"Special" Drawing Rights

One of you asked me the other day about a couple of SDR theories floating around right now that you thought might somehow be a threat to Freegold. I thought I'd share my email response with everyone:

My basic approach to the SDR is, who cares? It doesn't matter. It would be worse than irrelevant to Freegold, it would be superfluous. It's just marginal speculation by people who haven't thought things all the way through. First of all, the SDR is only a unit of account, by design. If they make it into something else, then it's no longer a true SDR. It's something else. Might as well call it a bancor or whatever. If you hold an SDR, you hold drawing rights to a basket of currencies, but the SDR itself is nothing but a unit of account used to calculate how much of any one of the individual currencies in the basket it is worth. If you ask for one of those currencies, they will likely be printed for you by that currency's issuer and his SDR count will increase. Here are a few of my past SDR references:

From Synthesis in 2010:

Freegold is our destination with or without the euro. Even on the outside chance that an SDR or a similar super-sovereign currency is accepted as the new global reserve currency, it would have to contain gold at Freegold valuations in order to be viable, accepted and trusted, in the same vein as Randy's comment about an EMF. So any way you cut it, the future comes to us with really high value gold by today's standards.

From Unambiguous Wealth 2 in 2011:

"Virtual reserve currency" means something—like the SDR—that's primarily a unit of account for the purpose of providing monetary stability. But with the primary and secondary media of exchange becoming separate but symbiotic counterparts, stability will be automatically achieved, and a "commodity-based" super-sovereign unit of account comparing fiat M3 with a centrally managed gold price will be completely superfluous and unnecessary (i.e., as unused as the SDR).

[…]

The point is, there's a turn-key problem-solving system waiting in the wings. So whenever you hear anyone in the hard money camp or the Anglo-American press talking about something that sounds like the SDR with "gold backing" (watch out for that word "backing") don't buy it for a second. They simply don't have the full picture and, therefore, don't know what they're talking about when it comes to macro solutions. But even so, they're still right when they recommend that you get your butt out of that reclining black office chair and take personal responsibility for your wealth.

From Freegold Foundations in 2011:

So, the point about currency is, and mainly for those of you that fret over a NWO currency, or "whatever currency," an Amero or SDR or euro-whatzit... chill TF out! Currency is no big deal. Currency is not the issue that matters here. What matters is what we, as a planet, choose to save.

RS Comment: So often in commentaries of this sort that propose a “solution”, the author is strangely obsessed with the notion of replacing the dollar (as a reserve currency unit) with simply another institutional emission of similar ilk (such as currencies of other nations, SDRs, bancors and whatnot). Their avoidance of any meaningful discussion of the most obvious remedy is almost pathological in the extreme. To be sure, we don’t need to invent any manner of universal reserve currency to fill the role of a unit of account because that role is already served in a fully functional capacity for any given country by its own monetary unit.

What IS desperately needed, however, is a universally respected reserve asset capable of filling our current void with a reliable presence that serves as a store of value. And far from needing to be conjured or created by complex international committees, that asset is already in existence and held in goodly store by central bankers and prudent individuals around the world — it’s known as gold. From amid the ruins of a chaotic financial crisis that was brought about by its own complexity, a degree of sanity will prevail, and gold as a freely floating asset will arise in stature as THE important element of global monetary reserves. The floating aspect is the vital evolutionary improvement over all previous structural monetary failures which tried to use a gold standard at a fixed price (i.e., unit of account) perversely joined to the very elastic money supply of any given country’s banking system.

And from The Return to Honest Money in 2011:

The point is, once "Freegold" (nature's wrath) inflicts itself upon us all, it won't really matter what is chosen/used as the super-sovereign or supra-national currency to lubricate international trade. It could be the euro, the yuan, the SDR, Facebook Credits or even the dollar! Triffin's dilemma will be gone. And you shouldn't worry so much over the transactional currency question, because that will be chosen through the market forces of regression, the network effect and game theory's focal point discovery at the international level.

You also have to understand why the SDR was invented in the first place. Robert Triffin, as in the Triffin dilemma, was actually a proponent of SDRs and helped create them in 1969. They were "paper gold" for the time, because there wasn't enough gold at the fixed price. But once you truly float the price of gold, there is always enough gold. In essence, today's paper gold is similar to the SDR of 1970. There isn't enough gold, so you have a gold proxy to fill the additional demand. But once the price of physical gold floats, the paper proxy becomes redundant, superfluous and ultimately irrelevant.

So, suppose they have a big monetary conference, à la Bretton Woods, and decide to use SDRs. Then you also revalue gold. Whether it's a part of the SDR basket or not, anyone running a surplus, sufficient enough that it requires centralized long term settlement, could then choose between the real thing and the proxy. Proxy gold credits in any form become superfluous for settlement when there's enough of the real thing.

Also, something other than gold will likely be used to temporarily settle short term imbalances. That "something" will be either currency or currency debt. It could be something like the SDR, or it could be the euro, or it could simply be debt or base money in one of the two currencies of the trading partners. But this doesn't supplant the need for true settlement.

There's no such thing as perfect balance in the short run. There's always a little imbalance in trade, and so you need a way to account for that until later when it reverses and goes the other way. There are many ways to do that, as I mentioned above, and the SDR would be one way. But then it comes down to choices at the centralized international level. Do you want your trading partner's currency, debt in your currency, debt in your trading partner's currency, some third party currency like the euro, debt in some third party currency, or debt denominated in SDRs which is a unit of account that takes several currencies into account, administered by an international organization?

Even if everyone agrees to SDRs, that still has nothing to do with Freegold. Because in Freegold, that temporary short-term role that would be played by the SDR is still a role that must be played by something in the symbolic currency realm. And I'm not talking about "Freefiat" here! That's a very different "alternative" theory.

True settlement at the micro level precludes the need for centralized balancing at the macro level. But even individual exporting net-producer savers will carry a currency balance for the short run and, in general, that would create a (much smaller than today) current account imbalance that would need to be temporarily accounted for at the central bank level. That's where SDRs might come into play.

Savers wouldn't hold gold for the short run in Freegold, not because it fluctuates wildly, declining in real purchasing power at times as "Freefiat" predicts, but because the transaction cost of moving between currency and gold will cancel out even perpetual appreciation (similar to the performance of the best of the best collectible physical assets, i.e., stores of value, only available to the super-wealthy today) for a quantifiable period of time. So for anticipated expenses in the short run, currency balances will be the best choice. And currency balances resulting from inter-regional trade will likely be accounted for (not settled) in some form of fiat currency, which could even be the SDR.

The reason for using currency rather than gold at both the micro and macro levels in Freegold is that it is easily and cheaply reversible, because you expect temporary imbalances to be reversed in the short run. There are no transaction, transportation, storage or insurance costs, and the temporary nature of short-term imbalances reduces other well-known risks like currency risk, default and the unknown. Short term imbalances need to be accounted for, not settled. And that's what the SDR is, a unit of account that takes multiple currencies into consideration. It is for accounting, not settlement.

Physical wealth is the only means of settlement, currency is simply for accounting imbalances in the meantime. The problem today is that we perpetually accumulate trade imbalances (on all scales, from the individual to the regional) and call them savings. This exposes the entire system to the obvious risks -- currency risk, default and the unknown.

Sincerely,
FOFOA