I'll start out by quoting our Bobswern's July, 2010 diary: A Bastille Day Reminder: We Reap What We Sow
Yves here. I am not terribly optimistic about the survival of the "open world economy". I believe that (absent measures like Keynes' Bancor proposal) large trade flows over time produce destabilizing international capital flows. Citizens are not prepared to suffer sudden, dramatic losses of savings and high odds of unemployment or reduced income in the name of world trade. Containing the downside would require a considerable loss of national sovereignity, which again few are prepared to accept.
Back in November, 2010, I wrote a diary because I caught wind that China was using $50Billion to buy a new IMF issued SDR and other countries were following suit.
I couldn't figure out how this could work, until now. It turns out Yves was correct. An open world economy needs a world currency. An international currency called the BANCOR is being discussed by the IMF:
Reserve Accumulation and International Monetary Stability
This is how owners of bonds in the basket, the SDR, can "cash out". They can use their dollars to buy IMF SDRs, and then receive BANCORS to trade with the world.
This move would eliminate the US Dollar as the world's reserve currency.
To save you time, I have posted the IMF BANCOR language below
From pages 26 and 27 of the IMF discussion:
From SDR to Bancor. A limitation of the SDR as discussed previously is that it is not a currency....
And though an SDR-based system would move away from a dominant national currency....
Called, for example, Bancor in honor of Keynes, such a currency could be used as a medium of exchange—an “outside money” in contrast to the SDR which remains an “inside money”....
it would be essential to construct governance arrangements that ensure accountability of the bancor-issuing institution while assuring its independence....
Why Bancor? A global currency, Bancor, issued by a global central bank (see Supplement 1, section V) would be designed as a stable store of value(emphasis mine) that is not tied exclusively to the conditions of any particular economy.
Emphasis on "away from a dominant national currency" mine. That means the $$Dollar would not be the reserve currency anymore.
Most have forgotten that the British Sterling was the reserve currency before the dollar:
Barry Eichengreen, University of California, Berkeley talked about this back in 2005 before our ecnonomy tanked.
Consider the following quote from Avinash Persaud of State Street Bank and Trust.
“[R]eserve currencies come and go. Over the past two and a half thousand years there have been over a dozen reserve currencies that no longer exist. Sterling lost its status in the first half of the 20th century, [and] the dollar will lose its status in the first half of this century...Losing reserve currency status will lead to a series of economic and political crises in the United States.”2
Well, not to worry. Geithner is the US Governor on the IMF Board of Governors. Bernanke is his back up. We can trust that they won't sell out the US citizens or the Fed who would lose its ability to print more dollars when needed.
Unless the number of votes in the IMF exceed their 16% votes. And there is talk that China, India, Russia, and Brazil might vote together. How many others can they get to exceed the votes of the Western World? And even if they did manage to do so, would the vote be honored. So many questions.
What I think really stinks is that the moves of the IMF are outside of the people's vote unless their are national laws that determine how the Governor for a country can vote.
The Secretary of the Treasury is the US Governor and does report to Congress.
The biggest downside to the $Dollar losing its reserve currency position is hyper-inflation according to many who talk about this possibility because we now import so much of what we need to survive. Many think this will happen next year, prior to the Presidential election.
I have faith in the people here. Whatever way things churn, I believe we will put aside ideology and work together as communities to feed our children. The Occupy movement, to me, has a lot to say about this need. So instead of fear, a renewed sense of community could be a silver lining to this move if the IMF is successful.