Triffin dilemma and loss of confidence in the US
dollar
From the 1960s, there was a widespread concern of the
sustainability of the Bretton Woods system of using national currencies as
reserve assets. This was most closely associated with the Triffin dilemma,
which predicted a loss of confidence in the gold value of the U.S. dollar as
the value of liquid claims on the United States in the form of dollar foreign
exchange reserves increased. Triffin argued for the need to choose the rate
of global reserve growth collectively rather than allow it to be a by-product
of national decisions.
The SDR Substitution Account (1)
The IMF created the SDR (Special Drawing Rights) Substitution
Account in 1969. T he core idea of the SDR is that the SDR
Substitution Account Central Banks allows to diversify their existing dollar
reserves in a one-time conversion away from the dollar into IMF’s SDR,
comprised of the US dollar, European euro, Japanese yen and British pound, in
an off-market transaction, so as not to depress the dollar’s exchange
rate.
By public introduction careful terminology avoided the
label of reserve asset and suggested that the SDR was designed to add to
rather than replace existing (dollar) reserves. This was pure cosmetic.
2016 is like 1978 all over again, with other
actors
Since March 1973, exchange rates have become much more
volatile and less predictable than they were between 1945 and 1973, due to
among other things:
- The “Nixon shock”, termination in 1971
of the gold standard.
- The oil crisis in 1971, when the OPEC
quadrupled the price of oil.
- The harmful effect of this on the US
inflation and trade position resulted in a decline in the value of the
dollar.
- The loss of confidence in the dollar
that followed the rise of US inflation in 1977 and 1978.
The Chicago Tribune December 31, 1978 mentioned:
In 1978, President Carter was backed into a corner by the
flagging US dollar.
American style officially died in Washington at November
1, 1978. That’s when President Carter announced that he was supporting the
FED plan to rescue the dollar. It was a plan that was the opposite of
populism. The US alone was unable to defend the dollar. The plan was worked
out in a secret White House meeting on October 28, but could not be announced
until the President won the agreement of Japan, Switzerland and (West)
Germany.
The dollar rescue operations and the domestic
implications were the subject of hearings (2) before the Joint Economic
Committee, Congress of the US in December, 1978.
In his opening statement of the hearings on December 14,
1978 Henry S. Reuss (co chairman) said that the committee supported
President’s dollar rescue actions. This included an austere budget policy and
a shrinking budget deficit, tighter monetary policy, and joint intervention
in support of the dollar with (West) Germany, Japan an Switzerland, to which
the US committed $ 30 billion of their own resources. Because of the drastic
drop in the dollar’s external value last summer and fall, drastic steps were
clearly necessary.
Nowadays the dollar is in an even worse condition,
although the US is keeping up the appearances of a strong dollar for the
majority of the population, among other things through suppression the gold
price by the BIS-network.
The present foreign exchange
reserves and debtor countries
The worldwide foreign exchange reserves are rapidly
growing. In 2012 the US dollar counted for 54% of the total foreign exchange
reserves. That’s approximately 54% of $ 12,000 billion is $ 6,500 billion of
the American national currency in the hands of other countries. $ 6,500
Billion held by debtor countries depending on US national decisions (like
ZIRP and printing money).
As Triffin’s dilemma predicted the US dollar is less and
less accepted as the world’s reserve currency, as the money printing is
enormous, the US ever lasting trade imbalances and debtor countries don’t get
any interest on their US dollar reserves. It’s not surprising that a new
vocabulary word arises in 2009: De-dollarization. In 2009 Chinese leaders for
the first time express their concerns about their US dollar holdings. They
want to replace the US dollar into the SDR. Several debtor countries convert
(a part of) their dollar reserves already into physical gold, before the
foreseeable devaluation of the dollar.
One-time off-market conversion away from the US dollar
into SDR?
We think that the IMF and others are working on a
one-time off-market conversion up to a maximum of $ 6,500 billon into SDR
with a gold-backing. Although there was in the 1970s a concern that giving
the SDR a gold backing might resurrect the role of gold in the International
Monetary System, without it would be difficult to sell the SDR agreement to
the national parliaments (read China). The amount of gold that would need to
be pledged to support SDR Substitution Account depended on assumptions of the
relative dollar price of gold and the dollar exchange rate.
We think that the dollar will be depreciated against the
SDR after the conversion and that will, without action, deteriorate the
finance balance of the SDR Substitution Account at the expense of the debtor
countries. The gold-backing is necessary to mitigate that exchange risk.
The SDR Substation Account in practice
In fact the SDR is a fiat currency, but only for IMF
member countries. The SDR comes to prominence when the US dollar is weak or
otherwise unsuitable to be a foreign exchange reserve asset. Any new
allocations must be voted on in the SDR Department of the IMF and pass with
an 85% majority. The US has 16.7% of the voting power.
In order to use its SDRs, a country must find a willing
party to buy them. The IMF act as an intermediary. The claim to currency that
SDRs represent is not a claim on the IMF.
The SDR Substitution Account
Accumulated US $ assets
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Accumulated SDR liabilities
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· Allocated to member countries IMF, such as China, EU,
Japan etc.
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· Weighted currency basket, re-evaluated every five
years
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· Private parties do not hold or use SDRs
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- BIS Working Paper No. 444 Reforming the
international monetairy system in the 1970s and 2000s: would an SDR
Substitution Account have worked? March 2014
- Hearings Congress of the US regarding
dollar rescue operations. December 1978
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Nico Simons is a Dutch investigative journalist on financial issues,
especially monetary issues. His articles are regularly published on
MoneyInsights.org.
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The author is not affiliated with, endorsed or sponsored by
Sprott Money Ltd. The views and opinions expressed in this material are those
of the author or guest speaker, are subject to change and may not necessarily
reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the
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