USD Liquidity Insufficient to Meet Growing Crisis Liquidity Requirements
By JC Collins
With so much happening in world markets on the heels of the BREXIT vote we are left to speculate on the problem, reaction, solution methodology surrounding the broader expansion of the SDR. It is common knowledge and accepted fact throughout the central banks and international institutions that the Special Drawing Right is being re-engineered to provide additional global liquidity in the event of another crisis. Only the profane and completely ignorant can continue to deny this reality.
The Bank for International Settlements, the International Monetary Fund, and even the G20, among others, have all published official communications specifically mentioning the use of the SDR in such a role. The move to include the Chinese renminbi in the SDR composition has created a more representative composition and currency weighting structure which can be used to provide international liquidity when the need comes.
The liquidity crisis which could be developing from the BREXIT vote might serve this purpose. The news on Monday morning is that banks around the world may be in trouble, stock markets are roiling, and though gold has seen an initial spike, it appears to be reversing and is not representing the volatility which is continuing. Though this can quickly change over the course of a day and a week as this new reality settles on markets and financial systems around the world.
Geopolitically we are suddenly witnessing such reversals as Turkey warming up to Russia, along with the rest of Europe. Traditional British allies, including some within the European Union, are extending offers to the UK to create new trade deals. Representatives within the EU are already calling for a restructuring of the monetary framework to appease some of the concerns expressed by those countries remaining in the union. Perhaps a return to the use of domestic currencies could be one of those changes.
Putin has suggested that BREXIT is reminiscent of the collapse of the Soviet Union. The implication in this statement is that the power structure of the world is about to change like it did in the early years of the 1990’s.
One can already see the script developing which will support and encourage an expanded use of the SDR. It will be stated that the US dollar cannot provide sufficient liquidity to meet the demands of the growing crisis which was sparked after the BREXIT referendum.
In support of the thesis that BREXIT is aligned with the rise of a new modern-nationalism which will support the transition to a multilateral monetary framework UK leader David Cameron is about to announce that there will be no second referendum. This contradicts the claims by the vast majority that both BREXIT and Trump represent an organic uprising by the people who are tired of being the victims of political and financial elites. If the perceived elites didn’t want this to happen then they would be pushing a second referendum with a constant barrage of mainstream media talking points.
All of this aligns with the time frame of China issuing SDR denominated bonds and creating an SDR based borrowing platform. The G20 will be deciding in September on a broader use of the SDR to meet the liquidity requirements of a new financial crisis. Don’t forget that the new SDR weighting is effective on October 1. This new SDR includes the renminbi and the IMF can issue a new allocation of SDR to meet the financial requirements of a growing crisis.
There are so many injection and integration points which have been quietly created connecting the SDR to the old monetary framework that any developing financial and liquidity crisis could provide the pretext for a sudden and swift change to how the international monetary system functions.
Whether the BREXIT referendum and subsequent reactions provide this pretext will have to be seen. But if the volatility settles down and a new balance is achieved, we can still expect that there will be some future period of instability which will provide the desired liquidity crisis to justify the expanded use of the SDR. – JC