The following excerpts are from a June 2009 Policy Brief from the Peterson Institute for International Economics written by John Williamson and will help explain SDR's:
"...it is the certainty that money [the U.S. dollar for example] will continue to be accepted by all parties, not who backs it [whether that be a country like the U.S. or gold by the way] that determines the social acceptability of money..."
"...In 1960...economist Robert Triffin...argued that the system...at Bretton Woods [foreign exchange system of currencies]...would not last...the increase in demand for international liquidity could be satisfied only if the reserve center, the United States, ran a payments deficit to supply more dollars to the world..."
"...officials...solution was to creat a synthetic reserve asset...Special Drawing Right...hence we still live with the term SDR's..."
"...in 1972 the IMF [International Monetary Fund] convened...to agree on...reform..."
"...[now, approved on September 9, 2009]...$250 billion in Special Drawing Rights (SDR's)...[were created by the IMF]..."
SDR's (Special Drawing Rights) are currently defined as a basket of currencies (44% US dollars; 34% Euros; 11% Japanese Yen; and 11% pound sterling) and are considered "credit" from the IMF not "money". Amending Articles of the IMF require an 85% vote but the U.S. currently holds a 17% quota which, in effect, is a veto power towards any moves to make the SDR a reserve currency to replace the dollar.
Again perspective is in order since the $250 billion SDR's issued recently accounts for 5% of the world's total non-gold reserve stock. The first issue in 1971 was only 2.9 billion, followed by 3.4 billion in 1972 and those two issues represented 9.5% of non-gold reserves at the time.
SDR's cannot be spent in the market - at least not at this time - and China has recently requested to be able to hold a much higher proportion of its reserve stock in SDR's instead of dollars. This is not entirely a bad thing because this would "...allow the world's reserve stock to grow without creating pressure for payments imbalances such as have recently troubled the world..."
If the U.S. must create deficits to allow other countries to have more liquidity then countries, like China, end up with very large surpluses and create trade imbalances that need to be corrected.
How? By (1) either the U.S. reducing its debt (what you hear the most) or (2) just as possible and plausible, having surplus countries increase domestic demand, thereby reducing their surpluses of dollars.
An Introduction
Hi. Welcome to BourGroup and my blog. Phil
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.
Phil Bour is a CERTIFIED FINANCIAL PLANNER(tm) professional since 2004, a Magna Cum Laude college graduate and an accounting professional for over 35+ years. I love numbers, statistics and economic history.
I am also an Enrolled Agent (EA) to represent taxpayers before the Internal Revenue Service and to prepare tax returns.
"Phil"osophy: I believe that you can manage your money on your own (not necessarily through individual stock selection but through mutual funds, ETF's and other solutions) once you receive some one-time, professional guidance. Why pay annual fees when there may be little added value? For additional information, first read the "An Introduction" label at the left. Then move on to others.