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IMF Make or Break Time

Politics / Global Financial System May 31, 2011 - 02:32 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleThe IMF's real goal, today, has mutated from supplying rapid aid to countries in balance of payments crisis (BOP crises) and more vague official goals for stabilizing exchange rates, aiding the growth of world trade, fighting poverty and newer elite fear themes, most recently global warming until its sudden fall from grace, after the disastrous and embarrassing Copenhagen "summit" of Dec 2009. Since the collapse of global warming as the underlying theme for generating new underlying financial assets, tied to emissions credits and carbon finance and thought able to generate at least one $ 100-billion-plus new funding vehicle for the IMF, it has shifted to its last and probably make or break role.

This is to initiate, organize and manage the end of the US dollar, euro and yen (and any other world moneys that could or might be included) in a world shift to a new single world reserve money.

To be sure this is a nice way to get rid of, or heavily dilute unpayable debt, but how can this be done without destroying the global economy through hyperinflation or deflation ?

More important is why this has to be done, and the two-word answer is sovereign debt. This especially concerns the OECD countries, from the G8 group including the US, trade surplus but national debt strangled Japan, ditto Germany, the UK, Italy and France, and almost any other OECD European country. Their debt has spiralled since end-2008, due mainly to national bailouts of their commercial or "high street" banks, major insurance and mortgage financing companies, even carmaking and airline companies at the supposed height of the crisis in 2008-09. In particular their private bank sector faces near-insolvency and the need for recurring or even "structural" cheap financing, loans, tax credits and other long-term government support. If not, their CEOs have many times warned, or threatened, they will roll down the shutters and place the key under the mat.

To be sure, simple and across-the-board nationalization of these failed private capitalist entities would be hailed as the North Korean solution, but a little closer to reality could be a Chinese communist solution, where the bank sector strictly does what it is told to. Critics of Chinese economics can compare China's foreign exchange reserves, with the debts and deficits of leading light late capitalist economies like the USA, European countries, or Japan.


Central banker economics is a unique mutant hybrid version of Austrian and Keynesian one-liner slogans, kneejerk urges and wrong turns. Like any hybrid car, its gasoline-engine is complex and underpowered, and the electric-motor's fantastic priced battery will surely run dry at the wrong moment. Translated to central banking action on bullion markets the golden rule is simple: buy gold when the gold price is rising; sell gold when the gold price is falling. The sure loser non-candidate for IMF leadership following Strauss-Kahn's exciting and sudden disappearance, 'Goldfinger' Gordon Brown, is well known for unloading about a half of UK gold reserves at the absolute bottom of the gold market, in 1999-2000.

The economics can be put this way: Goldfinger Brown sold UK gold at a price around $ 250 per troy ounce; when rather than if the Bank of England buys gold at present prices, or is loaned gold at present prices, it will be at about $ 1550 per troy ounce.

The politics and policy of central bank gold buying and selling underlines a huge difference between the two parts of this hybrid doctrine. Under today's current circumstances any central bank that inevitably in secret sells, swaps, lends or leases its gold is not doing it because it likes the idea. Gold is the one asset that rises above the tangled web of counterparty and systemic risk. If a central bank is pawning its gold, it is because the pawner is running out of choices or even has been forced to put its gold on hock, by its political overlords and bond traders.

In theory, only in theory the IMF is the central bankers' gold pawnshop but the scale of the challenge is outsized. The intensity of the sovereign debt crisis and the strange inability of political deciders to solve the crisis, or their predictable ability to intensify this crisis, has resulted in the IMF needing more resources than ever remotely conceived of in its strange 67-year history. The IMF is totally under-sized producing more than about one-half of the one-year financial bail outs for countries the size of Ireland, Greece or Portugal, Latvia, Iceland or Hungary. How can it launch a new world reserve money ?

The answer is in fact gold, not because it is possible or even credible, but because neither Austrian, Keynesian or Reagan-omics has an answer. In Thatcher economics talk, there is no alternative.

This no alternative is a mortal challenge for the old-style IMF, which we can date at the period from its foundation and first gold endowment in 1944-48, to the start of the subprime and sovereign debt crisis in 2007-2008, mutating from 2009 into a permanent First World crisis. Since at latest 2008, the IMF has had no alternative, itself, to launch ever more risky, crisis-driven reactions and responses, wrongly called "initiatives".

