Will The USD Be Replaced By The SDR Or The CNY As The Next Reserve Currency?

Tyler Durden's picture

Jim O'Neill, who did not make any friends within the bear community earlier today, has written an interesting paper on the IMF's Special Drawing Rights, and whether this hypernational currency can ever become a reserve currency as is, and/or with the CNY as a constituent member. While O'Neill as usual focuses on the angle of the "next paradigm" BRICs, and how they will increasingly dominate global economics, he does pose an important question: with the dollar likely to suffer the side effects of either hyperdeflation, hyperinflation, or hyperstagflation, will the next reserve currency be a diluted melange of other flawed fiat constructs (i.e., the SDR), or the currency of the one country, which for all its flaws, still has the cleanest balance sheet backing its own fiat construct. On the other hand, the question of whether this analysis is moot to begin with, and the world will revert to the gold standard as the ongoing crisis of confidence in all paper money flares up, is not raised even once... We wonder (not really) what Jim O'Neill would have to say on that particular issue.

Here are the main bullets:

  • The issue of the ‘international reserve currency’ and the possible role of the IMF’s Special Drawing Rights (SDR) has moved from obscurity to the centre of discussions about the future.
  • Given China’s importance in terms of its share of world trade, the CNY should now be part of the SDR. The case for including it can only become more obvious as this decade progresses.
  • However, actually including the CNY as a constituent of the SDR is likely to remain a challenge without the CNY becoming more widely used internationally, including as a reserve asset.
  • The case for including other BRIC currencies in the SDR, especially the RUB, is also likely to become stronger over the coming decade.
  • Although the Dollar will probably not be as dominant in 2020 as it is today, it is far from clear that it needs to be replaced by the SDR—or by anything else—as the main reserve currency.
  • For the SDR to be attractive to private users, it will need to include the CNY and possibly other BRIC currencies. However, this alone would not guarantee that the SDR would be more attractive to private investors.

The paper is a critical follow up to anyone who found Albert Edward's earlier analysis of collapsing global FX reserves relevant.

Full paper:


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Nolsgrad's picture

but the world is better than you think.

66Sexy's picture

the globalist agenda gives too much power to a small group of interests; the SDR IMF currency will only lead to oppression. i would say they dont DESERVE such power, because of the inadequacies we're seeing now. theres a possibility the people wont legitimize another currency if its not backed by anything; that why we keep expecting gold to drop and it doesn't.. its the only international currency with any true long term relevance in global trade. they can dictate or threaten all they want; it will fall on deaf ears, just as it is now.


the forced indoctrination of a new SDR type currency will only lead to a direct commodity for commodity trade mandate..


gold for oil....



Moneygrove's picture

long fire wood !!!!!!!!! Don`t care about oil !!!!!!!!!!!!!!!

Turd Ferguson's picture

"Although the Dollar will probably not be as dominant in 2020 as it is today, it is far from clear that it needs to be replaced by the SDR—or by anything else—as the main reserve currency."


B.S. It is very clear that the $ will be replaced by some type of SDR...the creditor nations will demand it. Oh, and it will happen well before 2020. Try 2011-2012. 

But, wtf do I know? I'm not some multi-millionaire partner at Hell, err..Goldman. I'm just a caveman.

MyFriendMises's picture

Your wrong, your not a caveman.  You are a worried Grizzly hiding in a cave. 

Paladin en passant's picture

Would anyone have the slightest interest in the yuan if they didn't have two-point-something trillion dollars of other countries' fiat currencies backing their pieces of paper? 

Isn't putting the yuan in the SDR simply going the long way around to include more dollars, euros and yen?

Seems more like Jim's sucking up to China than thinking things through in the real world.  Please correct me if I'm wrong.

tmosley's picture

That's like saying people are only intrested in the Yuan because it's strong.

Having a lot of dollars and other FX reserves is an indicator of the strength of their currency, though the mechanism whereby they get it has temporarily weakened their currency.  What is causing their currency strength is their production and net exports.

pitz's picture

Why not the Canadian dollar?

silvertrain's picture

 I have put alot of thought into this and come up with the same question that tyler poses..At the end of the day its still a fiat system.. My thought is that if times were good and the ptb could duct tape this system together for a long enough period of time to work the kinks out, then it is very possible that tptb/IMF could sneak it in the backdoor and the masses wouldnt even miss an episode of the bachelor.. But if this system comes apart , and its doing so as we speak , then anything other than a hardbacked currency will fly like a lead balloon..You cannot have peoples pensions/401k/retirements go down the drain and then say were going to do it again, this one is prettier though..

