What is the World Reserve Currency?
NEW YORK (CNNMoney) -- The International Monetary Fund issued a report Thursday on a possible replacement for the dollar as the world's reserve currency.
The IMF said Special Drawing Rights, or SDRs, could help stabilize the global financial system.
From GetMoneyEnergy.com:
Also known simply as a reserve currency, or less frequently, an “anchor currency,” the world reserve currency is more like a vehicle or container – like a 401(k) or RRSP – which can hold a certain currency inside. In other words, there is no essential or necessary world reserve currency. It could be any currency – even one that does not exist yet. Right now the reserve currency happens to be the US dollar. It has been since the Bretton Woods agreements of July 1944. This was when the U.S. was a creditor nation and the fastest-growing worldeconomy.
Reserve currencies have been in effect for centuries. And in fact, with much of the new recent hoopla about supplanting the US dollar as the reserve currency, it’s worth noting that this may be an escalating trend, but similar calls were also made in the 1970’s over similar worries about the world financing US deficits.
Certain amounts of the world reserve currency are held in foreign exchange reserves by governments (and sovereign wealth funds) and institutions (like the IMF) around the world. But foreign exchange reserves around the world do not *only* hold the world reserve currency: while the US dollar is always a majority of their holdings, the Euro is a close second (about 25% of holdings), and other major currencies (Swiss Francs, Yen, pounds, Canadian dollars) are also held. Thus, strictly speaking, these are also reserve currencies, with an important caveat:
The world reserve currency also acts as the international pricing currency for oil, gold, and other products traded on world markets. You can’t trade oil in Euros and countries can’t trade gold in Yen. This gives an advantage to the US dollar because other countries need to transact to exchange their own money into dollars first. It has even been argued that this serves to artificially inflate the US dollar insofar as it becomes the only reason countries need to hold it.
Or, this from Nobel prize winner, Joseph Stiglitz:
“The world is on the verge of moving to another regime of managed exchange rates and fragmented capital markets….A new global reserve system or an expansion of IMF “money” (called special drawing rights, or SDRs) will be central to this co-operative approach. With such a system, poor countries would no longer need to put aside hundreds of billions of dollars to protect themselves from global volatility, and these would add to global aggregate demand…. with such a system, the US would no longer enjoy the extraordinarily cheap borrowing that comes with being the minter of the most important global reserve currency. But the current arrangement is an anomaly. The world is at a critical juncture.” (A currency war has no winners, Joseph Stiglitz, The Guardian)
| Soros: U.S. Dollar No Longer World Reserve Currency | | Print | |
| WRITTEN BY JACK KENNY |
| TUESDAY, 12 APRIL 2011 12:51 |
 It was President Richard M. Nixon, a favorite of the neoconservative establishment, who announced in his first term that "We're all Keynesians now," indicating that the old Republican bible of balanced budgets and a limited role for government in the marketplace was dead forever. Perhaps a future President — no doubt one who, like Nixon, got elected by preaching the virtues of free markets and small government — will look back at the Bretton Woods II Conference and announce grandly: "We're all Sorosians now."This time the crisis is the burden of debt that is driving the United States and key western allies to the brink of bankruptcy and the declining dollar that had long been the leader of world currencies. Soros, like British economist John Maynard Keynes, whose pump-priming, big-spending activist role for government became orthodoxy in America during the New Deal of the 1930s, appears to be looking for a more inflatable, adaptable currency, more easily manipulated by the political and economic elite to create yet another "new world order." And Soros, of course, would be "present at the creation" and, presumably, calling the shots. Speaking to Bloomberg News on Sunday, Soros described the decisions facing the world leaders at the conference: The big question is whether the U.S. dollar should be the reserve currency. It no longer is[;] it shares that role with the euro, other currencies and commodities. But it's not just gold being used as a substitute, but oil too, which is putting upward pressure on the market. While the original Bretton Woods Conference created the World Bank and the International Monetary Fund, the second was called to create a new financial "architecture" for the world, Soros wrote when he called for a second Bretton Woods Conference two years ago. Current economic arrangements are not working, he told Bloomberg on Sunday, as developed nations have devalued their currencies and are