With everyone lately focused on China's foreign reserve position, analysts have forgotten that America also has an International Reserve account consisting of foreign currency positions, as well as gold reserves and equivalents. And while the total combined holdings as of the most recently reported period are a joke compared to China's $2+ trillion, the most recent number of $133.6 billion does raise red flags, particularly when one traces this number's level throughout the year.
We present a graphic representation of the US International Reserve Position over the past year:
The big question mark at the end of August is when the U.S. International Reserve Position increased by almost 50%. The reason for this: a near quintupling of S.D.R. holdings on the U.S. balance sheet in the span of one week - from August 21 to August 28.
Note the SDR position as disclosed on August 21:
And here is the comparable reserve asset balance on August 28:
The SDR balance increased by 500% practically overnight and has stayed that way ever since.
Now as many readers are aware SDRs have been the IMF's way to provide a super-reserve currency, formed in the post-Bretton Woods world. As the IMF itself discloses, the SDR value is determined based on a basket of currencies:
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. The U.S. dollar-value of the SDR is posted daily on the IMF’s website. It is calculated as the sum of specific amounts of the four currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.
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.
By purchasing $40 billion in SDRs virtually overnight, what the Fed has done is to increase the value of the entire basket pro-rata, while in the process reducing the actual value of the dollar (which is a weighted constituent of the SDR basket). This was an operation to reduce the dollar's value: pure and simple. In many ways it explains why the DXY has continued its straight one way decline since the beginning of September, when many pundits assumed the market was finally going to tank on profit taking after Labor day. By performing this dollar adverse transaction, the Fed sent a loud and clear signal what the Fed was going to do going forward vis-a-vis the i) dollar and ii) its derivative, the stock market.
And what is worse, this is not a roundabout or circuitous way of devaluing the dollar: this is head on intervention. It is one thing to print trillions of MBS and Agencies and to monetize Treasuries, where one could say Tim Geithner's claim that the U.S. is for a strong dollar, and the dollar is only weak as a function of supporting housing prices. That could potentially fly as an explanation. However, when the Fed is actively and purposefully destroying the dollar's worth via transactions such as material SDR purchases, then it truly demonstrates Geithner's statement as a bold faced lie to the American public. When will Mr. Geithner be finally taken to task for his repeated fabrications of reality and intent?
The action seems to have been a portion of a global reallocation of SDR's by the IMF which made the SDR outstandings to increase by a massive amount: "With a general SDR allocation taking effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs will increase from SDR 21.4 billion to SDR 204.1 billion (currently equivalent to about $317 billion)."
And here is the explanation for the justification of the SDR expansion:
Q. Why was the 2009 general SDR allocation necessary?
A. The general allocation of US$250 billion implemented on August 28, 2009 was the response to the call by the G-20 Heads of State and the IMF's International Monetary and Financial Committee (IMFC) at their respective meetings in April 2009.
• It is a prime example of a cooperative monetary response to the global financial crisis: by providing significant unconditional financial resources to liquidity constrained countries, it will smooth the need for adjustment and add to the scope for expansionary policies, where needed in the face of deflation risks.
• This is particularly important for emerging market and low-income countries that have been hit hard by the current global economic crisis. Over the longer term, the allocation could also reduce the need for pursuing destabilizing and costly reserve accumulation policies that could contribute to global imbalances.
And some speculation on what this action will do to the global economy:
Q. Will the SDR allocation be inflationary?
A. Not likely.
• The size of the allocation is small relative to global GDP (? of 1 percent), trade (less than 1 percent), and reserves (3 percent).
• With a global output gap projected to persist through 2014—by which point any expansionary impact of early spending of the SDR allocation should have dissipated—the allocation is unlikely to generate significant inflationary pressure.
Last but not least, the US was of course expected to bear the brunt of this reallocation, responsible for purchasing three times as much (SDR30 billion) as the second largest quota allocated country: Japan (SDR11 billion). China is far in the distance at SDR 6 billion. In essence: the monetary community increased its global liquidity position, by assuming that the U.S. is still the defacto reserve currency, and forcing it to take the majority of the devaluation hit relative to all other IMF constituents.
Well done, Ben.