What You Should Know About Special Drawing Rights (SDRs)

“When I started talking about SDRs in 2010” said best-selling author Jim Rickards, “most people thought that it stood for ‘Strawberry Daiquiri on the Rocks. Now, everybody seems to be talking about Special Drawing Rights…”

“Yet, very few people know what they are… How they work… Or what they mean for everyday Americans.”

According to Jim (who, if you don’t know – is a three-time best selling author that advises the U.S government on financial threats and was general counsel to one of the most influential hedge funds in history), these SDRs or new “World Money” as we like to call it, are going to affect ordinary people like you sooner than you might realize.

By definition, world money is labeled as “Special Drawing Rights” (SDR) that have vaguely been described by the International Monetary Fund (IMF) as its “international reserve asset.”  

World money has been used as a sedative in times of global economic shock.  The IMF turned to the SDR as a “band-aid” in order to support central bank reserves that were under threat during the most recent global financial crisis.  

As the IMF escalates its role as the central bank of the world – here is what you need to know about world money:

SDR World Money

Who has “world money?”

The IMF member states have exclusive membership to this currency club and only four countries are in that group “basket” – for now.  This means that the IMF weighs all of the member currency values into a standard rate which changes daily.  

Currently, the U.S dollar, European Union euro, Japanese yen, and U.K pound sterling make up the SDR.  As of midnight on September 30, China’s renminbi will join the elite club.  Membership has only changed once in the past three decades.  

Where can you get world money?     

In short, you can’t.  The IMF is the only institution that can print and distribute world money.  Only its member states that are within its elite “basket” can freely exchange SDR as currency.  Typically, SDR’s are used to take loans or make repayments made by the IMF.  They are also used by its members central banks to sell in order to help currency reserves during times of economic crisis.

How does world money impact the U.S dollar?

The SDR has the capacity to bring the dollar down to the status of a basic local currency. That means the dollar would no longer be the standard bearer for the world financial system.  

As was the case when the world eventually dropped the gold standard, the U.S dollar faces a similar threat. The possibility that the U.S could lose its crown as the top denominated bond in the global currency market could bring along several nasty side effects.  The most detrimental would be a loss in confidence in the dollar and reactionary hyperinflation – prices for goods and services skyrocket.

What are the current value rates for the world money basket?

The SDR per currency rate is based upon the representative exchange rate for each currency.  This rate changes daily. Out of those currency weights, the U.S holds the greatest weight – and the greatest influence. With the inclusion of the Chinese renminbi to be calculated by the IMF on September 30, 2016 the rates will stand at:

  • U.S. dollar 41.73 percent (compared with 41.9 percent at the 2010 Review)
  • Euro 30.93 percent (compared with 37.4 percent at the 2010 Review)
  • Chinese renminbi 10.92 percent
  • Japanese yen 8.33 percent (compared with 9.4 percent at the 2010 Review)
  • Pound sterling 8.09 percent (compared with 11.3 percent at the 2010 Review)

The IMF is scheduled to publish illustrative currency amounts in the weeks leading up to the official entrance of the Chinese currency (renminbi) on October 1, 2016.

What should you pay attention to with the looming SDR deadline?

The G20 finance ministers and central bank governors convened September 4-5, 2016 in Hangzhou, China.  With less than a month away from the IMF accepting China into the elite currency club, this gathering will has offered leadership signals for what to expect for the future.  

The fact that the world’s leading bankers gathered in China just prior to its grand entrance on the world money scene is not random. As the president of China noted in his official G-20 statement, the gathering must look at “expanding the role of the SDR of IMF.” The Chinese president is also the presiding leader of the G-20 for 2016. After a strained series of events between the U.S and China during the G-20 summit, the currency war over world money is just beginning. The SDR could prove to be a pivotal battleground.

Regards,

Craig Wilson

for The Daily Reckoning

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