sinking beneath mountains of unsustainable debt. Yet even as the Obama administration and the Republican-dominated House of Representatives in Washington square off in a battle over raising the legal ceiling on the nation's debt of more than $14 trillion, Soros believes the United States should, à lathe Keynes philosophy, be willing to take on still more debt to jumpstart a stagnant economy. He acknowledged, "There is very a strong push to tighten the budget as a way to reduce government spending. In my opinion, the country could actually absorb some more debt in order to get the economy going." Soros contends that with a growing economy the United States could "tolerate a higher level of debt." He recognized China as a major new powerhouse on the world economic scene and observed that despite risks of inflation, the Asian giant has emerged as the "big winner" in the current financial crisis. No longer isolated, China has become the "main beneficiary" of the globalization of national and regional economies, Soros commented. The billionaire investor also indicated that he believes last Thursday's hike in interest rates by the European Central Bank came at a "quite inappropriate" time and called China's reluctance to allow currency appreciation a mistake: There is a real danger of wage price inflation because prices have gone up and particularly real estate prices have gone up. So, the Chinese government I think made a mistake not allowing its currency to appreciate, which would have controlled the price inflation. Instead, authorities now face 20-percent to 30-percent wage increases, which seem to be falling out of their control, Soros added. Moreover, he sees a shadow banking system that is "growing out of control" in China because of the strong demand for money while banks are refusing to lend. China, officially communist since the conquest by Mao Tse-tung's red army and the establishment of the People's Republic of China in 1949, has in recent decades relied for economic growth on state capitalism, a system that allows the government to both stimulate and control economic development. Because of the nation's spectacular economic success in recent years, other countries are emulating the Chinese way. But Soros sees the surging Asian giant as an economic threat to the rest of the world. "They are effectively controlling the world currency system," he declared. More statements regarding the secret conference are expected to come out over the next several weeks, Bloomberg News reported. |
Stiglitz Calls for New Global Reserve Currency to Prevent Trade Imbalances
By John Detrixhe and Sara Eisen - Apr 10, 2011 9:51 AM MT
The world economy needs a new global reserve currency to help prevent trade imbalances that are reflected in the national debt of the U.S., said Nobel-prize winning economist Joseph Stiglitz.
A “global system” is needed to replace the dollar as a reserve currency and help avoid a weakening of U.S. credit quality, said Stiglitz, a professor at Columbia University in New York. The dollar fell to an almost 15-month low against the euro last week, and the U.S. trade deficit widened more than forecast in January to the highest level in seven months.
“By taking off the burden of any single country, we don’t have to have trade deficits,” Stiglitz said in an interview in Bretton Woods, New Hampshire. “Things would be much worse if it were not the case that Europe was having even more of a problem, but winning a negative beauty pageant is not the way to create a strong economy.”
President Barack Obama and congressional leaders negotiated a last-minute deal two nights ago to avert a government shutdown. Within weeks, the government may be forced to increase the $14.3 trillion federal debt ceiling to ensure the U.S. will meet its financial obligations.
The benchmark 10-year Treasury note yield was at 3.58 percent on April 8, below the average of 7 percent since 1980.
The ratio of general government debt, including state and local governments, to gross domestic product is projected to climb to 100 percent in 2012, the most of any country with an AAA ranking, Fitch Ratings said last week.
‘Extremely Low’
Even so, “the likelihood of the U.S. government failing to honor its financial obligations and in particular make due and full payments on U.S. Treasury securities is extremely low,” Fitch said in a statement.
To finance its budget deficits, the U.S. sells bonds to overseas investors and governments, boosting the dollar reserves of those nations. Overseas holdings of dollar reserves rose to $3.14 trillion in the fourth quarter of last year, according to International Monetary Fund figures.
“Reserves are IOU’s,” Stiglitz said. “When IOU’s get big enough, people start saying maybe you’re not a good credit risk. Or at least, they would change in their sentiment about credit risk.”
Stiglitz, who won the 2001 Nobel Prize for economics, was attending the Institute for New Economic Thinking’s conference in Bretton Woods at the hotel where U.S. and European officials met in 1944 to remake the global monetary system.
