The SDR Magic Circle October 1, 2014 By JC Collins
Reader and commenter Steve Henningsen is one of the many frequenters of this site who not only contributes intelligent and thoughtful opinions, but also does invaluable research on the coming transition of the global financial architecture.
Last night Steve sent me a link to a briefing from the OMFIF – Official Monetary and Financial Institutions Forum.
The OMFIF is made up of experts and members of the global financial institutions and is a direct source of information for what is really happening.
Here are some of the highlights from the briefing:
No decision has been made. But measures already taken by the Chinese authorities to internationalise the renminbi, and a big increase in financial market interest in the currency, increasingly point towards a broadening of the SDR’s composition from January 2016.
This is in spite of the renminbi’s formal inconvertibility, reflecting Beijing’s restrictions on capital account transactions that are highly unlikely to be completely scrapped in the foreseeable future.
Though I suspect we may see a broadening of the SDR’s composition before January, 2016, we at least now have a benchmark to work with. How quickly some of the other geopolitical and legislative issues can be worked out will likely speed things up somewhat.
Inclusion of the renminbi in the SDR basket, although ostensibly a technical step, would confer upon the Chinese unit the de facto standing of a reserve currency, a highly important symbolic development and the first time that an emerging market currency would attain this status.
This statement is exactly what I was describing in the post Renminbi Is Already A De Facto Reserve Currency, which was written on September 14, 2014, 15 days before this brief was published.
Chinese entry into the ‘magic circle’ of reserve currencies in the SDR, along with the other components (the dollar, euro, yen and sterling), has already been advanced by a ground-breaking decision announced this month by the UK Treasury.
The British government will issue renminbi-denominated bonds, the first sovereign government to take such a step (apart from the Canadian province of British Columbia), and allow the proceeds to be held in the UK reserves managed by the Bank of England, breaking two long-held taboos for the UK authorities.
There is the “magic circle” term again. And I also mentioned that the Canadian province of British Columbia was the first foreign government which issued a renminbi denominated bond.
The IMF will undertake a technical criteria-based review of the options for widening the SDR in a review next year, with most of the work to be conducted from mid-year onwards and any changes taking effect in January 2016. The main conditions are that a currency in the SDR should be widely used in trade invoicing and should be ‘freely usable’ in international payments and asset management.
This statement fits well with what we discussed in the SDR’s and the New Bretton Woods series, where the 2010 IMF Code of Reforms were discussed. The full implementation of these reforms will allow for the restructuring of the Executive Board which will facilitate the process described above, namely the review and inclusion of the renminbi in the SDR basket.
In view of worldwide interest in the renminbi, repositioning and redynamising the SDR by including a leading emerging market currency could encourage greater interest in SDR-denominated instruments by banks, corporations, asset managers and other institutions around the world. SDR bond issues, which made an entrance in the early 1980s, have never achieved much support on financial markets.
This statement speaks to the detractors of the SDR. The SDR of old is unworkable but when the renminbi, and likely gold as well, is added to its basket composition, the whole game will change. The linear thinkers who can not see the abstract reality of what is taking place in the world are going to be surprised when the world of tomorrow leaves them behind.
These international and institutional think tanks have been the main source of all my own research and from this information I have developed my opinion on what is happening in the socioeconomic world. Understanding this information has made it extremely easier to decipher and understand what is happening on the geopolitical front as well.
The Bank for International Settlements and its mandated institutions around the world, including all central banks and the IMF, as well as the BRICS Development Bank and Contingency Reserve Fund, are all fragments of a much larger process of initiation moving the world into a macro multilateral architecture.
Over the last nine months I’ve taken some heat for attempting to blend economic metrics with the esoteric philosophy aspects in my writing style and content. The reference to the “magic circle” in the above briefing is in direct relation to this esoteric, or occult if you will, content and style.
Things will always come full circle and the complete picture begins to come into focus. Just like the name Philosophyofmetrics is being further understood and defined with the help of readers and commenters like Steve.
And for the purpose of clarity, I have no moral interest or vested interest in the SDR supra-sovereign currency structure. The intent of my writings is to explore and relate what to me are obvious and inevitable conclusions and outcomes. I do not support the SDR macro plan.
What I do support are humanities attempts to move outside the magic circle and broaden our awareness of the infinity possibilities which weave in and out of all things. We can be the grand architects of our own lives. – JC