SDRs and the Endgame for the US Dollar Reserve

Our take on this is that there is NO question that the US dollar will lose its reserve currency status, and the Treasury and the Fed are aware of this.

The game being played now on the international stage, largely behind the scenes until recently, is with regard to what will take its place and how it will be implemented.

The talking heads on US financial television are largely talking their books even today, taking the position that nothing can replace the US dollar for the next fifteen years at least (Robert Altman-Bloomberg).

Most of the anchors and house commentators are just shallow, nervous in a giggly sort of way, and astoundingly naive which may be attributed to their relative youth and lack of relevant experience in anything beyond looking good and being often wrong but never in doubt.

The US and UK are pushing for Special Drawing Rights (SDRs) from the IMF as the replacement, with very minor rebalancing. There are those who prefer something that they feel is less neo-colonial, or at least more neutral, and reflective of a changing economic reality.

Much of what is hitting the news now is political jawboning ahead of the next realignment of the SDRs in 2010 after the recent summit in Istanbul to discuss this very topic that the news people in the US are denying ever even occurred.

"The basket composition is reviewed every five years by the Executive Board to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems.

In the most recent review (in November 2005), the weights of the currencies in the SDR basket were revised based on the value of the exports of goods and services and the amount of reserves denominated in the respective currencies which were held by other members of the IMF.

These changes became effective on January 1, 2006. The next review will take place in late 2010"

The current composition of the SDR, as calculated in 2005, is:

"The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar."

"With effect from January 1, 2006, the IMF has determined that the four currencies that meet both selection criteria for inclusion in the SDR valuation basket will be assigned the following weights based on their roles in international trade and finance: U.S. dollar (44 percent), euro (34 percent), Japanese yen (11 percent), and pound sterling (11 percent)".

Here is a commentary from Max Keiser, an ex-patriate based in Paris. His analysis will seem harsh at times to American ears, more conditioned to the evening news. But this represents what a significant portion of the world now thinks, and it is worthwhile to at least listen to it.

Why would the US resist this? Because there is a huge overhang of dollars in the world, far beyond what can be sustained at current valuation if the dollar was NOT the reserve currency., artificially incenting countries to hold dollars, and to use them for some essential purchases such as oil.

The strong dollar is a huge benefit to the US financial sector and the government. It is a significant drawback to US industry and the non-military productive economy. This is why the Europeans are opposed to the Euro becoming the world's sole reserve currency. Their financial sector has not obtained a dominant influence over the government, and their predisposition to military adventurism is still tempered by their experiences with war in the 20th century. That could change, but not yet.

People talk about an artificial short in the dollar because of debt. That concept only works if the Fed does not exercise its printing press, which it said it would do, and is now doing. But the dollar overhang exists, and has become precariously unstable, and unsustainable.

Max Keiser is hearing that the target composition will be weighted to 50 percent gold, in a return to a system more in keeping with the original Bretton Woods agreement. This is most likely the position being taken by France, China and Russia. The US and UK are adamantly opposed and will fight a delaying game with 2020 as a target for a phased in approach that continues to favor the dollar.

He starts going 'off the rails' for my taste about four minutes into this interview, but it is a viewpoint that is becoming more widely held in parts of the world that are starting to matter to the US economy, blowback-wise, and Americans need to be more aware of this perhaps for practical considerations.



See Also: The Decline of the Dollar as the World's Reserve Currency

The Unreasoning Antipathy for the Bull Market in Gold Deconstructed as Cognitive Dissonance

"Foolishness is my theme, let satire be my song." George Gordon, Lord Byron

The comments in the news today following the suggestion that the US Dollar is not eternal, and that gold might be rising in price because of increased demand and changing economic climate and taste, might be humorous, if not uproariously comical, if the underlying subject was not of such potentially serious consequence to the savings of many.

For example, a major gold bullion site, that seems to be permanently bearish on gold through its house commentator, has even added a new chart to its main site that purports to show that the rising price of gold is just a dollar doppelganger, not real, and not a bull market. Given that said analyst has been bearish on gold for the last several hundreds of dollars, one has to ask, "Is he talking someone's book, or just feeling sheepish?"

