Deflation and Liquidity for the MFS
By JC Collins
The transition script for the SDR Multilateral Financial System (MFS) is becoming clearer with the recent announcements of numerous banks failing stress tests. The large list of banks which are insolvent or becoming insolvent continues to expand and the obvious nature of what has been hidden in plain site for the last 5 years will soon be brought to the surface.
The intentional scripting and planning of the transition has been kept quiet as the framework and injection points for the MFS have been developed and positioned. The new BRICS and ASEAN financial institutions have been strategically placed to geographically and politically capture the full scope of the global economics and governance arena, to ensure that balance is maintained when the new system is brought online.
The recent announcement of the IMF lowering interest rates to 0.05% is the scripting required for the next stage of this CSI, or Cultural and Socioeconomic Interception. In April of this year the SDR rate was 0.13% and when we go all the way back to August of 2008 we see that the rate was 3%.
Since that time, the financial crisis of 2008, central banks around the world have been slashing interest rates which have finally ended with the infamous ZIRP, or zero interest rate policy. Along with this they have expanded the money supply trough QE policies. This expansion of the money supply has ended up in the stock markets and foreign reserve accounts of central banks around the world.
With QE now coming to an end, and the announcements of failed stress tests and bank insolvency, the CSI script is about to move the awareness of the disorganized masses into the next stage. In this stage we are going to experience sudden deflation and contraction of liquidity. The response, or reaction, already being built into the global information structure through media engineering is that central banks will be unable to increase liquidity as they did in 2008 because they are insolvent.
The level of sovereign debt by the governments of the world will also leave little room for any actions to stem the suction from the equity and bond markets.
It will emerge from the maelstrom that the zero interest rate policies of the large member countries of the International Monetary Fund, with a focus on the ones that make up the SDR basket, being the dollar, yen, euro, and pound, are pulling down the interest rates of the SDR itself.
In order for the SDR to be used to increase liquidity and save the world from complete financial collapse another currency will have to be added to the basket valuation. This is where the internationalization of the Chinese renminbi comes into action. Because of the large volume of renminbi currency swaps and RMB denominated gold contracts through the Shanghai Gold Exchange, along with other Chinese FX trading platforms, such as the Pan-Asian FX Trading Center where the renminbi and Vietnamese dong have begun to be directly converted, and the Singapore dollar direct convertibility, it will be announced that the Chinese currency can be added to the SDR basket to increase stability.
Gold may also be added to the SDR basket composition and the whole group will bring the required stability to allow for the broader usage of SDR bonds as a method of increasing liquidity at reasonable interest rates.
The gold to GDP ratio for China will soon be announced with the anticipated increases shown in the gold reserves. The instability in the dollar, or the western banks abilities to increase liquidity, will be seen as the moment when the system needs to be reversed and the SDR becomes the reserve asset from which governments and international corporations balance accounts.
For those who maintain that the IMF and SDR are not going to be expanded and that the BRICS countries are going to upset the global banking order, let us proceed through the following information.
The International Monetary Fund has a method of borrowing from member countries which is called NAB, or New Arrangement to Borrow. In 1998 there were 25 countries which were contributing to NAB, for a total contribution of SDR 34 billion.
In 2010, after the IMF Code of Reforms had been agreed upon by all member countries, the number of participating countries in NAB went to 40, with a total contribution of SDR 367.5 billion. The largest of these new contributors were the BRICS countries, with China contributing 8.5% of the total, and Brazil, India and Russia contributing an additional 7% to the total.
As it turns out, the new NAB structure was only agreed upon by setting the voting and veto rights at 85%. Considering the BRICS have the required 15% to veto any NAB allocation of funds, they hold something akin to a trigger finger over the world economy when the next liquidity crisis strikes.
There is an additional need to increase the IMF’s core resources outside of what is allowable under NAB. From this came the 2010 Code of Reforms, or what is also referred to as Voice and Vote Reforms, to increase the voice of the larger emerging markets and to increase the vote as well.
