A Global Milestone at the G-20 China

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Now that the G-20 has emerged as a global economic and political gathering it has evolved into a “committee to run the world.” It is also significantly worth paying attention to.

The G-20 was an ad hoc conference at its inception and has no directly supporting internal institutions. Instead it has institutionalized representatives and other organizations. It pushes forward delegates called “Sherpas” who are experts that accompany delegate representatives at the summit and develop agendas in advance to the actual meetings. This allows heads of state to arrive, sign pivotal documents and release public communications at its gatherings.

The G-20 has also shifted to the International Monetary Fund (IMF) as a “central bank of the world.”  The G-20 acts as a psudo “board of governors for the IMF. As an intergovernmental organization the IMF that can utilize its own money, execute debt issuance and issue loans. At the forefront of these actions are the special drawing rights (SDR) which exist as world money for the IMF.

The G-20 – China 2016

With the emergence of BRICS and rise of emerging markets, China can no longer be ignored. It is the second largest economy in the world, but had never fully been included with the G-20 because of its rapid ascension. Until now.

The 20 nation group that met in Hangzhou, China this past weekend is, in many rights, running the world. With China playing host, there is significant symbolism. The G-20 operates with a rotating presidency. They have 20 members and alternate annually who directs its agenda and setting.

This year, the president of the G-20 is China. The president of China, Xi Jinping, is the presiding head of state at the summit. As a nation, China puts a considerable weight on the symbolic nature behind the meeting. While the west might not place as great of emphasis on such meetings – these gatherings matter for China both domestically and abroad.  

Building from this symbolism, last November the IMF made a groundbreaking decision to include the Chinese yuan in the “basket” that determines the price of the SDR. The special drawing right, until later this month, had 4 currencies behind it. The dollar, euro, yen and pound sterling. Beginning at the close of business September 30th, there’s going to be a 5th currency in the basket. The Chinese yuan.

China has now been admitted into the most exclusive club in the world. This exclusive “club” is smaller than the G-20, the G-7 and will be a “G-5.” It also creates support for the SDR on behalf of China.

China and the SDR

With building speculation over the years, the belief existed that China wanted its currency to displace the dollar as the global reserve currency. That was never the case. It is true that China’s yuan is emerging as an important global currency. Where China now has its aim is for the SDR to replace the dollar, not the yuan. If the SDR was going to be “world money,” the yuan had to be on board. It is now.

This unfolding is totally not by coincidence. The Sherpas and people in power including the head of the IMF, Christine Lagarde and president China, Xi Jinping, U.S Secretary of the Treasury, Jack Lew have given these actions considerable thought. It is not coincidental that the yuan is being included in the SDR at the same time as China is the president and host of the G-20. This is a very carefully orchestrated event to announce that China has now arrived on the world stage. They’re no longer the the emerging member on the world scene, they are a full member. They’re now in the club.

What does all of this mean? What it could mean is inflation. While we are not going to wake up one day and the dollar is going to be dead. There is significance in these events. The dollar doesn’t die overnight. It dies in stages. It occurs in a process it has absolutely started and we’re watching them unfold. These are very significant milestones.

We’re going down a path where there’s no turning back. A path where, by the time all these institutional arrangements are put in place, you are going to wake up, look around and realize the dollar is similar to the Mexican peso. If you are going to Mexico you’re going to get some pesos. If you’re going to the United States you’re going to get some dollars.

The major mechanisms around the world, the balance sheets for the multinational corporations, the funds for major multilateral institutions, global capital markets and even the price of oil will all eventually be denominated in SDRs.

Stay tuned.

Regards,

Jim Rickards
for The Daily Reckoning

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