…Until recently American trade imbalances were irrelevant to the U.S.. While every other nation had to have foreign exchange reserves, mainly USD’s, which were difficult and expensive to acquire, all the U.S. had to do for its trade was to ‘print’ the damn things or enter them onto a computer screen…Well, that era is now coming to an end in that American balance of trade deficits will start to hurt and haunt the U.S. as the world migrates to a series of arrangements for trade beyond the USD (although the USD will continue to function as the lead foreign exchange/reserve and trade currency for sometime yet) and the introduction of an IMF-SDR basket of currencies.
Aside from a series of bilateral arrangements and the current disintegration of the petrodollar, we are close to the IMF – SDR basket of currencies. This is China’s toe in the door to the continuing loss of dominance of the USD in terms of world trade (U.S. national/sovereign debt and trade deficits will now and in the future become increasingly painful to the U.S.) so these IMF – SDR’s will be increasingly important. In part they will because the U.S., China, the Euro and Yen are the big players in the SDR world and they, especially China, will gain more authority in that pool/basket as the U.S. declines over time.
What makes the IMF SDR vehicle extremely important is that the IMF is also the fourth largest ‘nation’ in terms of their gold hoard. It is clear that these key players consider gold to be money and an anchor for their national currencies as well as the new IMF basket. In spite of constant protestations by central bankers to the contrary, why else do the central banks maintain such large stores of gold if it isn’t money and it isn’t important? Those nations without gold of consequence, for example the UK and Canada, have one arm tied behind their backs in the period ahead.
There is another key element to these changes which is that most all of these countries have incurred vast quantities of sovereign debt which neither major new taxes or out-sized economic growth is capable of coping. So how does a first world nation avoid falling into the barrel which banana republics and dead beat nations like Argentina do when facing the debt wall? They pay their debt rather than denouncing it but they pay their debts with ‘devalued currency units’. How do they devalue currencies? Among the methods is to back currencies, including the revised SDR, with ‘revalued gold’. Arbitrarily revaluing gold has the effect of propping up the currency unit and causing renewed confidence in the currency.
Unfortunately, upwardly valuing gold, which these nations all have in considerable quantity, concurrently ‘devalues’ the currency, which is exactly what these dominant nations such as the U.S., China and the other major players want. The fact that a devalued national currency helps make debt payments cheap, it also causes price inflation. The people get poorer because they need more dollars, Euros – currency units – to buy what they want than before the currency devaluation.
How do governments avoid being skewered by their respective electorates? By throwing up their hands and pointing fingers to anyone but themselves. Of course their unpayable national/sovereign debt was incurred by the national governments both past and present.
The fact that currencies have now been devalued by the arbitrary decision of key central bankers in conjunctions with key IMF members of the central SDR currency basket, means that national governments have convenient villains to point toward and to skewer at home with their respective national electorates. They can also play the ‘social class card’ by pointing fingers toward investors and financial institutions which are making oversized profits from precious metals mining investments. Calls for ‘windfall profits taxes’ will be as common as asking what time of day it is. It also will be politically advantageous.
Think of how bureaucrats organize. They reflexively create committees to deal with issues/problems in large part because they are convinced that success in solving the issue is highly elusive. Responsibility – and especially accountability – is difficult, indeed impossible, to assign to a group of people or nations. My point is that this IMF – SDR basket, which includes key nations is a committee. You can point fingers, articulate criticism, but it is well nigh impossible to make the group or any national member of the SDR group accountable for the pain that is being felt by the citizens of various national governments. What this development achieves is buying more time before an inevitable global currency/financial crunch. It creates an amorphous accountability arrangement and creates a new mechanism to keep everything functioning for yet another undetermined period until the global economy threatens to blow up again.
As the U.S. dollar becomes more and more unglued the IMF – SDR basket of currencies will become increasingly important.