05.31.2009 0

$100 Billion IMF Expansion to Aid Dollar’s Downfall

  • On: 06/08/2009 15:42:29
  • In: Monetary Policy
  • By Robert Romano

    ALG Editor’s Note: In its email edition, this article misattributed the Mandeng quote to Lipsky.  The copy has been edited for accuracy.

    On June 6th, the International Monetary Fund’s First Deputy Managing Director John Lipsky dropped a bombshell on the dollar, saying the IMF’s Special Drawing Rights (SDR) could replace the dollar as the world’s reserve currency over time, as reported by Bloomberg News. According to Lipsky speaking in St. Petersburg, “There are many, many attractions in the long run to such an outcome. But this is not a quick, short or easy decision,” adding that it would be “quite revolutionary.”

    According to Ousmene Mandeng, head of Ashmore Investment Management Ltd.’s public sector investment advisory, “The largest debtor is very unlikely to dominate any currency arrangement today” referring to the serious decline of U.S. status on account of the nation’s astronomical $11.3 trillion debt.

    Making matters worse for the American people, Barack Obama promised the IMF $108 billion—which Congress is set to vote on this week—to enable this new rise of the IMF as the world’s central bank. But are they watching the warning signs overseas?

    The IMF’s chest-beating dovetails on April’s G20 proposal for IMF expansion, designed in part to increasingly anchor the currencies of developing economies with the SDR reserve currency. The head of China’s central bank, Zhou Xiaochuan, recently wrote that the “SDR has the features and potential to act as a super-sovereign reserve currency.”

    The G20 summit itself was preceded by both Russia and China proposing replacing the dollar as the world’s reserve currency, as reported by Reuters. In March, Treasury Secretary Timothy Geithner supported “[increasing] the use of the IMF’s special drawing rights,” but backtracked after the dollar started tanking, saying that the U.S. dollar should keep its place as the world’s reserve currency.

    Now, China, Brazil, Russia, and India are purchasing bonds denominated in SDR—boosting its role as a reserve currency and transitioning away from the dollar.

    Combined, Russia ($2.261 trillion), Brazil ($1.981 trillion), India ($3.288 trillion), China ($7.916 trillion) have GDP (PPP) of $15.446 trillion compared to the U.S GDP (PPP) of $14.264 trillion. Through transitioning away from dollar assets, the disparity between the two should be expected to grow, especially if the dollar continues to decline and predicted inflation ensues as U.S. monetary and fiscal stimulus kicks in.

    And now, with the IMF proactively pursuing an agenda to supplant the dollar with SDR, and the Congress ready to give its approval by adding a $100 billion line of credit and an $8 billion expansion of U.S. SDR holdings, the dollar’s days could indeed be numbered.

    The only silver lining is that Congress may actually fail in passing the $108 billion IMF expansion, as ALG News reported last week. The trouble is that by attaching the legislation to an Iraq and Afghanistan war supplemental, they lost House Republican support, and by attaching that war supplemental to the IMF funding, they are losing critical House Democrat support.

    This political miscalculation may actually cost Barack Obama one of his top agenda items—especially on the international stage where his credibility is already waning only 6 months into his Administration.

    And American taxpayers—who would have to pay for in terms of higher interest rates and more inflation the price of dethroning the dollar—would be the chief beneficiaries.

    In the meantime, the IMF, China, and Russia are talking an increasingly big game about destroying the dollar—and Washington needs to pay attention. Even more bombshells will be dropped on the dollar’s head in the coming days, and it will be up to the nation to play dollar defense and awaken to these grave warning signs from overseas.

    Robert Romano is the Senior Editor of ALG News Bureau.

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