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Posted at 1:38 PM ET, 02/10/2011

IMF considers whether its currency could play greater role in world economy

By Howard Schneider

They don't have fancy engraving, counterfeit-proof holographs or historical portraits on their face - in fact they do not exist in any physical form. In the evolution of money, the Special Drawing Rights issued by the International Monetary Fund are on the un-sexy end of the spectrum, without the quaint appeal of conch shells, the primal authority of gold, or the (current) popularity of good old American dollars.

But officials at the IMF and in some international economic policy circles are opening what they hope will be detailed talks about whether the fund's peculiar currency could play a greater, and helpful role, in the world economy.

SDRs are a hybrid concept, representing the value of a basket of highly-traded currencies, including the dollar, the euro and the yen. They are backed by the financial commitments of the fund's members and used to help countries facing a crisis. Under the agreements and treaties governing the fund, SDRs loaned to, say, Ireland or Greece, can be exchanged for any freely traded currency, converted at rates that change based on market values.

Examining the aftermath of the recent financial crisis, IMF officials wonder whether the SDR could play a broader role - taking some pressure off the dollar as a world reserve currency, and being used to reassure nations that they could have access to cash in a pinch.

In a seminar at the IMF on Thursday, Managing Director Dominique Strauss-Kahn spelled out some of the possible benefits: allowing nations that currently stockpile reserves, particularly in Asia, to feel comfortable holding less; being used to value trade and other contracts and thus lowering the currency exchange risk faced by traders; providing a global liquidity fund that could free the U.S. Federal Reserve from, in effect, being the world's lender of last resort. During the recent crisis the Fed opened "swap lines" around the world so that central banks in Europe and elsewhere had ample cash.

The IMF, Strauss-Kahn said, could potentially step into that role.

National currencies and nationally-driven economic policies "are not going to disappear," Strauss-Kahn said. "On the other hand globalization is here...The IMF can do more than it has been able to do in the past."

The discussion of monetary reform is being pressed not just by the IMF, but also by French President Nicholas Sarkozy, who wants the issue to be a centerpiece of discussion this year among the G20 group of major economies.

It is not an easy issue. Even revising the SDR "basket" to be more representative would require, for example, major changes in China's day-to-day currency management, and the underlying structure of its financial system.

And, despite the many pledges for more international cooperation made after the financial crisis, anything that involves an actual shift of authority from individual countries to the IMF is likely to face political opposition.

But there are reasons the U.S. might like the idea, said C. Fred Bergsten, head of the Peterson Institute for International Economics. Bergsten said the dollar's role as the world's preferred reserve currency is often assumed to be a good thing -- allowing the country to attract the investment it needs, for example, to fund its mounting debt.
However Bergsten said the country might benefit from the "external discipline" that would come from a more diverse system, where safe haven investors had more choices than U.S. Treasury notes.

The current reserve status, he said, is "too much of a good thing."

By Howard Schneider  | February 10, 2011; 1:38 PM ET
 
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Comments

Wow. There's a guy -- Stansberry, he advertises on radio -- who forecast this actually happening. He said it would be a very BAD thing for US currency, that we benefit from being the reserve currency because we can just print more dollars to fund debt. I better buy his newsletter (not a shill or a plug).

Posted by: gbooksdc | February 10, 2011 6:03 PM | Report abuse

C'mon, C. Fred Bergsten can't be talking seriously, for good or ill the U.S. is passing bad checks to the world, better known as the U.S. dollar notes in such a way that to me, if this were to end, it would probably be like if someone who is addicted to free crack cocaine all of a sudden having to get used to the complete loss of the stuff...

Better not even think about it for now, let the U.S. re-learn how to make stuff again, lets us work hard at becoming a more productive nation again, I think in the end it'll be all the better for everyone and the environment...

Posted by: Anonymous | February 10, 2011 7:09 PM | Report abuse

It amazes me that people who thought the very real economic meltdown in 2008 was bogus and the actions of the fed and others overblown...

Who now believe that we are in REALLY big trouble because the actions the government took to solve the problems.

Ok, so lets look at the evidence. In the space of a few months at the end of Bushes last term, the economy lost upwards of 6 million jobs. The global financial markets froze and most world trade came to a screeching halt.

Now, at the end of 2010, almost all of the TARP bailout has been paid back. The domestic auto industry is roaring back. The world economy is a little shaky, but getting more solid every day.

Inflation is at the lowest level in memory. The economy is not yet adding many jobs, but only an idiot could look at the economic indicators and not see a real recovery happening.

So I do not understand why people insist on thinking that we are all going down the tubes. Only 27% of American's want to raise the debt ceiling. They would rather have America declare bankruptcy and refuse to pay its lawful debts.

Its a good thing that these dingbats are not running the economy. Oh wait... they elected the Republican's so they could ruin the economy for them!

Posted by: Anonymous | February 10, 2011 8:47 PM | Report abuse

They can't be serious!

These private bankers of worlds central banks can't even manage oversight of the banks they are supposed to be overseeing and according to a new 50 page report discussed in a guardian.uk article the IMF did an incredibly poor job with the oversight they were entrusted with.

NOW the IMF thinks it can do a better job by using some SDR's that aren't even money to make things better?
Sounds like typical bank-speak...imagine some new type of Fiat entity and sell the idea to the world so they can gain even more dominance over the worlds monetary systems and keep moving the worlds wealth to the top few who already have too much wealth and power and still seek to enslave us even more.

We the people and governments of the world would probably do better by cutting these private central bankers loose and letting them fend for themselves instead of holding the people of the world financially responsible for their bad behavior and making the people bail them out.

Posted by: CommentingID | February 11, 2011 8:22 PM | Report abuse

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