Are Emerging Markets about to Switch US Treasuries for SDR Bonds? (FREEPOM)

JcollinsEconomics, FREEPOM39 Comments

By JC Collins

The first issuance of SDR denominated bonds in the Chinese market is being implemented by the World Bank.  Let that sink in for a moment.  The World Bank, the great bastion of the western banking elite, will be providing SDR bonds specifically for the Chinese market. This is a major defeat for all of those who repeatedly promoted the idea that wealthy interests within China were attempting to overthrow the western banking structure or implement a competing system.

A second issuance of SDR bonds will take place through the China Development Bank.  The purpose of both issuances is multiform.

First, SDR denominated bonds will allow for the diversification of the currency composition of foreign exchange reserves.  This will allow the governments of emerging markets, whose central banks have carried the bulk of US Treasury bond debt for decades, to minimize their exposure to the single currency Treasury Bonds and exchange rate pressures.

Second, it will provide Chinese investors with an alternative which will slow capital outflows and could even potential reverse and lead to large capital inflows.

Most emerging markets suffer higher risk by the large accumulation of US Treasuries.  The USD based exchange rate regime which most of these nations follow allows for destructive exchange rate swings when the Federal Reserve decides to raise interest rates.

The Chinese monetary authorities have been very vocal over the last few years about the Fed not raising rates.  This has provided time for the renminbi to be added to the SDR basket composition and to implement the SDR bond framework which is now being utilized.

As official foreign exchange reserves are diversified from US Treasuries to SDR bonds this risk is minimized.  This SDR diversification serves the purpose of both China (and other emerging markets) and the United States.  The US is in a situation where increasing interest rates will cause large ripples in the international monetary and financial systems.  This could potentially even lead to a financial crisis in China.

The substitution of Treasuries for SDR bonds will provide the Federal Reserve with just enough wiggle room to move forward on modest interest rate increases.  As the transition from US Treasuries to SDR bonds takes place across the emerging world, the pressure on both the US and emerging nations in regards to interest rate increases will decrease.  US interest rate increases could leapfrog with foreign exchange reserve diversification.

A decrease in demand for US Treasuries, which is already happening, will help push up interest rates at home.  This will also align with the interest rate paid on SDR bonds.  The Federal Reserve will not be able to keep the interest rate lower if it wishes to keep the dollar relative and compete with the yields provided on SDR bonds. But the increases must align with the larger dynamic of foreign exchange diversification and substitution.

As the accumulation of US Treasuries decreases and comes into balance with the international monetary realities, the dollar will be able to realize some much needed depreciation, which could be in the range of 20% to 30% against the currencies of its largest trading partners.

Such depreciation will make American made goods more competitive and increase exports.  This will lead to more job creation at home and help lower the debt-to-GDP ratio and facilitate debt management, which will become more expensive as interest rates increase further.  It’s a dance of monetary perfection and must be handled with great care and strategy.

Another benefit of the broader use of the SDR through bond issuance is that it will provide the International Monetary Fund with a new source of financing. Such financing could be used to manage a sovereign debt crisis in the Euro Zone and possibly even an Asian crisis sparked by outpaced US interest rate increases.  Think of it as a contingency plan in case the rebalancing is out of alignment at any point or time.

Emerging markets would do well to diversify their reserves sooner rather than later and decrease the risk to US interest rate increases and exchange rate volatility.  Accordingly the US will need to time any interest rate increases carefully to ensure that there isn’t a large rush out of Treasuries.  Some of the geopolitical challenges taking place in Eastern Europe and the South China Sea could very well force the hand of either.

After almost three years of writing about the above it is fascinating to see the process unfolding in the real world.  It is still my position that the transition will happen through agreement and that no large war between major players will take place.  Outside of all the military posturing I would suspect that the foreign exchange reserve diversification will continue and pick up pace throughout 2017.  Expect interest rate increases during this period.

Soon other emerging nations, such as Vietnam, India, and other BRICS members, will begin to issue their own SDR denominated bonds.  Once the trend picks up steam the demand for Treasuries will decrease and interest rates will increase.  Without a doubt, this will be the biggest monetary transformation since the end of World War Two.  – JC

Also read:

Depreciating US Dollar will Strengthen SDR Denominated Assets – Understanding O-SDR, M-SDR, R-SDR and Substitution Accounts

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39 Comments on “Are Emerging Markets about to Switch US Treasuries for SDR Bonds? (FREEPOM)”

  1. “Emerging markets would do well to diversify their reverses sooner..”

