How Current Debt Transforms Into SDR Liquidity
By JC Collins
It’s been a while now since we’ve discussed the mechanics and machinations of the emerging SDR reserve system. In light of some of our recent discussions around the internationalization of the renminbi, as reviewed in the post Renminbi Is Already A De Facto Reserve Currency, and our further investigations into both the renminbi and gold being added into the SDR basket valuation next year, see post The Coming SDR Gold Standard, it is time to revisit some of the statements and directions which have been previously laid down and extrapolate that information forward into next year and the following.
But first let’s detour into the mining world for some examples of human ingenuity and ability to overcome challenges.
The oil sands deposits were created over the last 300 million years. The large area of the deposit was once an inland sea, called by geologists the Albian Sea. The oil was formed as the large mass of organic matter decayed and eventually blended in with the sand left behind from the sea.
Today there are still underground aguifers, large porous rock formations that contain salt water, or what some call Devonian water, in essence large underground salt water lakes. One mine in the region accidently dug into one of these salt water lakes and it flooded the mining pit before operations could be completed and the full ore deposit extracted.
Another mine, in the preliminary stages, has discovered its own salt water lake beforehand and is implementing a procedure where large cooling rods are driven deep into the deposit and massive refrigeration units are used to freeze the area. The idea is to dig out the ore deposit right up to the ice wall face and when mining is completed, in perhaps 40 years, they will pull the rods and allow the Devonian water to melt and flood back into the mined out pit, creating a new salt water lake which can be used for recreation.
Or at least that’s the plan.
What this shows us is that humanity, and industry, when faced with the necessity of ingenuity, can and will rise to the occasion. Perhaps the need for this ingenuity in the example above can be questioned or debated, but it still doesn’t take away from the reality that industry and economics in a broader sense are an extension of our basic survival instinct, which has been passed down to us from the primordial world of Devonian water.
With all the discussion we’ve had here at Philsophyofmetrics.com in regards to the macroeconomic multilateral financial system which is emerging between now and 2018, we’ve never once touched on the survival instinct component of what is happening, and how that survival instinct ensures further consolidation. This consolidation is proceeding against the backdrop of resource proxy wars because man’s collective fear of collapse and threatened survival is greater than the desire to seek an alternative.
In addition, the human mind seeks familiarity and sameness in patterns, which is the main reason why each consolidation or centralization, is built upon the aspects of the one which existed before it. The old transforms into the new. Which is why the new macro system will be the more centralized version of what is quickly becoming the old micro system.
Let’s use the EU as our lead in to the next segment of this post. The Euro is made up of the currencies of the participating countries. The central banks of the European countries have foreign reserve accounts in which they hold currencies. The SDR amounts in these accounts have been slowly increasing. It can be expected that over the next few years, likely beginning next year, the central banks of Europe will begin consolidating their SDR reserves into the larger reserve account of the European Central Bank.
There is a specific reason why this will happen. Let’s continue.
In previous posts I have mentioned how QE, which is an expansion of liquidity by the Federal Reserve, is abstractly funding the new multilateral system. The expansion of the money supply by other central banks around the world is also serving the same purpose. This massive amount of liquidity when considered on the independent micro level of each central bank is reaching dangerous levels. But when we view this sea of liquidity as a part of a larger macro process things begin to make more sense.
Much of this liquidity is ending up in the foreign reserve accounts of central banks. Through the usage of the substitution accounts which we discussed before in previous posts, these reserves can be exchanged on a large scale for SDR’s. Think of it this way, China takes a trillion dollars of its US denominated assets which it holds in its foreign currency account and exchanges it for SDR’s at a time when the dollar is high. This exchange is facilitated through the substitution accounts at an equivalent value.
Now SDR’s can’t be created through substitution alone, but when this process is structured as a re-allocation of existing liquidity, then the International Monetary Fund becomes the largest holder of US dollars, which eliminates the “exorbitant privilege” that America has achieved by maintaining low interest rates on dollar reserves.
This re-allocation of liquidity will take place from the foreign reserve accounts of all central banks belonging to the countries which make up the SDR basket valuation, being the dollar, euro, yen, and pound, with the renminbi to be added next year. The re-allocation will begin after the 2010 Reforms are fully implemented, the executive board restructured, and the basket composition is adjusted to add the renminbi, and likely gold as well.
The belief is that this re-allocation of liquidity through the SDR will create less erratic reserve growth and that the SDR will develop a more stable value than the currencies which make up its smaller micro components.
Then it starts to get interesting as the scheme which is running today continues under the guise of the SDR. As stated above, the substitution process can only re-allocate or re-distribute the liquidity which has been created by the member central banks. But the IMF, which at this point would control the growth of world liquidity, or the global money supply, can issue specially allocated SDR’s to the central banks themselves which make up the basket countries, denominated as SDR bonds, for which the central banks can then exchange for the original debt or liquidity which was re-allocated in the first place.
This allocation process is the macro of what is now the micro Federal Reserve process of expanding liquidity. It would allow for the original liquidity which is held in the substitution accounts to be increased.
And from here we can expect to see a process where, let’s say China, can re-lend its dollar based SDR liquidity through the IMF to smaller countries which need liquidity, or capital. I say capital because of course all capital, being money, is debt or an expansion of the money supply, being liquidity.
The International Monetary Fund will require a more flexible quota-based process than the one currently used for SDR allocation, but this is what the 2010 Quota and Governance Reforms are all about. It’s even more interesting when we consider that this re-allocated SDR liquidity can also be deployed to other financial institutions as well.
Going back to the European Central Bank, we can expect to see the sovereign debt of European countries re-allocated or consolidated, under this larger SDR liquidity process and re-deployed across the central banks and financial institutions of the European Union.
This is where we can likely see the split between Britain and the European Union. Both the pound and the euro are reserve currencies which make up the SDR basket valuation. As such, it serves no purpose to have both currencies blended together in one re-allocation of liquidity from their foreign reserve accounts. A much larger and more controlled re-deployment of SDR liquidity can be achieved by separating the current debt held in the pound and euro.
This has been known and planned for some time now which is why the dollar economic and industrial interests are willing to trade their European geopolitical interests for a broader gain of resource allocation in the Middle East. See the post The Business Deal of the World.
The next stage to this whole process will be another shift from micro to macro as a broader allocation of SDR liquidity will eventually be required to keep the scheme going. This expanded allocation will require a more structured global central bank than what exists today. Watch for a streamlining of policies and regulations across the institutional mandates of the World Bank, BRICS Development Bank, and other banks which may yet rise from the lower levels.
This larger global central bank will create the increased liquidity required to fund the Rise of the World Empire.
Going back to our analogy of Devonian water and the necessity of ingenuity to ensure survivability of the species, we can recognize the pattern of primordial salt water as the act of re-deployment or re-allocation. Through the instinct to survive man has created a mining industry from which the resources required to survive are extracted and processed for a broader use.
What was once old is now new. The micro always becomes the macro, and back again. – JC