Former IMF Deputy Director Mohamed El-Erian has published a piece with Project Syndicate which all but confirms the thesis which we have been discussing here on Philosophy of Metrics for years. The call for a broader use of the SDR is not the surprising part. What is surprising is El-Erian’s suggestion that the growing anti-globalization political movements and trade protectionism should be the call to implement a “stronger multilateral core for the world economy” which would “reduce the risk of damaging fragmentation”.
Readers will pick up on the reference to the “new modern nationalism” theme which I have suggested would be used as the springboard to further advance the transformation of the international monetary framework. The use of the word “fragmentation” is also a strong reference to the deeper articles which exist here on POM.
El-Erian’s full article reads like a POM contribution. The multiple sources which I have used over the years to trend and analyze the information, along with some educated conjecture, spans across a large spectrum. The working papers of the international institutions, central banks, national treasury departments, non-governmental organizations, independent world-class economists, think tanks, and groups like Project Syndicate, have all provided pieces and knowledge from which the full thesis has been developed.
The articles reference to the use of the “new modern nationalism” to force the acceptance of the SDR is the first non-POM confirmation I have seen of this particular aspect of our thesis. This is rewarding and encouraging for all of us, as it is extremely suggestive of the accuracy of the information which we review here.
Long time reader Dane brought the article to my attention and noted that it touched on some of the more detailed and process oriented aspects of the POM thesis. These are best summarized in the article with the following passage:
“Areas of focus would include using the SDR for some bond issuance and trade transactions, developing market infrastructure (including payments and settlement mechanisms), improving valuation methodologies, and gradually developing a yield curve for SDR-denominated loans and bonds. This would also help to leverage the inter-connectedness of the SDR’s roles, in order to reach critical mass quickly and have a foundation for further incremental gains.”
But the piece didn’t stop there. It went on to describe another important piece of POM conjecture regarding the BRICS institutions as being established to work within the IMF framework. Though the piece doesn’t state BRICS by name, the following quote would strongly suggest that such an alignment between institutions is a workable and possible path forward:
“While it is not easy to combine developmental and commercial activities, the implications for global growth and stability of not doing so suggest that it is an effort that should be explored. Moreover, the IMF could start small, focusing on interactions with other official multilateral and regional institutions, sovereign wealth funds, and multinational financial companies – all anchored by an active coalition of the willing among the G20.”
Some readers may recall POM articles such as Meet the Asian Monetary Fund which was published on August 25, 2015, which stated the following:
“The idea of a region specific Asian Monetary Fund (AMF) was first suggested by Japan in September, 2007, and was supported by all members of the ASEAN+3. The idea was to pool foreign exchange reserves which would meet the demands of the Chiang Mai Initiative, which would later be called the Chiang Mai Initiative Multilateralization (CMIM).”
“The idea of the AMF was originally opposed by the United States and the IMF based on the assumption that it would be a straight duplication of what was already established within the International Monetary Fund itself, but the need to establish the new initiatives described above, namely:
Regional Economic Surveillance
2. Regional Liquidity Support Facility (Chiang Mai Initiative)
3. Local Currency Bond Market Development
…could not be ignored and a sustainable regional approach and implementation of effective initiatives would have to move forward before the monetary framework imbalances could be corrected.”
“The CMIM was a contentious issue between Japan and China based on the fact that voting powers would be defined and established based on the financial contributions of members. The negotiations on the Chiang Mai Initiative Multilateralization were protracted but would eventually lead to an agreement where both countries, one a stout American ally, and the other the largest holder of external US debt, would contribute equal amounts of 32% for equal voting powers.”
“As such, the initial framework and structure of the CMIM, including financial contributions of member countries, and associated voting powers, was defined as represented in the following chart. This is the basis for the forthcoming Asian Monetary Fund.”
“The CMIM also contains a portion which is linked to the IMF. This fact is the undeniable reality of the direct connection and multilateral planning which exists between international institutions like the IMF, and the Asian institutions which are being developed.”
“The IMF delinked portion does need to be expanded and increased so CMIM members can use the emergency lending component without going to the IMF, as that proved challenging and non-effective in the crisis of 1997 – 1998.”
“Currently the delinked portion is set at 30%, but will be increased to 40% to accommodate the volatility which will come with the Fed rate increase in September. The chart below defined the quota amounts of each member country along with the IMF delinked portions.”
The reference made by El-Erian in the Project Syndicate article is a clear reference to the CMIM and the further alignments which can be made throughout the BRICS New Development Bank and Contingent Reserve Arrangement with the International Monetary Fund and World Bank.
The POM articles have provided us with the blueprint for the transformation but the process itself takes so long that we can lose focus at times. The details and complex nature of this multilateral transition are mind-numbing and somewhat lacking in excitement when it comes to emotion-laced headlines.
Which is why it is important to reflect upon the information when we encounter articles like this one. It gives us a sense of confirmation that we are indeed on the correct path and provides us the strength to not click on the doom and gloom headlines which are full of misleading and simplified information. – JC
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JC Collins can be contacted at email@example.com