    Did you mean “Emerging markets would do well to diversify their reserves sooner..”?

  2. And what will all those hoarding cash do with that cash? Will they begin to use it or is it still important to save just in case?

    1. You ask a valid question speedspirit. I would hope that there would be a window for those with old dollars to claim the new currency. However there is risk if you bring a large amount of cash to a bank for exchange….civil forfeiture comes to mind on general suspicion.

    1. Alan, Thanks for Posting. This quote from your link sums it all up nicely.

      “The brilliance of the SDR solution is that it solves Triffin’s dilemma. Recall that the paradox is that the reserve-currency issuer has to run trade deficits, but if you run deficits long enough, you go broke. But SDRs are issued by the IMF.

      The IMF is not a country and does not have a trade deficit. In theory, the IMF can print SDRs forever and never go broke. The SDRs just go round and round among the IMF members in a closed circuit. Individuals won’t have SDRs. Only countries will have them in their reserves. These countries have no desire to break the new SDR system, because they’re all in it together. The United States is no longer the boss. Instead, you have the “Five Families” consisting of China, Japan, the United States, Europe and Russia operating through the IMF.

      The only losers are the citizens of the IMF member countries—people like you and me—who will suffer local-currency infla- tion. I’m preparing with gold and hard assets, but most people will be caught una- ware, like the Greeks who lined up at empty ATMs in June 2015. This SDR system is so little understood that people won’t know where the inflation is coming from. Elected officials will blame the IMF, but the IMF is unaccountable.

      That’s the beauty of SDRs—Triffin’s dilemma is solved, debt problems are inflated away and no one is accountable. That’s the global elite plan in a nutshell.’

  3. I think that the much bigger effect this will have is not so much on Treasury accumulation as besides China, most emerging market nations have massive debt denominated in USD. That is what nearly choked the world last year. Imagine your debt going up 20% for now other reason than speculation…totally unbearable.

    I think the SDR will be the mechanism through which many nations will refinance their debts away from the USD. The SDR would allow them to repay their debt in an SDR currency, including gold possibly.

    1. It is called SDRM – Sovereign Debt Restructuring Mechanism. I have written about it, along with the use of substitution accounts, extensively here on POM for almost three years. Both are, and will continue, to happen as expected.

  4. The fact that the Chinese and Russian elite are selling out with the Anglo NWO is utterly repugnant. What a repulsive backstabbing race – the Chinese. That’s all they do is take advantage of their own people then fuck off to the west. Absolute vermin if I ever saw it.

  5. JC, while not requesting investing advice, of course; what is the best way to approximate an SDR bond for individuals? What kind of interest rates would the SDR bonds have vs Sovereign currencies?

  6. I’m an old retired guy whose better years are certainly behind me but throughout my years I have been told by many a successful person and witnessed (in my mind anyway) that “the small guy always gets crushed”. So, if SDR bonds will be replacing US Treasuries at the central banks around the world who hold a large amount of them (I would presume), what market absorbs/buys them? These US Treasuries that they will be unloading, don’t just disappear do they? My guess is that these US treasury notes will have to be sold to the retail marketplace, right? If so, the bond market to the retail investor will become attractive especially as interest rates rise, correct? Then, wouldn’t this suggest a significant downturn in stocks as well?
    Any comments/thoughts would be appreciated. Thanks!

  7. SDR bonds Humm… It’s still the same game.

    In 1913 “they” found another entity to assume the debt burden with the creation of the FED; now debt could be offloaded where all debt goes to die.

    A hundred years later that entity is chock full of worthless paper so a new entity must be found, who better than one most people don’t have a clue about – better to hide the sausage.

    Nothins new, just shifting the paper, it’s what the debt holders do to keep the gravy train rollin.

    So the little people will continue to get screwed, the rich bastards will continue to live off the work of the peons and the shit will always roll down hill.

    Don’t try to sell this ‘old shit’ as something new… it’s the same shitty game.

  8. Don’t try to sell this ‘old shit’ as something new… it’s the same shitty game.

    @Mark Branham your comment is boring.

    I’m a subscriber to this website and I can tell you first hand that Mr J. Collins ain’t trying to sell you something @mark. For anyone that IS a ‘participant‘ at this website its clear that JC is simply offering a running commentary on the events unfolding in front of us in realtime – with regards to the multilateral transition away from the US dollar as the worlds reserve currency – and all that encompasses.

