International Monetary Fund headquarters in Washington, D.C., in 2018. (Yuri Gripas/Reuters) But will the countries it purportedly seeks to help?
As last week’s meeting of G-20 finance ministers in Venice, Italy, wrapped up, there was one big winner: the International Monetary Fund (IMF). Under the guise of assisting countries in their efforts to finance COVID-relief efforts, the IMF will issue $650 billion in special drawing rights (SDRs). That’s a whopping 120 percent increase in the stock of outstanding SDRs. These will be distributed to the IMF’s 190 member countries in proportion to their quotas.
SDRs are a reserve asset — a kind of “paper gold,” to use a self-contradictory description — created out of thin air by the IMF. They were first issued in 1969 when experts at the IMF feared that there would be a shortage of international reserves and a liquidity squeeze that would result in a worldwide deflation. As is often the case, though, the experts were wrong. Since 1969, there has been an explosion in world reserves via the accumulation of U.S. dollars by foreign countries. Contrary to the experts’ expectations, SDRs have proven to be unimportant in that respect.
But that hasn’t stopped the IMF bureaucrats from trying to drum up ways to make SDRs “useful,” so that the fund can produce more of them and expand its scope and scale of operations. Never one to let a crisis go to waste, the IMF has used the COVID pandemic to strike gold.
Just how do the SDRs work? They are a basket of five currencies — China’s renminbi, the U.S. dollar, the euro, the yen, and the British pound — that are used as a unit of account by the IMF. In addition, SDRs are interest-bearing assets that can be exchanged for cash, with the IMF facilitating SDR-for-cash swaps among member countries. So, holders of SDRs can potentially transform them into cash if they find partners who are willing to engage in exchange.
The importance of the $650 billion “gift” of free money to the IMF’s member countries that was blessed
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