  And then on to my other major problem that I see, the US has majority interest with the ONLY veto power, I do not see china allowing us to have all the power, the wont unpeg the usd now because of the chance of being screwed..So, I say maybe way off in the future, but to many kinks right now to work out..But dont worry, Im sure they have something up there sleeve..

DeeDeeTwo's picture

The USD is the only game in town, baby. This is not a "crisis" by historical standards. It's a speed bump. When Merkel invades the Czech Republic while Putin crushes Ukraine... we can call it a "crisis" by historic standards.

The Gulf Disaster is the end of Obama Tragi-Comedy. When the Republicans take over the House in early 2011... the Adults will be in charge again, Special Prosecutors will be appointed, members of this Administration and Congress and Wall Street will begin going to jail... the USD will be just fine, my friends.

And a 10% import tax on Chinese goods will take care of that Paper Tiger.

Instead of hunkering on your haunches in your basement with your gold and cold bowl of rice... make your fortune, baby, this is the opportunity of a lifetime.


Mad Max's picture

When the Republicans take over the House in early 2011... the Adults will be in charge again

Are you kidding?  When they take over (and it seems almost a sure thing), the only change will be redder power ties worn by the inmates running the asylum.  Oh and those inmates will be a shade whiter, though it won't actually mean anything in terms of their views or actions.

We're several bananas past republic status.

RockyRacoon's picture

Yeah, the Republicans will fix it all.  I can rest easier now.  Thanks.

aurum's picture

oh yeah the republicans are going be able to manage the 100 trillion + US deficit just fine and king dollar will rise again. it is mathematically impossible for us to service our obligations without significant inflation...but i am probably talking on deaf ears to a person who believes merkel invading the czech republic is far more important than the fall of the 300 + year old UK/US fiat paper ponzi scheme.

Canucklehead's picture

DeeDeeTwo is right on all accounts except the invasion scenarios.  Today, the growth scenario is typical M&A; you take over their banking system.  There is no need to physically invade a country. You want their market.  Fund them in their moment of need.  There is no need for them to thank you later.

The Ukraine is a basketcase that will either go to Russia or to the EU.  The Ukraine is not important.  Germany and the Czech Republic think very much alike and I expect that old Prussia-Austro Hungarian unity from them.  If they don't move to a DM soon, their markets will start to use the USD. It's a digital world.  The banks will convert USD into any currency you want.  Residual wealth will be held in USD.

When all is said and done, Adults will be back in charge.  The "Veterans"  of this financial war will not want it re-visited on their children or grandchildren.  It will be the USD forever.

ctiger2's picture

When the Republicans take over the House in early 2011... the Adults will be in charge again


I almost vomitted when I read this bit. You're on ZH and you still don't get it?

DoChenRollingBearing's picture

I too have thought about what, if anything, could be better.

What I should be doing is writing an essay on a grand theory that is jelling in mind (only half-baked now, if you will).  Looks to me like a grand confluence of problems (Peak Resources, shifty police states, apathetic people, chronic deficit spending, unprepared people, fraud and incivility at all levels, etc.) are going to smash the snot out us all!

Some of these ideas and perspectives I have picked up here at ZH.

RockyRacoon's picture

Your "half baked idea" couldn't be any worse than what we have now! Go for it.

Mercury's picture

I think you'll end up titling it World War III

DoChenRollingBearing's picture

Rocky, Mercury, thx for the kind words.  You may have pushed me into doing this.

RockyRacoon's picture

I have always respected your thoughtful and reasoned posts.  Go for it!

AUD's picture

I wrote a grand theory too!

It's at http://www.goldstandardinstitute.com/sections/articles/nature_of_money.html if anyone is interested.

The rest of the website is good too! I recommend spending some time studying the Real Bills Doctrine. If you don't understand the money market, you don't understand nothin.

Apostate's picture

They have to print for a long time to keep the government workers from going on jihad.