    I’d like to suggest to you @mark that your understanding of what exactly this website offers is completely of the mark. As it seems your unwilling to part with the few ‘clams‘ it would require to acquire a membership, you’d do well to navigate the multitude of Free Pom articles that are on offer here at POM by Jared Collins before leaving such obvious uneducated comments [with regards to the material available here].

    Just my thoughts. Thanks for reading.

    1. Alan, Marks comment is harsh perhaps but is somewhat similar to the view of Jim Rickards, whose comment I pulled out of your PDF link above:

      The only losers are the citizens of the IMF member countries—people like you and me—who will suffer local-currency inflation…. That’s the global elite plan in a nutshell.’

      1. beachdude, the similarities haven’t missed me but my contention is not with mark’s perspective on the subject matter, it’s with the very clear accusation he made towards this website and that philosophyofmetrics.com is trying to sell the very thing with which mark is in opposition too. I think that is very clear, don’t you?

        Don’t try to sell this ‘old shit’ as something new…

        I’ll always speak up if someone presents a misinformed comment or directs an accusation towards something I feel needs some clarity. Who wouldn’t feel that obligation with something they’re proud of.

        Anyways, to remain on point – perhaps it’s just my feeling – but I haven’t had the impression that philosophyofmetrics.com has ever tried to sell the idea of SDRs and this monetary transition we are experiencing to readers. No, this site has only ever impressed on me the possible consequences and likely outcomes of such materials.

        Having read a few of marks online comments I’m actually surprised at the delivery of his comment above. He sounds like someone that shares very similar views with the material presented here at philosophyofmetrics.com and who could potentially offer some great contributions in this virtual space.

  9. “A press release providing the final currency amounts in the new SDR valuation basket to take effect on October 1, 2016 will be issued by the IMF on September 30, 2016. The first SDR interest rate based on the new basket will be determined on October 7, 2016, and will be applied for the week beginning October 10, 2016.”

    http://www.imf.org/en/news/articles/2015/09/14/01/49/pr15543

    – September 30th = Final currency amounts in new basket
    – October 7th = First SDR interest rate determined
    – October 10th = First SDR interest applied

    How or will the SDR’s interest rate effect the basket currencies interest rates in their perspective regions at this stage?

    1. Investors will be looking for the best yields. With SDR bonds now being issued it’ll be interesting to see what the rate is. It just may force more interest rate increases to compete with SDR bonds. This is what I anticipate, but over an extended period of time.

  10. For Alan,

    Debt is not money but we’ve been sold the idea that it is.

    Exchanging sovereign debt for IMF debt still allows nations to issue debt which puts them in an inferior position to the debt holders… just as the american people are in an inferior position to the banks when the people “borrow” money(which is not money but debt)

    My issue with this site is that it does not address the problem that enslaves us all, namely that governments borrow their own money and are obligated to pay interest on money it could and should create itself. And, commercial banks were granted the right to create money out of thin air with each “loan” they make. The creation of the FED made commercial banks the creator of our money(debt). These two issue must be solved. If not, the consequences are as I stated.

    Shifting the creator of debt from nations to the IMF simply shifts the holder of debt that should never be created in the first place. Which means, things remain the same(which hitlery will do if elected which is why so much digital ink is spilled to demonize Trump)

    I fully expect this scheme to move forward, but it should not. It just means more wealth for the oligarchs and more debt for the peons(us).

    No progress will be made in the race for freedom and equality until the people are aware of the nature of money, how its created and who creates it. JC is accurately explaining what the oligarchs are doing to assure that they will maintain their wealth and power at the expense of the worlds people. I think a better thing to do is expose the game of the money masters; even then much time will transpire before real change can happen. Why not start now.

    1. Mark, Very well stated. Debt restructuring from the USD into the IMF’s SDR just keeps the oligarch’s game afoot. Same as it ever was.

      1. Yes, the money creation takes place at the central banks. The SDR system, at least initially, serves as a sort of currency pooling. It will evolve into a full reserve system in time. And thanks Alan for handling this comment flow. Your responses have been mature, informed, and stand in contrast to the diatribe which prompted it.

        1. JC, So it is a diatribe to suggest that “Debt is not Money.” And why is it a diatribe to question why every sovereign country must have a private Central Bank to create money out of thin air for which it can charge the sovereign (and its citizens) interest?

          Seems that Lybia was able to survive for many decades creating its own money without a private CB. Don’t you find it curious that creating a new CB was one of the first acts after Gaddafi was removed?

