments needs. For example, the fresh USD 668 million allocated to the Democratic Republic of Congo were 860 per cent of their international reserves at the time.

$129m amounted to 79 per cent of Tajikistan’s reserves. $38m amounted to 33 per cent of Gambia’s. $409m was 9 per cent of Ecuador’s. Those SDRs could be readily exchanged for US dollars by a specialised department at the IMF. 

This time, the IMF should forget about conditionality or loan-facilities and should straight up issue 10 times the amount of SDRs that were issued in the midst of the Global Financial Crisis a decade ago. We have no time to make the allocation shares more just, but we have no restriction as to the amounts issued. Out of the 3tn SDRs, almost 167bn SDRs would flow to African countries; that is a little over $230bn in fresh foreign exchange for all of Africa.

The problem is not about misbehaving players anymore, we don’t need to bail out banks or corporates, this time it’s about saving lives.

Strong stuff. But will the IMF consider it?

Central banks have not reached their limit. There is no limit. The key question is has politics limited central banks, either via wealth imbalances, ideology or some other variable.

The same political question must apply to the distribution of IMF SDRs. It will not go ahead without some kind of nod from the US, which has by far the largest SDR quota and voting rights.

So, does Donald Trump want to weaken the USD dollar reserve status is the question?

Yeh, it’s a scary one!

David Llewellyn-Smith
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