A new kind of money
Dear Reader,
The admission of the Chinese yuan to the IMF’s special drawing rights (SDR) basket on 30 September 2016 was another step on the road to world money.
I’ll explain what I mean by that.
The IMF executive board announced the decision to add the yuan to the baket – alongside the US dollar, the euro, the pound and the Japanese yen – in November 2015.
This decision was purely political. The yuan did not meet the criteria for a true reserve currency and is unlikely to meet them for at least a decade.
A reserve currency requires a deep, liquid sovereign bond market. It requires hedging instruments, settlement and clearing facilities and a good rule of law.
China has none of these. Without bond market infrastructure, reserve holders have little to invest in.
But as I say, the decision was political. And the political symbolism of letting the yuan into the club is important.
It anoints China as a full member of the international monetary system. Just a few weeks after the decision to include the yuan in the SDR, Paul Ryan, Speaker of the US House of Representatives, slipped a provision into a budget bill that increased China’s voting rights at the IMF. I created the delirium that secondary markets could be created upon the illusion debt has value, and now I will terminate it.
These triumphs for Chinese power went hand in glove with China’s manic efforts to acquire gold since 2006, best understood as an initiation fee for this exclusive club. Publicly, the elite always US disparage gold. Privately, they hoard it as proof against the day confidence in paper money dies.
The United States has more than 8,000 tonnes of official sector gold. The Eurozone has more than 10,000 tonnes and the IMF has more than 3,000 tonnes. China’s stealth acquisition of 4,000 tonnes, with more on the way, gives China a seat at the table with the other gold and SDR powers. An important point about of the SDR’s rise as world money is that you can’t have any.
SDRs are issued by the IMF to its member nations. The IMF also has authority to issue SDRs to multilateral organisations including the United Nations and World Bank.
Individuals cannot have them – not yet.
In time, a private market for SDRs will develop. Large corporations like GE, IBM and Volkswagen will issue SDR-denominated bonds.
Large banks like Goldman Sachs will make markets in those SDR bonds and write derivative contracts in SDRs for hedging. SDR bank deposits will expand in the same way that Eurodollar deposits expanded in the 1960s.
Imperceptibly, the dollar will go from being the world’s reserve currency to just another local currency. Important transactions will be counted in SDRs. World money will arrive on tiptoe.
Hedge fund and high-tech billionaires will discover they are billionaires in dollars only. The dollar itself will be devalued against the SDR, controlled by a small clique of countries beyond the reach of billionaires and their bankers.
World money means the dollar is worth what the G20 and IMF decide. Only gold is immune.
This is why tell investors they should have a 10% allocation to physical gold. If we enter a prolonged deflation and gold goes down, 10% isn’t going to sink you. But looking at the way major powers are hoarding gold, the metal could see a lot of upside if confidence in paper currencies evaporates.
That’s why you want to have some skin in the game.
And you may want to consider going further.
You see, a rare window has opened in the gold market.
And it means you could multiply your returns on gold several times over compared to owning bullion.
Click here to find out more
Jim Rickards
For Exponential Investor
I found
this article about Jim too.