With the new SDR system in place, all the currencies of the world can peg their value to the SDR containing the basket of commodities and other composition weights which we have discussed.
With the SDR acting as the reserve currency anchor a fixed exchange rate can be set (or allowed to fluctuate within a band) and the foreign reserves held in dollars will be slowly replaced with SDR reserves.
With a large scale substitution of U.S. dollar reserves with SDR reserves, it will create a situation where less exchange rate pressure is exerted on the U.S. dollar as it attempts to restructure its sovereign debt through the very same SDR consolidation system.
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So why hasn’t the Global Currency Reset and Great Consolidation taken place yet? Simple, the United States Congress has not passed the legislation required to restructure the Executive Board of the International Monetary Fund.
For those who doubt that this is indeed the holdup, a very brief review of the 2010 Code of Reforms themselves should be required. The U.S. holds 17% of the vote on the Executive Board. For any measures to pass the required vote is 85%.
The U.S. can veto any resolution or policy change as it sees fit. It is holding off on restructuring the board and in turn the international monetary system as referenced by the G20 above, as a form of chess game in which it is seeking additional allocations and compositions for the dollars’ value and placement within the system once said system is fully implemented.
Now that Congress has given a blank cheque debt limit increase, the money should be available for increased deficit spending which will increase the U.S. quota injections into the I.M.F. This will allow for the sovereign debt restructuring to begin.
Another probable explanation for the refusal of the Congress to enact the legislation is the likelihood of the exchange rate risk associated with the transition from dollar liabilities to SDR liabilities.
This risk could be captured in a temporary substitution account which would be setup as a form of safety net for the dollars collapse.
Perhaps the United States is negotiating a shared risk instead of sole responsibility for maintaining the dollars SDR composition value on the substitution account as the transition from dollar reserves to SDR reserves takes place.
It is well known by all sides that the dollar cannot collapse without causing the collapse of the new SDR system before it is even fully implemented. The I.M.F. and the U.S. both require this substitution account as a temporary transition point to ensure there is no sudden drop in demand for dollars. The transition has to be slow and orderly.
The substitution account will further allow for the direct foreign exchange market intervention for SDR’s which will enhance the attractiveness of the SDR compositions and allocations as laid forth in the capital asset reserve structure of the Basel 3 Regulations.
As foreign exchange in the SDR system increases, account balancing and clearing can be completed by the Bank for International Settlements. The BIS has already developed a multi-tiered system for clearing and settlement of SDR payments.
Thus we come full circle back to the statements made by Zhou Xiaochuan of the People’s Bank of China, (who just so happens to be one of the most influential economic figures in the world) calling for the SDR system.
And remember, he is a board member of the Bank for International Settlements as well.
If China gets its way and overall economic growth is added to the weights of SDR compositions, which could in fact be used as a method of shared risk within the temporary substitution account, than we will see the SDR system implemented without further delay.
Once all the world’s currencies are pegged to SDR’s and not dollars than we will see a form of global trade which will not only encourage, but also enforce a method of real effective exchange rate stability based on real economic values.
This is where currencies like the Vietnamese dong will be revalued and become a stable form of wealth storage for the people. See “Why the Vietnamese Dong Will Reset”.
A complete peg to the SDR will promote global trade by removing exchange rate fluctuations and will in essence act as a simulacra of the gold settlement system. A de facto gold standard.
Let’s us go back to the beginning of this essay and think in term of the chess game again. The complexity of this SDR system is not easily understood or explained. It will be sold to the public at large as an extension of what it happening already.
In previous essays we have thought in terms of micro and macro patterns. Let us do so again, as we consider that the Quantitative Easing through the Federal Reserve will slowly transition into SDR Quantitative Easing through the International Monetary Fund and accounts balanced through the Bank for International Settlements.
As the Fed tapers QE we can expect that it will mean an increase in SDR QE through the I.M.F. In time this will become more obvious.
Full implementation of the Basel 3 Regulations through the Bank for International Settlements have been extended to 2018. One can only wonder if this has to be a direct cause and effect to the delay in the 2010 I.M.F. Code of Reforms.
The Basel 3 Regulations are meant to strengthen bank capital requirements by increasing liquidity and decreasing bank leverage. This increase in capital requirements are broken into two categories:
Tier One Capital – must be common shares and retained earnings.
Tier Two Capital – Supplementary but Harmonised Capital:
Subordinated Term Debt
It is the Revaluation Reserves that interest us in regards to our essays on SDR composition and allocation.
When foreign exchange reserves are revalued to match the level of economic output and commodity basket or composition of the SDR’s, the banks themselves that hold these foreign reserves will see an upward revaluation of their Tier Two Capital requirements under the Basel 3 Regulations
which are meant to support the I.M.F. 2010 Code of Reforms and consolidation of sovereign debt, which will come about when the Executive Board of the I.M.F. is restructured to reflect the economic realities of the emerging markets.
This is the Global Currency Reset and Great Consolidation. Please refer back to Part Three for a full explanation of the problem/reaction/solution Hegelian Dialectic which is being purposefully played out in the system which we are attempting to explain here.
The process is confusing and convoluted. Is there any wonder that there are rampant conspiracy theories about it? You just need to remember that this is a game of chess and not checkers.
The development of new reserve assets takes place through the SDR system or we are likely to face further sovereign debt problems and untethered currency fluctuations. Its consolidation or collapse, not conspiracy theories. – JC Collins
SDR's And The New Bretton Woods Part 1
SDR's And The New Bretton Woods Part 2
SDR's And The New Bretton Woods Part 3
SDR's and the New Bretton Woods Part 4
SDR’s and the New Bretton Woods – Part Five
SDR’s and the New Bretton Woods – Part Six