Nations agreed to fix exchange rates, establish the IMF and start the process of rebuilding Europe’s economy in the aftermath of World War II by encouraging coordinated economic policies.
The existing monetary system means “there’s a very good risk of an extended period of low growth, inflationary bias, instability,” Stiglitz said. It’s “a system that’s fundamentally unfair because it means that poor countries are lending to the U.S. at close to zero interest rates.”
To contact the reporters on this story: Sara Eisen in New York at seisen2@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
Soros: U.S. Dollar No Longer World Reserve Currency
| Source: New American Written by Jack Kenny |
| Tuesday, 12 April 2011 12:51 |
It was President Richard M. Nixon, a favorite of the neoconservative establishment, who announced in his first term that "We're all Keynesians now," indicating that the old Republican bible of balanced budgets and a limited role for government in the marketplace was dead forever. Perhaps a future President — no doubt one who, like Nixon, got elected by preaching the virtues of free markets and small government — will look back at the Bretton Woods II Conference and announce grandly: "We're all Sorosians now." Whether the conference held at the Mount Washington hotel in Bretton Woods, New Hampshire, over the past weekend eclipses in significance its namesake of 1944 is yet unknown. The event — organized by left wing billionaire George Soros, was strictly a private affair — a gathering of kingmakers who, like their 1944 counterparts, are out to reshape the world and redefine its currency. Then the world had been torn apart by World War II and the creation of a "new world order" would, in the early postwar years, be accomplished on such a scale that when President Harry Truman's Secretary of State Dean Acheson published his memoirs, the book's title was Present at the Creation.This time the crisis is the burden of debt that is driving the United States and key western allies to the brink of bankruptcy and the declining dollar that had long been the leader of world currencies.
Soros, like British economist John Maynard Keynes, whose pump-priming, big-spending activist role for government became orthodoxy in America during the New Deal of the 1930s, appears to be looking for a more inflatable, adaptable currency, more easily manipulated by the political and economic elite to create yet another "new world order." And Soros, of course, would be "present at the creation" and, presumably, calling the shots.
Speaking to Bloomberg News on Sunday, Soros described the decisions facing the world leaders at the conference:
The big question is whether the U.S. dollar should be the reserve currency. It no longer is[;] it shares that role with the euro, other currencies and commodities. But it's not just gold being used as a substitute, but oil too, which is putting upward pressure on the market.
While the original Bretton Woods Conference created the World Bank and the International Monetary Fund, the second was called to create a new financial "architecture" for the world, Soros wrote when he called for a second Bretton Woods Conference two years ago. Current economic arrangements are not working, he told Bloomberg on Sunday, as developed nations have devalued their currencies and are sinking beneath mountains of unsustainable debt. Yet even as the Obama administration and the Republican-dominated House of Representatives in Washington square off in a battle over raising the legal ceiling on the nation's debt of more than $14 trillion, Soros believes the United States should, à la the Keynes philosophy, be willing to take on still more debt to jumpstart a stagnant economy. He acknowledged, "There is very a strong push to tighten the budget as a way to reduce government spending. In my opinion, the country could actually absorb some more debt in order to get the economy going."Soros contends that with a growing economy the United States could "tolerate a higher level of debt." He recognized China as a major new powerhouse on the world economic scene and observed that despite risks of inflation, the Asian giant has emerged as the "big winner" in the current financial crisis. No longer isolated, China has become the "main beneficiary" of the globalization of national and regional economies, Soros commented.
The billionaire investor also indicated that he believes last Thursday's hike in interest rates by the European Central Bank came at a "quite inappropriate" time and called China's reluctance to allow currency appreciation a mistake:
There is a real danger of wage price inflation because prices have gone up and particularly real estate prices have gone up. So, the Chinese government I think made a mistake not allowing its currency to appreciate, which would have controlled the price inflation.
Instead, authorities now face 20-percent to 30-percent wage increases, which seem to be falling out of their control, Soros added. Moreover, he sees a shadow banking system that is "growing out of control" in China because of the strong demand for money while banks are refusing to lend.China, officially communist since the conquest by Mao Tse-tung's red army and the establishment of the People's Republic of China in 1949, has in recent decades relied for economic growth on state capitalism, a system that allows the government to both stimulate and control economic development. Because of the nation's spectacular economic success in recent years, other countries are emulating the Chinese way. But Soros sees the surging Asian giant as an economic threat to the rest of the world. "They are effectively controlling the world currency system," he declared.