But, trying to accept that these things as genuine and sincere expressions of thoughtful analysis, in the face of overwhelming evidence to the contrary, here is some speculation on why the concept that the dollar might no longer be the focus of Creation, and could be replaced by something that includes gold, proves to be so disturbing to the point of mania in some noted and otherwise presumably public figures in the face of four years of steady price increases and an unmistakable upward trend.

We do not have an issue with someone who thinks that some future outcome might diverge from what we think might happen, since it is all about probabilites. But it is odd when people choose to continually deny what IS happening, and keep rationalizing that it is not happening, cannot be happening, and is merely some illusion because it does not fit in with their firmly held belief. That denial seems a bit irrational, coming from those we suppose are ordinarily rational and otherwise grounded in reality.

Prechter, Shilling, and the Ideologically Predisposed Deflationists

Those who have decided what *should* be happening, and are not pleased that reality is not cooperating with their ideological predispostions. "I reject your reality, and substitute my own." See 'Flat Earth Society'

"An early version of cognitive dissonance theory appeared in Leon Festinger's 1956 book, When Prophecy Fails.

This book gave an inside account of belief persistence in members of a UFO doomsday cult, and documented the increased proselytization they exhibited after the leader's "end of the world" prophecy failed to come true.

The prediction of the Earth's destruction, supposedly sent by aliens to the leader of the group, became a disconfirmed expectancy that caused dissonance between the cognitions, "the world is going to end" and "the world did not end."

Although some members abandoned the group when the prophecy failed, most of the members lessened their dissonance by accepting a new belief, that the planet was spared because of the faith of the group." Wikipedia

Market Analysts and Financial Newspeople Syndrome

Sometimes people who have chosen a particular path, profession, or investment strategy will strenuously reject anything that suggests that their choice might have been incorrect, or threatens their status quo, with sometimes humourous results. Similar to 'pampered child being denied their candy and rejecting that possibility' syndrome.

"In a different type of experiment conducted by Jack Brehm, 225 female students rated a series of common appliances and were then allowed to choose one of two appliances to take home as a gift.

A second round of ratings showed that the participants increased their ratings of the item they chose, and lowered their ratings of the rejected item. This can be explained in terms of cognitive dissonance. When making a difficult decision, there are always aspects of the rejected choice that one finds appealing and these features are dissonant with choosing something else.

In other words, the cognition, "I chose X" is dissonant with the cognition, "There are some things better about Y." More recent research has found similar results in four-year-old children (Bloomberg and CNBC news anchors and commentators) and capuchin monkeys (Several prominent metals analysts and chief market strategists)." Wikipedia

But we would have to admit that at the end of the day:

"No man really becomes a fool until he stops asking questions." Charles Steinmetz

Peak Employment

The Labor Participation Rate is the total number of people employed expressed as a percentage of the total non-institutionalized working force over the age of 16.

It is a good number to watch, because it is harder to play games with it, as the government tends to do with the unemployment rate, making people disappear when their benefits expire.

Granted, it is not perfect, because it does not account for those who are underemployed, working part time or at a minimum wage job far below their aspirations and capabilities.

Nevertheless, we are seeing a flatness in the employment figures that is pronounced.



This might not necessarily be a bad thing, if the average real wage was rising sufficiently so that one might put forward the hypothesis that people are not working because they do not need to work, and their disposable income is sufficient for their needs.

But this is not the case in the USA.

A painful adjustment to free trade and globalization? Sending your working class against nations that are executing aggressive industrial policies is like sending troops marching upright in ordered ranks into heavily entrenched machine gun fire.

Most would feel better if that pain were more equally and equitably distributed. The wealthy elite often like to use a crisis to send a nation to war at times such as these, to create work and control the population. In WWI there was also a vigorous pandemic to help cull the herd as the eugenicists used to say. Good for employment, perception control, and of course profits.

And so it is, that the generals, besotted with the favors of industrialists, and the institutionalized thinking of craven staff, are fighting the last war once again, and losing badly.