Dangers Ahead for the US as IMF Plots Dollar Alternative

On Thursday, CNN Money confirmed that the IMF is in fact determined to seek an instrument to replace the dollar as the world's reserve currency. Sources say that the IMF prepared a 30 page report, much like its usual annual report, giving strong support for SDRs to be used as the world's reserve instrument.

Special Drawing Rights (SDR) was created by the IMF in 1969 and is based on a weighted basket of various currencies. The collapse of the Bretton Woods system raised a red flag in the international funds market, supporting the need of a more diversified system. Today, SDR is the typical IMF lending product to countries. It's a less volatile alternative weighed heavily by four main currencies: Euro, Yen, Pound Sterling, and US Dollar.

The goal is to diversify the world currency system. The IMF wants to reduce its dependency on US Treasuries by using SDR-denominated bonds. Pricing gold and oil in SDR terms instead of the US Dollar is expected to decrease volatility. Analysts say IMF nations should agree to create $2 trillion in SDRs over the next five years. The actual structure of reserve type SDRs will be difficult to craft and will take time, effort, and high costs for central bankers and global trade participants to adjust. And for the US, this will place us in terrible shape as the realities of years of economic folly at international will come to light.

As the chart in the right picture displays, the purchasing power of the US Dollar declined 94% in the 76 years of child-like economic discipline from 1933-2009. Under the Bretton Woods system, countries had to back their currency by gold reserves (the gold standard). This ensured stability and actual trust during the exchange of money between governments. However, around the 1930's following the US Great Depression, the Federal Reserve decided to exit the gold standard to stimulate growth. Being a reserve currency strengthened our reason for doing so - borrowing more money by issuing US Treasuries increased global circulation of US Dollars. Running deficits allowed the US government to increase global power, creating this image of structural strength as the world's reserve currency. Since then, the gold standard was abolished, and the US rapidly increased spending in defense, social entitlements, and foreign policy in terms of aid - all funded through debt. However, economists cite the Triffin Dilemma - the imbalance in the current account of the balance of payments; the fundamental conflicts of interest between short-term domestic and long-term international economic objectives.

The US was used as a pawn by the international community. Within the next decade, the US will struggle to return to fiscal sanity as we try to correct our debt burdens. SDR is a clever instrument that will leave the US in serious pain. The IMF is in the business of forecasting economic declines, and it secretly knows that the US is on an unsustainable path as we maintain the reserve currency only to continue domestic hardships. As the demand for Treasuries decrease, how will we fund the operations that are we hold dear to our culture? The spending spree became a footprint of US norms after the gold standard - we always borrowed our way out. The spirit of our independence from British rule was completely forgotten. Washington warned us about meddling in international affairs, and the spirit of American ingenuity was that of structured growth. We borrowed from the British to fund the industrial revolution, but payed it back in full - an actual investment with ROI.

Meanwhile, like the IMF, China is diversifying its currency holdings. The world will soon depend on China to consume and assemble; and for the US, our debt will increase China's presence on our soil as they seek leverage to gain power.