SDR & the New Bretton Woods – Part Nine

FREEPOM, SDR's and the New Bretton Woods

Debt Swaps and Quota Reforms

In order to have a full and broad understanding of the information we have been discussing in this series, we will need to understand something called Sovereign Debt Restructuring Mechanism (SDRM).

“The objective of an SDRM is to facilitate the orderly, predictable, and rapid restructuring of unsustainable sovereign debt, while protecting asset values and creditors’ rights. If appropriately designed and implemented, such a mechanism could help to reduce the costs of a restructuring for sovereign debtors and their creditors, and contribute to the efficiency of international capital markets more generally.” 

The above quote is taken from a 2002 publication by the International Monetary Fund titled “A New Approach to Sovereign Debt Restructuring”.

When previous attempts at sovereign debt restructuring have taken place it was quickly realized that the public sector funds which were allocated for the sovereign debt restructuring did not stay in the country and in fact became something akin to a transfer of wealth.  We have covered this in previous posts with the explanations about rent seeking elites and the importance of putting self-limiting legislation in place to prevent the transfer of wealth from the large disorganized masses to the small organized rent seeking elite.  See What Are Conspiracy Theories?. 

As the International Monetary Fund plans and implements a new and improved SDRM, the sovereign debt crisis in the world gets worse by the day.

It’s interesting that the media will do anything to avoid mentioning or admitting that the US has a sovereign debt issue.  Maybe that’s because the US dollar is the reserve currency of the world and the debt itself, as well as associated inflation, can be exported around the world.  With QE the US began to monetize its own debt.

When the IMF 2010 Code of Reforms eventually get passed and the inevitable debt restructuring begins, the US will have no choice but to go along and allow its currency to be downgraded and its debt restructured.

This is where the concept of debt swaps come in.  Debt and/or equity swaps are when a debt holder, being China holding US debt, can get an equity position in exchange for a cancellation of the debt. When we think of the low price which China paid for the JP Morgan building, can we safely assume that this was a part of a larger debt/equity swap agreement?

There is also another form of debt swap agreement which entails an exchange of debt holdings for new bonds which have been restructured from the original bond debt.  These types of bond debt swap agreements are meant to take advantage of interest rate differences and conclusively, currency exchange rate difference.

In a previous post we discussed the importance of arbitrage and purchasing power parity.  As a lesson from the original attempts at SDRM, purchasing power parity will be an important and functioning aspect of any debt swap agreement, as arbitrage was the main culprit of why the SDRM failed.

It’s within this larger bond debt swap arrangement where I see sovereign debt being restructured through an SDR (Special Drawing Right) system.

Say China exchanges so much of their US debt (in the form of treasury bonds) for equity in the Federal Reserve System itself, controlling a proportionate amount of internal equity within the American system.  This would explain the JP Morgan purchase and other bank purchases, along with industry and real estate which China has been gobbling up within the United States.

The rest of the treasury bonds which China holds as US debt will be allocated as a bond debt swap within the SDR system.  This debt swap will allow China to retain its investment value of US debt while receiving new SDR bonds which can then be allocated within its new renminbi composition at a new exchange rate which more realistically reflects the economic sustainability of its currency.  This bond debt swap can be completed through a substitution account as stated in previous posts.  This substitution account will be denominated in SDR’s.

Many rumors have come out over the last few years about an impending Global Currency Reset.  It is stated that countries hold large foreign reserves of specific currencies, or the sovereign debt of other countries, within their foreign currency accounts.  As do banks.  When these currencies revalue upward, the money creation will be injected into the world economy and help alleviate some of the pressure of the sovereign debts.

In essence this premise is correct.  The SDRM will take into account the M1 money supply of not only the US dollar, but other currencies of the world as well.  Through this process of debt bond swap or restructuring, we will witness something not unlike a Global Currency Reset, though the mechanics of it will be challenging to understand.

As the world financial system makes its transition to the multilateral system as defined by the International Monetary Fund, the World Bank, the Bank for International Settlements, and all the countries of the world, represented by the G20, no old sovereign debts can be carried over to the new paradigm.  This means the bonds of all countries, including select historical bonds which were issued in such volume and value that their omittance in the new system would create large imbalances in each respective countries SDR composition.

A reader sent the following link which explains in more detail the IMF 2010 Code of Reforms and how the Executive Board would be redesigned with the US retaining its veto power over votes.  This document is a perfect example of the convoluted processes and procedures involved in understanding the transition to the new multilateral financial system.

At first the US retaining its veto power on the Executive Board of the IMF seems like a contradiction to what is meant as reforms.  It’s important to recognize that the US needs to approve the reforms of the Executive Board because the 85% vote required can only be met if the US votes for it.  But once the reforms to the Executive Board are accepted, the emerging markets will have equal say over the quota reforms, which only require 70% of the vote.

IMF-board1

Major policy changes to the Executive Board will still require the 85% vote which the US will have veto power over.  But in essence, it’s a wet paper veto as most of the multilateral financial system processes and procedures will be completed through the use and continued reforms of the IMF quotas.

We will get into the quotas themselves in a future post, but they are directly related to the transition to an SDR bond debt swap system.

For the US, the quota reforms are of vital importance because it will allow for the increase of quota injections from the emerging markets, including China, which as we discussed above, will be instrumental in restructuring the sovereign debt of the United States.

We have touched on so many aspects of this new multilateral system in our series titled SDR’s and the New Bretton Woods.  Many of these components have been connected within the overall picture in this post itself.  If any are finding it difficult to understand, I would suggest rereading the main instalments of the series.  As hard as it may be to understand, it is even harder to write about it for the purpose of creating clarity.  It hurts my head and I’m sure there will be mistakes or misinterpretations in how I both understand and explain certain aspects.

Before closing this essay, I’d like to remind everyone of the Hegelian Dialectic component in the overall picture.  In previous posts we have explained how this process of problem/reaction/solution will be used to drive the sovereign debt and currency crisis around the world to extreme levels.  We will see revolutions, like in the Ukraine and elsewhere, and debt defaults and threats of defaults, which will stir the solution offered up by the International Monetary Fund, Bank for International Settlements, World Bank, G20, and other NGO organizations.

As revealed in The Great Work of the Ages, an alchemical process is taking place on the world stage.  From the ashes of the old fiat currencies will rise the phoenix, by way of SDR’s as the new world currency.  It is obvious when deciphered from the documentation of the rent seeking elite themselves.  What we can only hope for is that the components of the new system which are intended to self-limit the wealth transfer activities of the elite will remain in place long enough for the system to transition once again before it corrupts back into itself.  Everything in this world is a corruption of the one true process.    – JC

SDR’s and the New Bretton Woods – Part One

SDR’s and the New Bretton Woods – Part Two

SDR’s and the New Bretton Woods – Part Three

SDR’s and the New Bretton Woods – Part Four

SDR’s and the New Bretton Woods – Part Five

SDR’s and the New Bretton Woods – Part Six

SDR’s and the New Bretton Woods – Part Seven

SDR’s and the New Bretton Woods – Part Eight