FED Increases SDR Holdings

It appears the FED has began to accumulate SDR's.  As of September 23 , they were showing $5.2 billon of SDRs, while only a week earlier  they had just $2.2 billion, according to the H4.1 statistical release.  This leads us to the IMF who announced recently:

General allocations of SDRs. General allocations have to be based on a long-term global need to supplement existing reserve assets. Decisions to allocate SDRs have been made three times. The first allocation was for a total amount of SDR 9.3 billion, distributed in 1970-72 in yearly installments. The second allocation, for SDR 12.1 billion, was distributed in 1979–81 in yearly installments.

The third general allocation was approved on August 7, 2009 for an amount of SDR 161.2 billion and will take place on August 28, 2009. The allocation would mean a simultaneous increase in eligible members’ SDR holdings and in their cumulative SDR allocation by about 74.13 percent of their quota.

    Special allocations of SDRs. A proposal for a special one- time allocation of SDRs was approved by the IMF’s Board of Governors in September 1997 through the proposed Fourth Amendment of the Articles of Agreement. Its intent is to enable all members of the IMF to participate in the SDR system on an equitable basis and correct for the fact that countries that joined the Fund after 1981—more than one-fifth of the current IMF membership—have never received an SDR allocation. This allocation would increase members' cumulative SDR allocations by SDR 21.5 billion using a common benchmark ratio as described in the amendment.

The Fourth Amendment became effective for all members on August 10, 2009 when the Fund certified that at least three-fifths of the IMF membership (112 members) with 85 percent of the total voting power accepted it. On August 5, 2009, the United States joined 133 other members in supporting the Amendment. The special allocation will be implemented on September 9, 2009.

How much did the US get of the allocations?  Of the General allocation the US received 27.54 in SDR and an additional 2.877 bilion in the special issue, for a total of 20.416 billion.  You can find that the exchange of 1 SDR is equal to 1.57727 US dollars. 

So what does this mean?  One thing is for sure, the IMF has increased its role and power.

Looking at the numbers, the new "General allocation" is very significant giving the size,  an increase in the SDR "quota" of 74.13%.

If we look at the Treasury website and the US Reserve position and Exchange Stabilization Fund (ESF) section, the August 21 and August 28 statements show a significant change in SDR holdings.  Further, while the IMF reserve position shows no significant change. 
From the Treasury website:

U.S. International Reserve Position 

November 14, 2008

The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S.reserve assets totaled $70,408 million as of the end of that week

(2) IMF reserve position 2	4,398
(3) SDRs 2	8,930

August 21, 2009

The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S.reserve assets totaled $83,585 million as of the end of that week

2) IMF reserve position 2	12,665
(3) SDRs 2	9,515

As of August 28, 2009

The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S.reserve assets totaled $127,018 million as of the end of that week

(2) IMF reserve position 2	12,656
(3) SDRs 2	52,589

September 25, 2009

The Treasury Department today released U.S. reserve assets data for the latest week. As indicated in this table, U.S.reserve assets totaled $133,969 million as of the end of that week

(2) IMF reserve position 2	12,812
(3) SDRs 2	57,792

This is nothing groundbreaking to those of us who pay attention but certainly is not something the US government advertises.  

I interpret this as follows.  

Think of a inverted (upside down) pyramid such as fractional reserve banking and the pyramid of debt.  An upside down pyramid seems like a pretty unstable structure and it is.  The tip of the pyramid (normally the top), the bottom in our fractional banking system, has to increase leverage and allow the factors above it do the same to allow the top heavy pyramid continue to grow upward and wider at the top.  Now a physical structure that continues to decrease its size/mass at the bottom and increase it towards the top becomes less stable as a result of higher center of gravity.   Although gravity is no factor in the inverted debt structure, the idea that it takes less effort or force to cause a fall is what needs to be remembered.  Not only does it take less to cause more damage, there are an increased number of factors that can be responsible for causing the damage. 

Ever play Jenga?  Although not a pyramid, the concept is the same.  You always have the same amount of blocks (call this our capital) but the tower gets higher and less stable as the game goes on.  It also takes less and less to cause a collapse, even breathing too hard may knock your Jenga tower over at a certain point.  Many believe that printing money can bring wealth, but without an increased capital base, like the block in Jenga, it just steals from the bottom (savings) and stacks it on top.  

I think you get the picture.  A taller tower is an illusion of something good if one blindly holds the assumption that height is what makes a tower good and stable.  The same can be said about the value of ones home or the stock market if one blindly looks only at them nominally.  But this neglects one thing, that the bottom must be built up first or else there can be no stable growth, only illusions. 

This will not work to stabilize the world's economies, if such is the intention of an international monetary authority.  Now they can not only take savings of individuals but also use the accounts of entire countries.  If a country saves too much the IMF can use inflation to steal and give where it feels the need is.  This is just adding a layer of leverage and a lender of last resort to the lenders of last resort.  

More leverage, more debt, more paper money, larger swings and crisis,  more redistribution of wealth all to be done with less to distribute.  I know this is hard for many to grasp, but printing money does not create anything other than more printed money and instability.  The IMF will not stabilize the economy.  In fact, they will accomplish just the opposite.