At the base, the problem is the size and credibility of IMF resources. Its published current gold reserves of all types (involved in swap or other operations, or freely disposable) are around 2800 tons ranking it third after the US and German in official reserves - but this has a market value in May 2011 of no more than about $ 145 billion. Present and near-term future SDR creation and allocation are to be sure subject to rapid increase and change, and almost any figure from around the equivalent of $300 bn to the region of $ 500 bn - $ 1 trillion can be used by the IMF and its supporters for fantasy scenario building. Whatever the big number however, it pales into insignificance relative to the stunning size and growth of national debts and government spending deficits in almost any OECD country.

SDRs are only useful, behind closed doors inside the IMF, for bartering against gold which after being mobilized by this horse-trade can then be sold, and the proceeds used to bail out debt-strapped borrowing countries, inevitably also imposing austerity and adjustment programs to increase social misery, privatize state assets, and make them available to predatory corporations at firesale prices. Economic stagnation and decline is the natural result, reducing tax revenues to the borrowing government, and creating an outlook no different at all from the Third World debt crisis of the 1980s and 1990s - transferred north with its political spinoff of the Flash Mob revolt, Arab spring-style.


The IMF's ability to print and allocate more Special Drawing Rights was a near-constant theme of Strauss-Kahn's "socialist flavored" leadership, but on the ground in debt-strangled countries it is real resources that are badly needed. Generating, or in IMF-talk mobilizing these resources always has a gold handle, usually well hidden in the paperwork footnotes details, far from prying eyes.

The IMF, most recently under Strauss-Kahn urged that willing governments utilize a modest portion of their existing SDR allocations inside the IMF to capitalize so-called third-party financing entities. Where or when the SDRs are not available, gold can fill its place. Strauss-Kahn the economics teacher turned politician argued for selling gold. The long-term implication of that strategy is very simple and almost described outright in footnotes to IMF publications in the public domain. A general wind-down of world central bank gold reserves - supposedly resulting in and being signalled by ever falling gold prices - would create a no alternative situation in which the forced introduction of a new single world reserve currency became inevitable.

Without real resources of any credible kind, except gold and not enough of it, the forced new money would be much worse than a farce: it would be a disaster.

This mega project needs to create some highly-credible monetary unit able to replace current world M1 money in circulation, equivalent to at least $ 50 000 billion. The alternative is compress the new M1 to fit the gold available for backing it. The no pain new money issued with the same abundance as current M1 would need relatively calculable, but totally impossible amounts of gold sales, if a gold-backed new reserve currency was seriously wanted. The conclusion is simple: this is a smokescreen and a threat to the world's few creditor countries.

This is the Catch-22 of the IMF. The strategy planning rooms of the IMF and World Bank, the US Treasury, the Fed, the ECB, Bank of Japan and other large players must have other plans, even more secret, but they will always hit the rock of securing the money.   At present and more likely, the IMF most likely has much more real and modest goals. Debts in fragile moneys like the US dollar, European euro and Japanese yen need to be heavily diluted. The world's small number of creditor and trade surplus countries have to foot the bill. The conflict lines are market in solid steel.

When this real world, real economy conflict exits from the ultra-discreet talkfests in the corridors of G8 and G20 conferences, the results could be dramatic. To be sure and in the short-term, the results will be directly measurable by gold prices and cross-currency rates. Quite soon after, if this 2011-version of the Crash of 79 continues with no agreed solution between the hyper debt axis of the US, Europe and Japan, and the creditor countries (China, other BRICs, Gulf petro-states), global trade disputes can only rekindle, as global mercantilism becomes a headline theme in a sharpened global balance of payments crisis, bringing us back to the founding rationale of the IMF: solve BOP crises. The problem is these were thought of as transient, small and manageable, none of which apply to a future and global BOP crisis which could result from the IMF continuing to play the Strauss-Kahn game.

Real resources are needed, and as Keynes did not say, you can't eat gold. His Bancor "real money" unit could resurface, in a food-energy-minerals real resource unit, managed by serious and credible central bankers - obviously not European, American or Japanese.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2011 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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