And how does the apocalypse manifest itself? As a Chinese financial takeover of the world: The Chinese renminbi soars; the U.S. dollar sinks, thus relinquishing its reserve-currency status; the U.S. stock market, with its assets denominated in dollars, collapses. Kick-off is this Saturday.
I’ve actually been privy to this short-and-tidy rendition of doom and gloom for some time now. A stock-trading acquaintance of mine, who I’ll call Matt (because that’s his name), is always sure to remind me of impending doom and gloom every time we meet, approximately twice weekly. How does he know doom and gloom is impending? The surfeit of gold-hoarding, run-for-the-hills financial publications that feed his biases.
Interestingly enough, though, the apocalypse arrives as more of a whimper than as a bang. The impending re-balancing of an esoteric financial instrument – special drawing rights (SDR) – has had Matt, and other fans of the apocalypse, pacing the floor at nights for the past year.
So, what’s an SDR, and how is it about to shift the world’s axis?
An SDR is really something of an Esperanto reserve asset. It was created by the International Monetary Fund (IMF) in 1969 to serve as a supplement to the U.S. dollar and gold. Initial SDRs were backed by gold and dollars. But in time, these two assets proved inadequate for supporting expanding world trade and financial flows. Gold was expunged and the euro, Japanese yen, and British pound were added. A current SDR is weighted at 41.9% dollar, 37.3% euro, 9.4% yen, and 11.3% pound.
But the cards will be reshuffled and embellished by the inclusion of a joker come the end of the week. At the stroke of midnight to enter Oct. 1, the Chinese renminbi gains a slot in the SDR family of supporting currencies. The renminbi will be granted a 10.93% weighting.
Market Collapse: Unlikely Doomsday Tale
And, that my friends, marks the beginning of the end. (See what I mean by a whimper?) At least that’s the story line put forward by my acquaintance Matt and the sundry crisis-come-hard-asset trade publications that he reads.
Including the renminbi is the first step toward the IMF’s furtive attempt to supplant the dollar as the world’s reserve currency, so we’re told. It’s all downhill from there. The new renminbi-charged SDR will assume the role the dollar currently fills on the world’s financial and commerce stages. The dollar will thus collapse and everything valued in dollars must thus collapse with it.
Scared? I didn’t think so, and neither am I. As apocalypses go, the rise of the renminbi and the fall of the dollar fails to grasp the imagination of most readers. It’s not even new, given that SDRs have been around for 47 years. The plot conjures the past three Woody Allen movies: been there, done that many times before.
To be sure, conspiracy theories are not necessarily wrong, but the facts and economic reality undermine the theory of an IMF coup d’état.
For one, the dollar will roughly maintain its current weighting, at 41.73%, in the new allocation. The euro takes the biggest hit. Its weighting falls 30.93%. The British pound is also demoted, falling to 8.09% of the weighting. Meanwhile, the yen takes a haircut, falling to 8.33%. The U.S. dollar’s stature remains intact.
Here’s another unfortunate fact for the doom-and-gloom theorists: Since the IMF announced its intentions to include the renminbi last year, the dollar has mostly appreciated against the renminbi. In fact, the dollar has appreciated against most of the world’s currency. (It has held steady against the euro and depreciated slightly against the yen.)
Just give it time, so the doomsayers warn. Including the renminbi in the SDR is the requisite catalyst for central banks and sovereign wealth funds to shift funds into the renminbi. That might be true, but we’ll need a lot of time. The market for SDRs is dwarfed by overall global reserves. There were 204.1 billion SDRs as of March this year, equal to around $285 billion, compared with some $11 trillion of worth global reserves.
And as for the new Goliath-slaying component? The renminbi constituted just 1.1% of official reserves in the latest IMF survey, compared with 63.7% for the U.S. dollar.
So, if you read about an impending collapse of U.S.-dollar denominated assets due to the rise of the renminbi or some mysterious “world currency” next month, stand firm. Tales of impending apocalypses sell, but they rarely produce desirable investing outcomes. This one is no different.