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April 2, 2009

G20 Gives Super Powers To The IMF

imf  The International Monetary Fund has received super financial powers at the G20 meetings and it seems to me that we might be on our way to a New World Financial Order.

Let me say that I am not a financial whiz by ANY stretch of the imagination.  I’m just reading between the lines and trying to explain what I see with my limited financial vocabulary.  If you’re a financial expert and see any mistakes I made I would appreciate it if you let me know.

The IMF is a group of 185 countries who contribute money to a ‘pool’ and members can borrow from the pool on a temporary basis.  All UN member countries contribute to the IMF except for Taiwan, North Korea, Cuba, Andorra, Monaco, Liechtenstein, Tuvalu, and Nauru. The IMF was set up in 1944 to help countries who get into short-term financial crises because they don’t have enough currency to pay their bills — it offers short-term loans to help those countries get through financially difficult times.

Like the financial bailouts here in America, if you have to borrow from the IMF then you give up some of your independence and power.  Once you borrow from the IMF it imposes strict conditions on countries that take out a ‘loan’ — for example, strict requirements that the borrowing countries cut their budget deficits.

Initially it was mostly European countries that turned to the IMF for help. But as you can imagine in recent years developing countries have been forced to ask for help since times are especially hard and with more countries going to the IMF for financial assistance its supply of funds is dwindling fast.

Because of this the G20 has decided that the IMF should have more money for loans.  The G20 wants the IMF to have enough money in its coffers to triple its lending and ensure that it has enough money to offer loans to needy countries. New monies for the IMF would come from member countries. So far both Japan and the EU have already committed to loan the IMF $100 billion each. 

Right now the IMF is trying something new, instead of waiting for countries to get into financial difficulties the IMF is now offering countries a line of credit to help them protect their currencies before they fall on their financial knees. Up until now countries were reluctant to ask for this kind of loan since the financial markets would get worried that they were a big risk and react negatively toward these countries. Mexico is the first country to ask for this kind of bridge loan and the stigma once associated with kind of loan seems to have vanished — another sign of the times. Most of these funds will be available to middle income countries that have relatively sound economies.

The G20 leaders also agreed on a revolutionary move that will give individual countries an additional $250 billion in available and accessible (liquid) funds. These countries would be able to create more of their own currency supported by the SDR or special drawing right.  The SDR is an international reserve currency that operates as a supplement to existing reserve assets. This new initiative would give countries essentially free money, which they could use as they wish without having to negotiate deals with the IMF, and would do much to boost confidence among poorer and developing countries.

In the past Germany has been against this kind of assistance since creating money is inflationary. But in the current deflationary climate Germany seems to be lifting their opposition.

The IMF is also developing an early warning system for financial problems and taking a larger role in looking at the problems of the financial sector as a whole, in conjunction with a new global regulator the Financial Services Board in hopes of helping to prevent future world wide crisis.

In 2012 there will be another HUGE change at the IMF – they will evaluate their voting structure which could lead to the US losing its veto power.  At the same time China (Russia’s cousin) and other up-and-coming countries would have greater influence.

It has also been decided that going forward the tradition that the World Bank and IMF must be headed by an American and a European respectively will be abandoned and will be open to any member state .  In return China will lend some of its reserves to the IMF and China will also continue to lobby that the SDR will become a real reserve currency that will ultimately replace the dollar.

The changes to the capital and the role of the IMF are historic and perhaps the most important outcome of the G20 summit and it seems to me that this is a move towards a more global system of international finance and maybe a global currency.

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