Posted on 2021-03-11 21:28:00
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The Bretton Woods conference of 1944 set the global financial system that still prevails today. The period 1969-1971 can be regarded as the First Reset, which involved the creation of Special Drawing Rights (SDR, ticker:XDR), the devaluation of the dollar and the end of the gold standard.
For years, commentators (myself included) have discussed the next global monetary realignment, which is sometimes called The Big Reset or The Great Reset.
Now, it looks like the long-expected Great Reset is finally here.
Details vary depending on the source, but the basic idea is that the current global monetary system centered around the dollar is inherently unstable and needs to be reformed.
Part of the problem is due to a process called Triffin’s Dilemma, named after economist Robert Triffin. Triffin said that the issuer of a dominant reserve currency had to run trade deficits so that the rest of the world could have enough of the currency to buy goods from the issuer and expand world trade.
But, if you ran deficits long enough, you would eventually go broke. This was said about the dollar in the early 1960s.
In 1969, the International Monetary Fund (IMF) created the SDR, possibly to serve as a source of liquidity and alternative to the dollar.
In 1971, the dollar did devalue relative to gold and other major currencies. SDRs were issued by the IMF from 1970 to 1981. None were issued after 1981 until 2009 during the global financial crisis.
“Testing the Plumbing”
The 2009 issuance was a case of the IMF “testing the plumbing” of the system to make sure it worked properly. Because zero SDRs were issued from 1981–2009, the IMF wanted to rehearse the governance, computational, and legal processes for issuing SDRs.
The purpose was partly to alleviate liquidity concerns at the time, but it was also to make sure the system works, in case a large new issuance was needed on short notice. The 2009 experiment showed the system worked fine.
Since 2009, the IMF has proceeded in slow steps to create a platform for massive new issuances of SDRs and the creation of a deep liquid pool of SDR-denominated assets.
On January 7, 2011, the IMF issued a master plan for replacing the dollar with SDRs.
This included the creation of an SDR bond market, SDR dealers, and ancillary facilities such as repos, derivatives, settlement and clearance channels, and the entire apparatus of a liquid bond market.
A liquid bond market is critical. U.S. Treasury bonds are among the world’s most liquid securities, which makes the dollar a legitimate reserve currency.
The IMF study recommended that the SDR bond market replicate the infrastructure of the U.S. Treasury market, with hedging, financing, settlement and clearance mechanisms substantially similar to those used to support trading in Treasury securities today.