I’ve been hearing a lot from private bankers lately (they’re always trying to flog you product), though the topic being discussed amongst themselves is that of the SDR going mainstream, and they’ve been asking my opinion.
We don’t have to look far to understand why.
Here’s the dollar index going back to December 2016.
Which itself has brought a not unsurprising but potentially valuable (depending on how you position) setup.
Here’s COT positioning.
Speculators haven’t been this short since 2014— back when… oh, never mind. This time is different, right?
Global Players Circumventing the Dollar
Fuelling this narrative has been talk about those sneaky Chinese and their moves to disintermediate the dollar through the development of gold contracts and oil traded in yuan.
All of this appears to be painting a particularly nasty picture for the greenback, and the bears, as we can see, are all in and betting on black.
This is the backdrop to the discussions those private bankers are having around the SDR. After all, if one hegemonic currency is to go away, it surely can’t do so without another replacing it.
Enter the SDR.
Let’s briefly define what an SDR exactly is so we know what we’re talking about.
Think of it as an ETF of international currencies which adjusts its weighting according to the prominence of currencies in terms of international trade and FX reserves. It’s currently made up of the following five currencies: USD 41.73%, EUR 30.93%, RMB 10.92%, JPY 8.33%, and GBP 8.09%
It is the brainchild of the IMF, an organisation that should be taken outside and shot. No trial, no last meal, and no flowers, please. The ideas coming out of this creature pretty much guarantees they should be avoided like a bubonic rat.
And speaking of the IMF, we have the head, one Christine “I’m a wretched old goat” Lagarde riding the coattails of the crypto currency boom.
LONDON (Reuters) – Global usage of the International Monetary Fund’s in-house currency, the special drawing right (SDR), could get a boost from the growth of digital currencies, the Fund’s managing director, Christine Lagarde said on Friday.
Like I said. Bollocks!
Let Me Explain
What do all of these have in common?
- Bretton Woods
- USD reserve status
- The formation of the United Nations
- The IMF and,
- The IMDB and,
- The World Bank
- The Gold standard, and lastly….
- Quantitative easing
The answer to this question explains why we’re extremely unlikely to see any SDR implemented — at least not yet… and not particularly soon.
All of these organisations, except for QE which isn’t an organisation at all (and I’ll get to it in a minute), were formed at the end of World War 2.
How do you get 44 nations, whose people speak different languages, pray to different gods, eat different foods, and have completely different domestic laws, to agree on one set of rules?
Rules such as a dollar standard backed by gold. Organisations such as the UN, IMF, the World Bank, and others.
You have a great big shocking brutal war. So devastating, so exhausting, and so physically and mentally sickening that in desperation society strives to create something that will create stability, peace, and an end to the mayhem. There is a cohesiveness in shared tragedy and by 1945 there was a helluva lot of tragedy going around with entire cities left in smouldering ruins, nations bankrupted, leaving society poor, desperate, and exhausted.
Nearing the end of WW 2 we all looked at one another and basically said, holy cow, let’s not do THAT again. In fact, let’s make damned sure it never happens again, heh folks.
The European Union itself was setup with the purpose of ending the frequent and bloody conflicts of European neighbours which culminated in World War 2. Many of the institutions and social structures of any scale were birthed in crisis.
Never worked. That it all ended up with people eating grass never stopped society from giving it a jolly good whirl — 1922 to 1991 is still 69 very long years. Imagine those were YOUR 69 years. Then they’d certainly have mattered.
That it failed as miserably as the euro will surely fail is missing the point. The collective decision to give communism a go was a by-product of World War 1, beginning with the Bolshevik seizure of power in Petrograd in October 1917.
Good ideas, bad ideas. Any ideas implemented at scale across political divides are more often than not achieved during and often after a crisis.
The bigger the crisis the greater the probability of something being implemented. A domestic crisis can birth a large domestic response but typically it takes an international crisis together with a shared political view to birth something like the various organisations that came out of Bretton Woods.
Was a coordinated effort in a time of crisis where participants from the world’s global central banks all chose to act together with self preservation being the obvious goal. That took political cohesion together with a shared crisis.
Now, this is where it’s important because a crisis where there is no global political cohesion does NOT result in coordination. All we need do is look at individual crisis which regularly take place and where global powers pay little to no attention to them, certainly not at a global coordinated level. Venezuela today, Argentina in 2003, even the Asian crisis never amounted to a true global coordinated effort to do something.
This comes back to an article I penned almost exactly a year ago on the incoming “strong men” and their impact on the global economy.
Where I stated the 3 important things to watch for.
- Political cohesion and stability can no longer be relied upon as politics becomes inward looking with everything from trade deals to central bank swap lines being renegotiated or cancelled altogether.
- Global coordinated central bank action. The era of global coordinated monetary policy which we’ve been experiencing since the GFC, especially with the three largest players (ECB, FED and BOJ), will be looked back upon with nostalgia by the current clutch of central bankers who muddy the halls of power. Policy will increasingly be driven with greater sensitivity to nationalist rather than international concerns, which brings me to…
- Liquidity in the financial system which has stemmed from easing monetary policy is already contracting. In a world where derivatives traverse borders, connecting financial systems like never before, a liquidity crisis presents enormous tail risk in a leveraged world.
Implementing SDR? Most Likely Not Today
Over the last decade, we’ve been moving rapidly towards a world of “us vs. them”. A world of insular inward looking politics, xenophobia, rising nationalism, rising religionism, and an increase in secessionist movements.
Catalonia is simply the most recent example, though preceded by Brexit.
When I look around the world today, I just don’t see the political cohesion necessary to implement the SDR.Today's fragmented world lacks the political cohesion required to implement the SDR.Click To Tweet
Unless someone rounded up the existing political elite from all over the world and severely and heavily medicated them, their interests are simply not aligned for this to take shape. Barring the snapping of some anchoring ligament in their current psyche, there exists no political will to act in a coordinated fashion.
The trend is, dare I say it, quite firmly in the other direction, and unless that changes, the implementation of the SDR at scale grows increasingly unlikely with each day.
Oh, and one last thing.
Let me ask you a question: If Europe has had such trouble managing a monetary policy amongst the Eurozone, which incidentally is a basket of countries with similar social, political, and economic structures, then how the heck does one manage such things on a global scale, across countries with distinctly different social, political, and economic structures?
“We are met here in Bretton Woods in an experimental test, probably the first time in the history of the world, that forty-four nations have convened seeking to solve difficult economic problems. We fight together on sodden battlefields. We sail together on the majestic blue. We fly together in the ethereal sky.” — Fred Winson, U.S. delegate at the Bretton Wood conference