          1. “Don’t try to sell this ‘old shit’ as something new…” That’s the diatribe. It’s an accusation against me and Alan drew attention to that fact. I think Alan was extremely clear on this point. Your comment is out of context from what was being communicated. And just for your own reference, my view on money creation and the central bank system has been made very clear over thousands of written words. If you don’t know what this view is you could always start reading from the beginning.

  11. JC,

    Thank you for clarifying my dilemma wrt the SDRM kickoff. Just a newbie question, actually two. How will the unpegged currencies (like the Swiss franc) be valued? Secondly, will the resource based currencies undergo reevaluation?

    You … Rock as usual.

    Ina-Lu

  12. isn’t this use of SDR bonds to replace use of US treasuries
    basically being used as a stop-gap for the next few years/decades?
    (its still all about paper/fiat money)

    and that years from now a more resilient system will have to be found
    (ie back to Gold standard, or something similar)

    1. SDR will transition into the world currency just like the European Currency Unit (a basket of currency like the SDR) was transformed into the euro currency.

  13. About time. I know SA has issues of it’s own but I’m sick of the Rand depreciating every damn fed meeting due to interest rate rise speculation. Just a big bomb that they created and now need to defuse and yet the states delay tactics just reek of government incompetence and people there think we are a 3rd country full of corruption. At least it’s honest straight in your face corruption lol

  14. SDR bonds allow nations to continue to create debt and off load it to an international agency, which few people understand, deliberately, so as to allow the oligarchs to continue to rule the world… that’s the real purpose of the IMF and making SDR’s the new world reserve currency.

    The issue is sovereign debt.

    Instead of going bankrupt, or facing the wrath of bond holders when nations debase their currency thru debt expansion, imf SDR bonds keep the monetary game going.

    I truly don’t know how to be more clear.

    Debt serfdom is the result. Nations go into debt which makes them subservient to the debt holders. People go into debt “borrowing” money from a commercial bank.. making nations and people inferior to debt holders… so we have the situation that exist today where governments no longer make their own decisions, the financial elites, which I call oligarchs, make the decisions.

    So we end up where we are today… nations and people ruled by self-serving oligarchs for the benefit of a very few. Given the natural course of events even a brain-dead bunch like us would soon catch on to the nature of the game played against us. BUT NO!!! Debt will now be off loaded to the IMF so the game can continue.

    How is this not obvious???

    So wake up people, only when that hundredth monkey knows will the game change.

    1. Mark, no one here would disagree with what you’re stating. You clearly cannot be accountable for your original comment which Alan called you out on. A process is being explained here and you would do well to read more material on this site before regurgitating what you’ve read elsewhere and put yourself in a position of conflict with the extremely intelligent people who frequent this site. Such an approach will not end well for you. Just giving you a heads up. Take it as you will.

  15. To Alan’s point, I know the IMF is not going to create debt but swap for sovereign debt… that should have been clear from my comments but if not…

    Another point. While central banks have the power to create money, until 2008 that power was mostly confined to open market operations. Only when cash for clunkers and first time home buyers tax credit failed to create enough “money” did the FED buy, hold, and potentially liquidate government debt. Most money creation takes place at commercial banks as”loans”. The only real money you, I or anyone else has is in your pocket, everything else is debt owed to a bank.

    Fraud, corruption, theft, etc. are the natural consequence of a debt-money monetary system. Off-loading debt to the IMF does nothing to remedy that problem. You and all these extremely intelligent people may be accurately describing how the oligarchs plan to continue “farming” the people…

    but the people will remain serfs on the estates of the few.

    The system has to change and only when led by extremely intelligent people will the hundredth monkey tip the the market to an equitable monetary system. The founders knew that more than 200 years ago. We seem to have lost that knowledge.

    If you’ve confined yourself to an explanation of how the oligarchs plan to shift the game to the IMF, I will leave this space in peace.

    1. The fact that you have used your “confined” statement suggests you still don’t understand the response to your initial comment. You waste words stating the obvious while remaining unaccountable. Safe travels.

  16. The SDR is the way out of the mess our US Fed got us into, in the first place. Albeit…our politician’s stupidity, not to create structural reforms, that deal with our economy in a positive manner. It’s what we all get for electing lawyers to Congress – those lying, cheating, scumbag slime!

    It doesn’t mean, our problems are over; they have just begun! High inflation will hit the dollar hard. Purchasing power, reduced considerably! Those that don’t have gold, will wish they did (not paper gold). Gold miners will go nuts!

    We cannot by SDRs. You need to own, the exact percentages of each currency, that makes up an SDR.

    When this all goes down, we’ll be paying $7.00 for a gallon of gas…can’t wait! UGH! ????

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