The reforms allow for a doubling of the IMF’s resources to SDR 476.8 billion. This is above and beyond the emergency measures contained within NAB, and will not come into effect until the 2010 Reforms are fully implemented. Considering the BRICS countries can veto any new NAB attempts it is increasingly clear that the 2010 Reforms need to get passed quickly.
This is likely why the G20 and the IMF itself has given the US Congress until the end of the year to pass the required legislation to enact the reforms on their end. They are the only member country who has not yet done so.
Europe has now become the largest borrow from the IMF’s GRA, or General Resources Account, credit outstanding. The current breakdown of IMF borrowers is as follows:
Africa – 0.9%
Asia and Pacific – 1.8%
Europe – 89.2%
Middle East and Central Asia – 6.6%
Western Hemisphere – 1.5%
It is obvious from the above information that it is not the intention of the BRICS countries to start a new IMF by way of the New Development Bank. The balance of power which has preceded the transition to the MFS is masterful in its design and implementation. No one party has leverage over another and yet all parties cannot disconnect from the system and branch off in a different direction.
The amount of US debt held in the foreign reserve accounts of central banks around the world ensures acceptance of macroeconomic policies which will see those assets exchanged for SDR bonds through substitution accounts.
Some of the former resistance to having the SDR as the reserve asset of a multilateral financial system is because of the structural conditions that the IMF has imposed on borrowing nations. Those conditions were previously implemented and designed to secure and expand the dollar based reserve system. But with a changing of the guard from the dollar to the SDR the structural conditions can be altered and reduced to satisfy the requirements of member countries.
The two types of conditionality’s which will remain are as follows:
1. Macroeconomic Conditions: contain inflation, reduce budget deficits and public debt, as well as strengthen central bank reserves. This last item will be achieved through exchanging current reserves into SDR bonds through the substitution accounts. You can begin to see the perfection of the emerging system as it completes the magic circle.
2. Structural Conditions – reform the tax system, improve banking supervision, improve fiscal transparency, and build up the social safety nets.
It is this second set of conditions, especially improving banking supervision and fiscal transparency, which has led to the epidemic of banker suicides and death penalties around the world. The system needs to be cleaned up and there are companies willing to bid those contracts and complete the work.
It is also important to note that the conditions outlined above are not quantified and have been tailored to align with the policies of each member country.
With the design of the MFS as mandated by the Bank for International Settlements, the once powerful institution of the World Bank has been marginalized and relegated to a subservient role. This is one of the other reasons why the BRICS Development Bank was formed, to fill the same role as the World Bank, but for the Asia-Pacific region.
It is also interesting to note that Britain is likely to separate from the European Union. The reason for this is because the large level of European debt owed to the IMF has ensured that America will no longer maintain geopolitical and socioeconomic control over the continent. The crisis in Ukraine has largely been about maintaining this control. But it is increasingly clear that American industrial interests traded Europe for the resource rich Middle East.
Considering the shared control that the BRICS countries now have over the IMF and its core resources, American interests were not in a position to barter for both the Middle East and Europe. Britain will separate from the European Union so it can maintain its allegiance with its long time ally.
Another change that we may see between now and July, 2015 is the Managing Director position change from a European to an Asian designate. Christine Lagarde, who is already embroiled in a corruption scandal in her home country of France, will likely step down and the 3rd Deputy Managing Director, one Zhu Min, former Deputy Governor of the People’s Bank of China will take her place. It is also likely that we could see the current Governor of the PBoC Zhou Xiaochuan step into the role. But considering that Xiaochuan is also having trouble at home it is increasingly probable that Min will be China’s man in Europe.
The coming contraction of credit and liquidity will lead to the required and sudden level of deflation. With no governments or central banks able to increase liquidity to keep the system from completely collapsing, the solution segment of the Hegelian Dialectic will be rolled out on the tracks that have already been laid for it.
With each passing day what was not so clear at the beginning of the year is coming into focus. The broader CSI at play is being implemented exactly as we have been explaining it since January. The MFS and it’s SDR bond liquidity will rise on wings of fire from the ashes of the worlds insolvency. – JC