Central Banks stepped in today to help raise liquidity for the struggling Eurozone. The Central Banks involved included the U.S. Federal Reserve (of course), the European Central Bank, and the central banks of Japan, Britain, Canada and Switzerland. Hey…where’s China? It might also be noted that G20 leaders promised this month to boost the global lender’s (IMF) warchest. However, another G20 source said policymakers had made no progress since then in efforts to boost IMF resources, which at current levels may not be sufficient to overcome the crisis.
Can the IMF save Europe?
In one sense, the IMF is looked upon as the worlds’ Central Banker. When countries need funds because of a financial/monetary/natural crisis, the IMF is ready at the door to lend, as long as they get a payment in return known as interest. So this is who Europe is looking to in helping out even more than they already have with Greece by possibly loaning to other Eurozone countries and helping to stabalize the Euro (or save the Euro).
Continued from the article referenced above, Euro zone leaders have agreed belatedly on one half-measure after another but have failed to restore confidence and someanalysts now see a Dec. 9 Brussels summit as a make-or-break moment for the euro. Finance ministers agreed on Tuesday night on detailed plans to leverage the European Financial Stability Mechanism (EFSF), but could not say by how much because of rapidly worsening market conditions, prompting them to look to the IMF.
This begs the question, can the IMF save the Euro?
The short answer is, not if the Central Banks don’t step in and help fund them. The long answer reality, as explained in this article, is the IMF is only as strong as the funds that come in from other countries continue to support it during this world wide recession and that’s hard to do as the IMF balance sheet shows declining income and assets while they try to help save all these faltering nations, including most recently Iceland.
IMF Income Declining As Unrealized Losses Mount
By looking at the following chart, one can see the IMF balance sheet is not one an average “astute” investor would want to put their hard earned dollars into, if in fact it were a company one could invest in. Interest Income is down considerably and Unrealized Losses dwarf any future income potential.
The numbers are priced in Special Drawing Rights (SDR’s), a unit of account used by the IMF which presently consists of the Euro, Pound, Yen and Dollar. According to the IMF, the value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold—which, at the time, was also equivalent to one U.S. dollar. After the collapse of the Bretton Woods system in 1973, however, the SDR was redefined as a basket of the four currencies just mentioned. The U.S. Dollar Index is similar in that the dollar is priced in a basket of other currencies;
So the Euro is part of the IMF accounting unit that all countries are bailed out in, as well as the major portion of the U.S. Dollar Index. Is it no wonder the Central Banks are pulling out all stops to try to save it? On another note, ever wonder why CNBC always talks about the dollar falling or rising, but never puts the Dollar Index on their moving ticker? Why is that? It’s only the most important financial baramoter in the world. Instead they put the price of other currencies, primarily the Yen, Pound and Euro on the ticker, but never the Dollar Index. I personally look at the Dollar Index every day, along with many other things. The dollar is not just the Yen, Pound and Euro. Wake up CNBC!
SDR’s, the Dollar and Gold
But here’s where it gets interesting. The U.S. dollar used to be redeemable in gold and equivalent to one ounce of gold or 20 Federal Reserve Notes (FRNs). Today gold is around $1,740 while 20 FRN’s are still… 20 FRN’s but with one caveat…they are no longer redeemable in gold. In 1944, SDR’s used to be the equivalent of 1/35 an ounce of gold or 0.888671 grams which today is the equivalent of about $50.00. In 1971 Nixon refused to redeem any dollars for gold. In 1973 SDR’s severed its relationship with gold. The collapse of Bretton Woods was the result.
What Does the IMF Think of Gold Today?
While the IMF might have cut the SDR ties with gold, just like all Central Banks, they kept the asset on their books. Why is that? The answer is because it gives the perception that gold have value. It gives the perception that gold backs currencies, even SDR’s. Nothing could be further from the truth. Currencies are only backed by the full faith and credit of the issuing government and their Central Bank printing presses. But while the IMF may be perceived as the world’s Central Bank, they have to manage their financial affairs just like any other country. We’ve seen above what their balance sheet looks like, but does that tell the whole story of what the IMF is up to?
It might be a surprise to some that the IMF has been dumping over 400 metric tonnes of gold the past few years. Germany, the so called savior of the Euro, has also been selling gold. Isn’t this what a family does when they run out of cash to pay bills? Don’t they dig into the jewelry box and head to the pawn shop to raise cash? But that family looking to cash in valuables can’t do what Central Banks can do; print money. And they can’t create credit out of thin air either like the IMF just did by asking other countries to chip in more. So who will chip in more? The good ol USA of course. Your Congress gives the IMF billions.and will continue to do so unless you stop it. Are you happy bailing out Greece? How about
The IMF has 2,814 tonnes of gold left today.
IMF Expand Credit 10 Fold
On March 11, 2011, a ten-fold expansion of the IMF’s New Arrangements to Borrow (NAB) became effective, increasing available borrowing lines under the NAB from SDR 34 billion to SDR 367.5 billion. Haven’t we seen this before? How can more debt added to debt solve anything? Who the heck do you think will pay for that debt?
There’s nothing in the street
Looks any different to me
And the slogans are replaced, by-the-bye
And the parting on the left
Is now the parting on the right
And the beards have all grown longer overnight
I’ll tip my hat to the new constitution
Take a bow for the new revolution
Smile and grin at the change all around me
Pick up my guitar and play
Just like yesterday
Then I’ll get on my knees and pray
We don’t get fooled again
Don’t get fooled again
Meet the new boss
Same as the old boss
Won’t Get Fooled Again, The Who
Ironically, this song came out in 1971….the year Nixon separated the dollar from gold.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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