U.S. Dumps Dollars for Special Drawing Rights (SDR)
The Special Drawing Right (SDR) was created by the International Monetary Fund in 1969 to support the Bretton Woods fixed exchange rate system.
The value of the SDR was initially coupled to one U.S. dollar, which was still pegged to gold (/oz) at the time. But after the collapse of the Bretton Woods system in 1973, the value of the SDR was adjusted to reflect a basket of 16 world currencies.
Today, the SDR is currently pegged to four currencies: the U.S. dollar (44%), euro (34%), Japanese yen (11%), and the British pound (11%).
The SDR is unlike any currency you’re familiar with. SDRs are not backed by assets, nor do they represent a claim on the IMF. Rather, each member agrees to back its SDRs with the full faith and credit of its own government and to accept them in exchange for convertible currencies.
In reality, the SDR is less of a currency and more of an accounting entry. However, the SDR has similar characteristics as money, such as an interest-bearing asset, store of value, and means of settling debt. The SDR is a private currency of sorts – useable and accepted exclusively by IMF member states.
There are no SDRs in physical circulation like the dollars or euros in your pocket; they have an electronic unit of value.
So the SDR can be simply created, instantly, at the will of the IMF board – which is not bound by regulations. Therefore, there is still the threat of inflation as with any regular fiat currency. Read More
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