Friday, 27 March 2009

SDR's as the new global reserve currency - perhaps the thin end of the wedge

As pointed out by a posting at SeekingAlpha there is an extremely high correlation between an independent benchmark such as gold when priced in SDR's and also when priced in US dollars (USD) for the simple reason that the USD is the main component of the SDR formula.
However, switching to SDR's as a replacement for the USD as the global reserve currency should perhaps best be seen as a tactical "thin end of the wedge" process on the part of countries such as China, Russia, and Brazil who are tabling this as a discussion item at the forthcoming G20 meeting in London.
One could, without too much of a febrile imagination, conjure up the following scenario. The principal global energy producers decide to price crude oil in SDR's and eventually push for a a reset of the basket of currencies that comprise the current SDR arrangement and quite conceivably push for a widening of the formula to include a commodity component. As a result this wedge could start to deliver leverage to them and other resource based economies in a very significant manner. It might even lead to a more economically sustainable pricing model for the pricing of non-renewable resources and the external costs incurred from their exploitation.
A more obvious political consequence would be that, if the implementation of a new reserve currency, not under the control of any one government/jurisdiction, was to be established, the US Federal Reserve would no longer be able to manipulate the monetary base and money supply so readily without paying greater attention to the wider consequences for the global economy.
When Tim Geithner initially suggested that he was open to a discussion about a proposal for a new reserve currency he probably had not thought through the full ramifications. His demeanour towards the idea has cooled noticeably since and one can be sure that it will not be one of the favorite items on the agenda for the US delegation to next week's G20 meeting.

2 comments:

  1. You are wrong about this. There is no need to worry the world will not dump the dollar!

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  2. what world do you refer, whatever you wish, reality is reality !!! the dollar has no chance to survive, it is dead since long time ago,

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