You could switch to a gold standard for some and keep printing for government workers, but you'd probably have to keep them on some kind of special price-fixing welfare system to protect the purchasing power.

We can speculate, but really, no one knows what the fuck will happen. My guess is that most government workers just go native and become mafia. Really, local governments - particularly in cities - are outgrowths of the old crime families. Rather than deal with the unions and the mob, the government pretty much absorbed them all, legalized the shakedown process, and asserted its monopoly of force.

RockyRacoon's picture

There used to be a lot of talk about the "good ole boy network".  Remember them?  Believe me, they are alive and well.  They had their bad apples, but for the most part that is what got things done -- when things needed done.  Close organizations of local (very local, like at county level) civil servants who had family members and "buddies" in other government departments.  Those networks will keep a lot of the rowdies from doing damage if TSHTF in earnest.  I've seen them in action and they'll do the job.

Apostate's picture

Sure, I know the "good ole boy network" from personal contact. I'm rather unimpressed with the lot of them.

I look at the NYPD and I see a lot of heavily-tatted dudes that are indistinguishable from the people that they randomly stop-and-frisk.

Good-ole-boys can't stop drugged-up packs of veterans, recently released inmates, striking transit union workers, the garbage men, and so on and so forth.

The fiat system, as far as I can tell, keeps the hooligans in line, predating primarily on people who don't look good on TV.

Like... from an NYC perspective, how do you think tens of thousands of Black civil servants are going to react after being fired by King Cuomo II? 

They have a network too! They'll go apeshit!

What about the Hasidic Jews who live off of a combination of insane welfare scams, nonprofit scams, protections from labor laws, etc.? These various ethnic/religious gangs have been at peace for a couple decades, but it really won't take much policy change or inflation to put them at each other's throats again. 

This is quite a bonfire of the vanities. 

Mad Max's picture

Good points, but the rest of the USA (much less the world) is not NYC.  There are many parts of the USA where the good ol' boy network isn't so bad.  Not the picture of equal opportunity, but not an organized crime system either.

Size of a community and the level of sunshine penetrating it make a major difference.  A huge community with no sunshine is probably the worst possible situation.

Anyway, NYC should get really exciting before long.

RockyRacoon's picture

I see where you are coming from, and it's a valid point.  My view is more from the hinterland, fly-over country.  Our counties have more grass than pavement.  Local sheriffs run for office from the back of a pick-up truck.  Those are the networks I was referring to.  These fellas won't put up with no city-slickers causing trouble, and they will be very tolerant of my reason why this guy is all shot up dead in my driveway.

Apostate's picture

Right. I mean, in the hinterland, there's really not much of a police force, anyway.

In the organized crime centers of the US (Washington DC, NYC, various towns in Kleptofornia), it's quite different!

Having been to many of the USA's post-apocalyptic cities, I have a pretty good idea of what may be in store. Particularly if there are insane public-private partnerships for World Bank style infrastructure projects as are being pitched to Cleveland right now.

Already, major hospitals (St. Vincent's first, plenty of other marginal hospitals on the docket) have gone kaput.

I like it because it's my stomping grounds, of course, and I'm looking forward to crashing property prices and some rapid carpet-bagger white flight. 

Ragnarok's picture

Didn't they just sentence the gangster ex-mayor of Detroit?  I mean the guy was a legitimate gangster and mayor. 

marc_hanes's picture

This raises a question I have been turnng over in my mind for a little bit. If things "melt down" or just even experience a momentary "hiccup" of a few months involving the inability to deliver necessary utilities to the citizenry (electricity, water, gas, why even cable TV), what happens to the incarcerated? How are they kept thus? In a longer term horizon, the question becomes, umm, do we let them out? This thought experiment can be extrapolated to many other groups who require special needs (innocently enough) or pose a threat to a citizenry already in chaos. Yes, there is a certain alarmist tone to the question but also a practical one. During anything even close to the breakdown of our regular day-to-day existence, what elements of fairness and ethics will get tossed aside in the name of immediate "safety"?

I feel obligated to finish my initial post with "gold bitches" since that appears to solidify the secret handshake to join the club. Whew.

Apostate's picture

Sure, they're already releasing tons of prisoners in both CA and NY in anticipation of the budget cuts and consolidations.

