SDR Substitution Accounts and Threatening Trade

Economics, Geopolitical, Premium POM16 Comments

Are Trump and China about to Checkmate the Anglo-American Establishment?

So…….the increasing tension over the North Korean situation is prompting the Trump administration to threaten ending trade with nations who are doing business with the regime of Kim Jong-Un.

Convenient.

Allow me to explain.

China is the biggest trading partner of North Korea. But China is also a huge trading partner of the United States, and just happens to hold the largest amount of USD denominated Treasuries outside of the Federal Reserve.

This massive accumulation of USD by the People’s Bank of China provides one of the most challenging aspects of transitioning the international monetary system from the traditional unipolar USD framework to the desired multi-currency and multilateral framework.

Under a situation where America stopped trading with China because of an engineered problem with North Korea, the Chinese would be forced into quickly diversifying those reserves so they weren’t cut off from the international trade market.

In previous posts over the years we have reviewed how the substitution accounts of the International Monetary Fund could be used to facilitate the large diversification of USD denominated reserves which have built up since the Bretton Woods agreements of 1944.

Dealing with these reserves is proving to be challenging for both America and China. The use of substitution accounts provides the best path forward. How quick such an action could be taken would depend upon the agreement of all involved.

In theory, the substitution accounts would serve as the clearing house for USD denominated reserves. China would transfer those reserves into the substitution accounts of the IMF in return for SDR. The exchange would be made at rates which reflect the value and term of each Treasury held by China.

Such an exchange would not have a negative influence on the USD at first. It would give both China and America the time needed to progress in additional multilateral mandates while continuing to reverse the imbalances of Bretton Woods and deal with some geopolitical situations.

This diversification would shift USD liquidity from the banks of China to the IMF. As such, the IMF would become the biggest holder of US debt outside of the Federal Reserve. The importance of such a move should not be lost on readers. What the Obama administration, and the overall Anglo-American establishment, have attempted to avoid by delaying IMF reforms, can be accomplished with one strategic move by Trump and Beijing.

The legitimate expansion of the SDR as a reserve asset would begin and nations would realign with the emerging realities of trade and reserve accumulation. The effects of such a move on American trade and the domestic economy can be offset by increasing trade in other areas. The narrative about renegotiating NAFTA and other trade deals is becoming more constant. All such renegotiations will facilitate the macro changes to the international monetary system and the role of the USD.

The upcoming budget talks in Congress over the debt limit in America will also play an important role in the path forward. China, as one of the big financiers of American debt, will have a lot to say about trade and Treasuries in the coming weeks. Threatening to end trade with China on the eve of debt-limit discussions should be understood as something different than what the mainstream media is presenting.

Big moves are in the works, and large capital flows could shift over the next few months. Everything happening now is building cause and purpose for the new emerging multilateral framework. Things may appear chaotic and threatening, but the narrative requires a sense of panic and frustration for the full transition to progress.

North Korea could also serve multiple purposes, as moves against Iran could be justified if some sort of attack takes place on the Korean peninsula. The argument would be that the world stood by while the North developed nuclear capabilities, and the lesson learned is that the world should not allow the same to happen with Iran, especially considering their so-called threats against Israel.

You can almost hear the narrative on television now.   – JC

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JC Collins can be contacted at jcollins@philosophyofmetrics.com

16 Comments on “SDR Substitution Accounts and Threatening Trade”

  1. JC, do you mean like China? You have written at length about this in the past. I even spoke with Jim Comisky regarding the SDRFutures account. I didn’t understand it fully then and it may have been a little premature, but once again, you are spot on in your assessment.

  2. Trump and the international banking interest that back him, want to see this new muti-lateral financial system come on line sooner rather than later. If it takes some tension and conflict to leverage that outcome, so be it. Is that correct?

    The “establishment” that seems to be behind the tension and conflict realize that the new system is inevitable, and are not struggling to prevent the system from coming on line. But they are more trying to slow it down, while they try to find a lane, because if they don’t they lose a seat at the big table. Something like that JC?

  3. Hi JC, I saw this news and thought I would pass it on.

    “China is embarking on a new Oil Futures Yuan benchmark that will be backed by Gold. Global Oil trading is a huge market and there is no doubt that the Petrodollar standard that Kissinger developed in the mid 1970’s is now under attack.”

    Here are some links (note that even Reuters has noticed…):

    https://seekingalpha.com/article/4103980-new-era-gold-investors

    https://www.reuters.com/article/china-crude-futures/like-it-or-not-chinas-crude-oil-futures-will-be-a-global-benchmark-idUSL5N11F04A20150910

    http://investmentresearchdynamics.com/china-begins-to-reset-the-worlds-reserve-currency-system/

    1. I saw that. Remember we first talked about that back in November of 2015. Glad to see it’s starting to happen.
      https://philosophyofmetrics.com/chinas-new-crude-benchmark/

      The statement in the article about the oil benchmark being backed by gold is somewhat misleading. The Chinese benchmark is obviously in yuan, which will be new, and the gold connection is the convertibility of gold into yuan on the Shanghai Gold Exchange. As far as I can interpret the information, there is no direct convertibility between oil and gold with the yuan on the new Chinese crude benchmark. Both represent separate yuan convertibility.

  4. dark night of the soul can produce crystal clarity. I still think for me , it was a gift , is a gift , for its something I would have not chosen.

  5. I think a diligent wondering about paradox gave me a front row seat to the dark night , still ongoing but at different levels .. Love all here and thoroughly enjoy your responses. Glad I am part of this community , even though I rarely share and what I seem to share seems bizarre. I have much gratitude to you all.

    1. Man cypress7 have you been in my bookmarks? Lol. Dark night of the soul is intersting. Funny thing is for years I thought I was doing something wrong but when I stumbled into the subject of the dark knight of the soul I knew I wasn’t alone.

      Bizarre? Lol. Keep them coming.

  6. From Putin’s speech here:
    http://en.kremlin.ru/events/president/news/by-date/01.09.2017

    (Russia aims at promoting global) “financial regulation reforms” and at overcoming “the excessive domination of the limited number of reserve currencies” (that is, the currency monopolies of Western countries) coupled with working “towards a more balanced distribution of quotas and voting shares within the IMF and the World Bank.”

    Russia advocates “the foundations of an open, equal and mutually beneficial multilateral trade system and the strengthening of the role of the WTO.”

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