Solving The Problem Of The Dropping Dollar.

The Financial Times has an interesting article on the decline of the U.S. Dollar and how by creating a substitution account at the IMF, we can stave off the precipitous drop in value that some people think is coming…

The world economy faces an acute policy dilemma that, if mishandled, could bring on the mother of all monetary crises. Many dollar holders, including central banks and sovereign wealth funds as well as private investors, clearly want to diversify into other currencies. Since foreign dollar holdings total at least $20,000bn, even a modest realisation of these desires could produce a free fall of the US currency and huge disruptions to markets and the world economy.

And how could we stop the free fall?

There is only one solution to this dilemma that would satisfy all parties: creation of a substitution account at the International Monetary Fund through which unwanted dollars could be converted into special drawing rights, the international money created initially by the fund in 1969 and of which $34bn-worth now exists…Instead of converting dollars into other currencies through the market, depressing the former and strengthening the latter, official holders could deposit their unwanted holdings in a special account at the IMF. They would be credited with a like amount of SDR (or SDR-denominated certificates), which they could use to finance future balance-of-payment deficits and other legitimate needs, redeem at the account itself or transfer to other participants.

To read the entire article you can check out Cryptogon, as Financial Times requires logging in to read the entire thing. I think my favorite part of the article on Cryptogon is the first comment:

“”¦unwanted dollars could be converted into special drawing rights”¦” – Is this just before unwanted dollars are converted to heat?

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