I've seen some truly shocking stuff, lately. On my way back from a concert back in February, for example, there was a guy (obviously recently released from prison) standing in front of the YMCA telling young women passing by on East Houston that he was going to knife them. That's in one of the hippest areas of the city. 

My neighborhood is a little crazy, but there have been unusual numbers of aggressive arrests, ridiculous numbers of car thefts, and so on. 

I mean, sure, that's nothing. When I was a kid in the early 90s, the city was supposed to be soft, and I used to go to bed to gunshots, backfires, and car alarms. That stopped in the late 90s and early oughts.

Now, it's coming back. Brutal murders in the parks. NYPD cutbacks. 

A bombshell report by the Village Voice on fraudulent crime reporting statistics (http://www.villagevoice.com/2010-05-04/news/the-nypd-tapes-inside-bed-stuy-s-81st-precinct/).

I guess they can distract people with the specter of incompetent jihadis, but the real issue is that the city is falling apart. Even with the criminal power provided by the discount window privilege, the city economy as a whole is hollowing out. Financial regulation will put the stake in the heart.

I personally like it because it means a lot of old people will be out of a job.

All you have to do is look to the 1970s to get an idea of what's coming - except you multiply it by 100x, and make it global as well. The USA barely held off a full-scale revolution during that decade. It'll take some time for it to get that bad, but - damn right - it's gonna happen.

Bailouts can kick the can down the road for a little while longer, even if it's completely brazen politically. What the bailouts do is keep critical workers (garbage men, utility workers, transit unions) from going on strike.

Eventually, it won't be enough, and there will be sturm und drang.

marc_hanes's picture

Born and bred NYer here, 43 years old, left two years ago, got priced out (even with the requisite Ivy degree). Lived in a 225 sq ft studio on 5th Street and Second Ave for 15 years before moving (rent was about to go over $1,000 and my daddy don't work for Shittybank), if the EV/LES could time warp back to 1991, I'd consider moving back. But until Snake Plisskin makes a bid for mayor I'm out. Only people left from my days growing up in the West Village and then college at CU are the bankers and lawyers (unless they moved to Summit or Scarsdale). They ask me when am I visiting, I say when you buy me a ticket! RIP, Kiev, Sophie's, King Tut's Wah Wah Hut, The World, etc. THAT was the crazy EV/LES back in the late 80's, not some young i-banker puking outside the newest gastropub. Sigh.

GoinFawr's picture

I say keep all the perp's of violent crimes locked up, and release all the minor offenders whose lives have been ruined by the completely ineffective 'War on Drugs' egregious mandatory minimum sentences policies.

In case anyone has any doubts as to when this heinous legislation was implemented, the chart below will neatly illustrate the decade responsible:


More of the same:

According to the US Justice Department, "While the number of offenders in each major offense category increased [from 1995 to 2003], the number incarcerated for a drug offense accounted for the largest percentage of the total growth (49%), followed by public-order offenders (38%)."

From http://www.drugwarfacts.org/cms/node/63


Say, when was it Dick Cheney started investing in privately run prisons, anyway? And if Halliburton is now officed in a foreign country, does that mean that this whole BP spill could be considered an act of international terrorism? I mean, if it was discovered that Halliburton's contribution to the catastrophe was negligent/deliberate...

Sorry, I know, I know. DC is like so 2008; I should get over it already, and just let it slide along with all the other dupes and rubes. I might as well be suggesting that there is still time to indict GDubyaB and his cronies.

Everbody knows, everybody agrees, but nobody dares, so everybody forgets.



Mad Max's picture

There won't be any other reserve currency.  IF the doe-lahr goes (and that's still a big if, regardless of the reasons it should go), no other fiatsco is going to replace it.  Not the euro, not the yuan, not the Canadian or Australian dollars, etc. etc., and the idea of Brazil or Russian fiatscos - are you insane?

No, IF the dollar goes, its replacement will be some hybrid of gold, valuable fungible commodities (oil and wheat, mostly), and limited use of country-specific fiatscos when the user deems that country important to their international trade.  End of story.

As for whether the dollar will go, if I knew that for sure, I wouldn't be posting on here or probably viewing ZH at all.

Cheeky Bastard's picture

You're welcome Jim O'Neil.

