America Becoming Isolated in the Monetary Framework
By JC Collins
In a June 12 press release from the International Monetary Fund it was made clear that the time for the United States to act on the 2010QGR is fast approaching. The IMF has given the US until September 15 to enact the quota and governance reforms as agreed upon back in 2010.
From that date the “Plan B workaround” will begin to be implemented and the completion of the steps required to reach the objectives of the 2010QGR will need to be fully implemented by mid-December, 2015. This statement can be interpreted several different ways. The obvious is that the methodology for the “workaround” will be implemented by mid-December, but the actual process of completing the reforms will take somewhat longer.
This is to be expected, as things in the international monetary architecture do not happen overnight.
The integration of data reporting standards and macropudential policies amongst the IMF, China, World Bank, BRICS New Development Bank, and Asian Infrastructure Investment Bank (AIIB), along with the needed changes to the balance of payments framework (which includes exchange rate adjustments), are heralding in the new multilateral framework which the supra-sovereign international money clearing unit (represented initially by the SDR), will expand and grow upon.
As stated previously, the long-term goal is to transition the SDR from a basket of currencies (like the ECU in the lead up to the euro) to the actual international money clearing unit that was originally intended back in 1944 during Bretton Woods, the bancor.
In the post When Will China End the Dollar Peg, posted back in March, 2015, we reviewed how China will likely widen the managed peg which the renminbi holds against the dollar. In a recent article from Bloomberg, this is exactly what is being suggested and stated that China will do in the lead up to the decision on the SDR.
The inclusion of the RMB to the SDR basket composition is a forgone conclusion at this point. The United Stated does not have the political influence to fight the 2010QGR and the SDR changes. The fact that the other major members of the IMF have signed on to the AIIB is a clear indicator that the US is being isolated on the global monetary field.
All players, including China, are intending to utilize the IMF and SDR. This should be clear by the Chinese push to have the RMB included in the SDR composition, and the acceptance of this eventuality by the IMF.
It is important to point out that the IMF is not a US institution, it is an international monetary institution which the US has dominated through the use of the dollar as the international money clearing unit since 1944. The original intention was to use the bancor as the reserve asset, and trade would be cleared through the International Clearing Union. The US vetoed the use of the bancor and the IMF was created in place of the ICU.
Now the IMF is being re-worked by the rest of the world, including China and BRICS, to act in the original role intended for the ICU, with the SDR acting as the reserve asset for a period of time as the bancor is developed and implemented in the forthcoming years, much like the ECU preceded the euro.
The multilateral transition is progressing as described in detail here on POM. The rumbles of the coming autumn months are loud, and no doubt there will volatility and a few surprises. The ability of the US to grind out further delays will be offset by its need to have the support of the rest of the global community to continue its deficit spending, which will be once again a domestic political hot potato in October. - JC
From the IMF Press Release:
The Executive Board of the International Monetary Fund (IMF) adopted on June 11, 2015, a report to the Board of Governors—the IMF’s highest decision-making body—on interim steps on quota and governance reform.
In light of continuing delays in the implementation of the 2010 quota and governance reforms (2010 Reforms), the Board of Governors, in February 2015, adopted Resolution No. 70-1, which called on the Executive Board to work expeditiously and to complete its work as soon as possible on interim steps in the key areas covered by the 2010 Reforms, pending their full implementation, and thus to enable the Board of Governors to reach agreement on steps that represent meaningful progress towards the objectives of the 2010 Reforms by June 30, 2015 (see Press Release No. 15/20).1
In its Report, the Executive Board notes that, while progress has been made, the Executive Board has concluded that more time is needed to build the necessary consensus among the membership to complete its work on interim steps. The Report further notes that the Executive Board reiterates its deep disappointment with the continued delay in the effectiveness of the 2010 Reforms, and urges the United States to ratify them as soon as possible. The Report indicates that, if the 2010 Reforms are not ratified by September 15, 2015, the Executive Board will consider prior to end-September which interim solution to pursue and will, building on its ongoing discussions, complete its work on steps that represent meaningful progress towards the objectives of the 2010 Reforms as early as possible and no later than mid-December 2015. The Report notes that the Executive Board will continue to follow the guidance and directions provided by the IMFC and the Board of Governors on all other quota and governance-related matters.
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