The IMF Unravels the Global Monetary Order

On August 28^th, the International Monetary Fund quietly made history.

The IMF was a product of the Bretton Woods summit of economists that created the post-war global monetary order of the same name. The IMF was envisioned as a global central bank, that would act as a lender of last resort to countries facing balance-of-payments crises. The IMF has traditionally lent by raising funds among the wealthy nations, but in 1969 it created a special kind of currency, called the Special Drawing Right. SDRs aren’t used as a means of payment anywhere in the world; SDRs are used as an accounting device between countries for international settlements. Perhaps SDRs were created in the hope that one day the IMF may be able to issue its own fiat currency, a step toward a global ‘super-currency’. If so, that day has arrived.

The IMF announced on August 28^th that it would create $283 bil worth of SDRs, and distribute them to member countries. I know of no other instance of fiat currency being issued by a non-governmental organization that has no economy behind it. Countries can exchange their SDRs for one of the four hard currencies that underlie the SDR’s value (the US dollar, the pound sterling, the euro, and the yen). The US will receive one-sixth of the new SDRs, worth about $47 bil. Small change next to the magnitude of the deficits, but every billion helps.

What’s the game here? The US desperately needs to fill the hole caused by continuing trade and budget deficits and is increasingly sensitive to the criticism (made by many world leaders and central bankers) that it plans to do so by printing dollars. Could this be a sneaky move where the US receives the benefit of free money but sticks the IMF with the bill? It won’t work, of course, as global markets will simply respond by increasing prices. Increasing the money supply without increasing the supply of goods will always create inflation.

The global recession was caused by reckless money creation, which inflated the value of assets from stocks to commodities to real estate, while encouraging astounding degrees of leverage. The financial house of cards was simply not built to last, and pumping more fake money into the deflating credit bubble won’t work. Debt leverage isn’t available like it was in the past, and even if it were, a more important illusion has been punctured, namely that all this risk was essentially free. Risk always comes with a price tag, and the sooner that price is accurate, the better for the global economy.