Slewburger's picture

GS zigs publicly...then zags.

Zé Cacetudo's picture

Request physical delivery of your share certificates.

zen0's picture

In general, alternatives to the dollar as the reserve currency would not materially improve the functioning of the system. While reserve alternatives would increase pressures on the United States to adjust, since "artificial" demand for their assets would be shared with others, incentives for the surplus countries that have thwarted adjustment would not change. The common lesson of the gold standard, the Bretton Woods system and the current hybrid system is that it is the adjustment mechanism, not the choice of reserve asset, that ultimately matters.


 The zen0 link above has this quote in it. This makes sense to me. The trials I went through to post this are Odyssian, so pay some attention.

silvertrain's picture

 Thanks for the link..I did read it and it makes alot of sense to me..

DormRoom's picture

Nixon got off the gold standard because he wanted free-reign to expand the money supply.  The plan since the 60s was to expand the money supply, and build up the military-industrial complex.  Nixon reasoned the Russian would be forced to expand their military-industrial complex, tete a tete. Eventually, as the USSR GDP became heavily lopsided towards miltiary spending, other sectors of her economy would eventually calcify, and she would collapse from within.  This was the economic war plan.  Since the USD was the world's reserve currency, the US could achieve its goal of economic war with the USSR, without harming its own economy.


Having said this, the US will never give up reserve currency status, since it has economic war plans against other nations; a prerequisite of which is reserve status.


p.s.  It's also why no modern nation will ever go back to a gold standard.  A gold standard would hamper the ability to fund massive military build-up, and pay for operations.  It's why Rome fell.  She eventually couldn't pay for her army because she didn't have enough gold reserves.  She later diluted the gold she paid her legions. Afterwards, vast legions deserted.  And the barbarians walked through the gates with minimum resistance.  It's also why the terrorists are attempting to collapse the global economy by inciting fear, uncertainty, and targetting attacks at critical financial centers.

The great depression ushered in fascism, and Lenin-Moaist-Marxism as an ideological alternative to capitalism.  Great Depression 2.0 will offer fundamental muslims a chance to  offer sharia-fascism as a competing ideological framework to capitalism for the disenfranchised, and alienated masses..  Fukiyama was wrong.  History is not @ its end; A new chapter unfolds.


Apostate's picture

Fukuyama was not only wrong about many things, but downright criminal.

I hold him single-handedly responsible for crushing the potential of biotechnology (at least temporarily) with his scare-mongering about "transhumanism."

Fuck that guy. That fuckwad single-handedly reduced general life expectancies for modern populations by at least 10 years with his inane rhetoric. 

ConfederateH's picture

Later this summer or in the fall the Fed will be forced to make a tough decision:  If they print $Trillions of money to forstall a wave of bank, City, County and State bankruptcies then they will lose the dollar's reserve currency status as countries (critically the Saudi's) refuse to accept the ever more rapidly diluted dollars in exchange for their goods.

So the choice facing the Fed will be to QE and kick the can down the road, or finally let the bankruptcies begin.  They will print, and the dollar will stop being accepted all around the world.

Sabremesh's picture

Having said this, the US will never give up reserve currency status...

That isn't really relevant. The salient issue is whether other countries decide to abandon the dollar, and since the economic hegemony of the US is now at an end, this won't take too long. The American era and the dollar will have been consigned to history by 2020.

IAmTheStig's picture

I find it ludicrous to mention the CNY or the SDRs to ever be anything meaningful.  Fuck, you can't even convert the red currency, and I'm quite certain that trying to take anything over 10 Maoist Yuan out of the country is grounds for 10-20 in a labor camp on the Mongolian border so what the hell are you talking about integrating it into international trade? 

I'm sure the Commies in the Central Committee/Politburo/whatever you wanna call the dozen or so people running a 1.25 billion+ person country are desperate to take over, er.., um,  I mean have a more meaningful role in international trade financing, but I won't believe it until all of the single moms on welfare start using their SDRs to pay for baby formula.  Everyone wants to shit on the good ol USA (calling us imperialists, bemoaning the "fat-cat bankers", and worse of all calling us capitalists) until that excrement starts hitting them in the face and then they come crying back to us wanting to buy our dollars.  Ya, so how did that diversification program to Euros turn out for ya there Communist China?