Worldwide SDR Inflation & the Centralization of Reserves

Economics, Premium POM

A Pre-Text for the Future World Currency

By JC Collins

Over the last three years I have written extensively about a broader use of the SDR and the implementation of substitution accounts to diversify foreign exchange reserves and reverse the accumulation of reserves denominated in US dollars. Now that this reality is beginning to emerge it is worth looking at what the next curve will be and what we can expect as it unfolds in the coming years.

The availability of USD alternatives, being represented by the Chinese renminbi and to a larger extent the SDR itself, will mean a massive rebalancing of reserves and reserve allocations.  World liquidity demands are not currently being met and each nation is experiencing the grind down of domestic monetary policy into low and negative interest rates.

It is expected that use of the substitution accounts will facilitate a large diversifications of foreign exchange reserves which will decrease USD liquidity in the international monetary system and increase the liquidity of the SDR.

New allocations of SDR will be supported by the central banks of each nation purchasing SDR and increasing the issuance of domestic currency created to buy SDR.  Much like China has expanded its domestic credit markets to purchase USD denominated assets.

This will lead to worldwide inflation as central banks print money to support the SDR system.  The inflation will not be in the SDR itself but will take hold in each nation depending on their allocation of SDR.  Instead of each nation accumulating reserves in their own central banks, the reserves, through SDR purchases, will become centralized within the IMF mechanisms.

This dynamic will create a period of stable inflation and global growth which will fuel the coming commodities boom and infrastructure development in emerging nations.  Just like China used the massive growth in its own credit markets to fund the construction of ghost cities and other infrastructure projects.

The period of stable inflation will eventually come to an end, within 5 to 10 years, and each nation will begin to experience unstable and enhanced inflation at irregular intervals. The level and severity of inflation will depend on the amount of national reserves accumulated within the IMF and allocations of SDR.

This inherent instability within the SDR system will build demand and momentum to transition the SDR into a full global currency.  This process will resemble the transformation of the European Currency Unit (a basket of currencies like the SDR) into the actual euro currency.  The centralization of reserves which would have taken place at that point will also build the case as the centralized liquidity will already exist to support the world currency.

The argument which will be made is that national currencies are prone to enhanced inflation under the SDR framework and should be reduced in use and distribution over a period of years.  It is also probable that electronic currency, such as bitcoin, or the evolution of bitcoin, could bridge the gap between national currency, the SDR, and the future world currency.

Today the challenge is contracting growth and deflation.  Tomorrow the problem will be disproportionate inflation. How the money of the future will look and function will be dramatically different from what we have come to expect and envision.  – JC