More statements regarding the secret conference are expected to come out over the next several weeks, Bloomberg News reported.
FROM THE IMF
FACTSHEET
Special Drawing Rights (SDRs)
September 13, 2011
The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to around SDR 204 billion (equivalent to about $328.3 billion, converted using the rate of August 31, 2011).
The role of the SDR
The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets—gold and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF.
However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of these developments lessened the need for SDRs.
The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR, serves as theunit of account of the IMF and some other international organizations.
Basket of currencies determines the value of the SDR
The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies,today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar. The U.S. dollar-equivalent of the SDR is posted dailyon the IMF’s website. It is calculated as the sum of specific amounts of the four basket currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.
The basket composition is reviewed every five years by the Executive Board, or earlier if the Fund finds changed circumstances warrant an earlier review, to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems. In the most recent review (in November 2010), the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies that were held by other members of the IMF. These changes become effective on January 1, 2011. The next review will take place by 2015.
The SDR interest rate
The SDR interest rate provides the basis for calculating the interest charged to members on regular (non-concessional) IMF loans, the interest paid to members on their SDR holdings and charged on their SDR allocation, and the interest paid to members on a portion of their quota subscriptions. The SDR interest rate is determined weekly and is based on a weighted average of representative interest rates on short-term debt in the money markets of the SDR basket currencies.
SDR allocations to IMF members
Under its Articles of Agreement (Article XV, Section 1, and Article XVIII), the IMF may allocate SDRs to member countries in proportion to their IMF quotas. Such an allocation provides each member with a costless, unconditional international reserve asset on which interest is neither earned nor paid. However, if a member's SDR holdings rise above its allocation, it earns interest on the excess. Conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall. The Articles of Agreement also allow for cancellations of SDRs, but this provision has never been used. The IMF cannot allocate SDRs to itself or to other prescribed holders.
General allocations of SDRs have to be based on a long-term global need to supplement existing reserve assets. Decisions on general allocations are made for successive basic periods of up to five years, although general SDR allocations have been made only three times. The first allocation was for a total amount of SDR 9.3 billion, distributed in 1970-72, and the second allocated SDR 12.1 billion, distributed in 1979-81. These two allocations resulted in cumulative SDR allocations of SDR 21.4 billion. To help mitigate the effects of the financial crisis, a third general SDR allocation of SDR 161.2 billion was made on August 28, 2009.
Separately, the Fourth Amendment to the Articles of Agreement became effective August 10, 2009 and provided for a special one-time allocation of SDR 21.5 billion. The purpose of the Fourth Amendment was to enable all members of the IMF to participate in the SDR system on an equitable basis and correct for the fact that countries that joined the IMF after 1981—more than one fifth of the current IMF membership—never received an SDR allocation until 2009. The 2009 general and special SDR allocations together raised total cumulative SDR allocations to about SDR 204 billion.
Buying and selling SDRs
IMF members often need to buy SDRs to discharge obligations to the IMF, or they may wish to sell SDRs in order to adjust the composition of their reserves. The IMF may act as an intermediary between members and prescribed holders to ensure that SDRs can be exchanged for freely usable currencies. For more than two decades, the SDR market has functioned through voluntary trading arrangements. Under these arrangements a number of members and one prescribed holder have volunteered to buy or sell SDRs within limits defined by their respective arrangements. Following the 2009 SDR allocations, the number and size of the voluntary arrangements has been expanded to ensure continued liquidity of the voluntary SDR market. The number of voluntary SDR trading arrangements now stands at 32, including 19 new arrangements since the 2009 SDR allocations.
In the event that there is insufficient capacity under the voluntary trading arrangements, the Fund can activate the designation mechanism. Under this mechanism, members with sufficiently strong external positions are designated by the Fund to buy SDRs with freely usable currencies up to certain amounts from members with weak external positions. This arrangement serves as a backstop to guarantee the liquidity and the reserve asset character of the SDR.
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