IMF calls for limiting use of USD for international reserves and tells why their bogus currency is better than the fiat dollar
IMF chief calls for governments to gradually replace dollar reserves for IMF issued SDR or Special Drawing Rights. Special Drawing Rights (SDRs) are international foreign exchange reserve assets. Allocated to nations by the IMF, a SDR represents a claim to foreign currencies for which it may be exchanged in times of need.
As we know, the IMF creates SDRs much the same way that the Fed prints dollars... out of thin air. Now the call has been raised by the IMF, on why countries don't diversify out of their dollar holdings to go into SDRs. As the dollar is also a fiat currency, there is no real benefit to using dollars over another currency, except for its prevalence in international trade.
The IMF doesn't call for an end to using the dollar in trade, they really are pushing it as an alternative to the use of the US dollar as a reserve currency. The IMF outlines their case below. Via IMF:
The SDR may have some potential to improve the functioning of the IMS in three mutually reinforcing ways:
Expanding the SDR basket would further support the SDR’s role. More specifically, enhancing the role of the SDR could serve the following objectives:
- as a sui generis composite reserve asset defined by the Fund’s Articles and centrally allocated;
- as a unit of account;
- and, as a new reserve-grade security issued by the IMF or a subset of its membership (SDR-bond).
- Reduce reserve accumulation/imbalances and strengthen the global safety net: Official SDR allocations are a lower cost alternative to accumulation of international reserves through borrowing or accumulation of current account surpluses. The SDR has the same properties as a swap line in that it allows holders access to foreign currency liquidity. SDRs are especially valuable at times of systemic crisis, as they give confidence to the market that the member can access foreign exchange funding without liquidating assets in financial markets that may be impaired or would be subjected to added stress from simultaneous action by several central banks. In addition to potentially reducing precautionary reserve accumulation, SDR allocations could conceivably (albeit not in the current legal framework) be used as a policy incentive against excess accumulation of reserves for non precautionary purposes.
- Develop a new reserve asset: Issuance by the Fund (or related investment vehicle) of SDR-denominated securities in sufficient volume could offer a safe haven in the event of disorderly diversification out of the existing stock of assets, as well as offering an alternative mode of Fund borrowing at time of high potential demand for its resources.
- Reduce impact of exchange rate swings: The SDR unit of account could be used to price global trade, denominate financial assets, peg currencies, and keep accounts and official statistics. The SDR’s basket characteristic provide a less volatile unit of account and store of value than its components when measured in domestic currency terms, thereby helping cope with exchange rate volatility for both the official and private sectors. These benefits are all the greater as the use of the SDR in both goods and asset markets is developed. Such development would allow the SDR to serve as focal point for IMS evolution, a more efficient outcome than several segmented markets in various national currencies.
- Accommodate a greater role for emerging market currencies in the IMS: The basket could smoothly accommodate a greater role for emerging market currencies in the IMS, notably the RMB: inclusion in the basket would allow holders of SDR denominated assets to acquire greater exposure to those currencies than otherwise possible, and would create a dynamic conducive to financial deepening and, depending on conditions for joining the basket, capital account liberalization in emerging markets. Generally, as the SDR composition is updated regularly to reflect the relative importance of different currencies in global trade and finance, a system with a liquid market in SDR-denominated assets could flexibly accommodate the evolution of the IMS and mitigate the impact of any sudden shifts in demand for different currencies. However, expanding the basket too much could increase the complexity of the SDR, potentially reducing its attractiveness to reserve managers.