The G-20's Funny Money

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The IMF has a plan to create cash and pass it all over the world.Article
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If the G-20 leaders meeting in London this week have one goal, it is to find a way to reflate the global economy with the least political cost. As bad luck would have it, the International Monetary Fund is standing by to help.

A hint of what's in store came from Japanese Prime Minister Taro Aso earlier this week when he said that he will propose an increase in "special drawing rights," or SDRs, at the IMF. If the term "SDR" sounds vaguely familiar, perhaps that's because it was the subject of a short-lived proposal last week from the head of the People's Bank of China to create a new global reserve currency that could replace the U.S. dollar. Treasury Secretary Tim Geithner may have been caught off guard when he said that he would entertain the idea. When his comment sent the dollar plummeting, Mr. Geithner quickly backtracked.

But Mr. Aso's reference to SDRs is something altogether different. He is proposing a massive expansion in foreign aid, which we will explain below. What is important to understand is that the plan means hundreds of billions of dollars in handouts going to emerging market countries with no strings attached: All governments qualify, including those that lock political dissidents in dungeons and steal from their own people. Treasury is widely believed to support the SDR expansion, despite the fact that it will increase, yet again, costs for American taxpayers and the debt burden of future generations and will reward dictators the world over.




SDRs are nothing more than a fancy term for allocated credits divvied out by the IMF to member countries. The SDR pool at the fund traces its roots back to the gold standard when it was used as a liquidity tool for balance-of-payments shortfalls. These "international reserves" would continually circulate from deficit to surplus countries.

Today, under fiat currencies, SDRs are like bits of paper printed by IMF officials in the basement. They have no value but can be exchanged for subsidized loans to nonreserve currency countries. As the fund explains, "The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members." The current exchange rate per SDR is about $1.50.

When a country decides it wants to spend an SDR, it alerts the fund, which then takes the bits of paper it created to the country that has the real money and exchanges them. For example, if Bananalandia wants dollars, its SDR account is debited, and America's SDR account is credited. The U.S. then issues debt to raise the dollars to give to Bananalandia. The rate at which countries borrow is a weighted average of the lowest rates in the dollar, euro, yen and pound sterling. In practice, the "loans" are almost never retired.

Since 1970, the Fund has allocated 21.4 billion SDRs (almost $32 billion at the current dollar rate). But in 1997 the IMF board passed a resolution to double the number of SDRs. In 12 years it has failed to get the 85% of total votes at the Fund to approve that resolution.

The reason was easy to understand: The U.S. has 16.8% of the votes and the cost to U.S. taxpayers of SDRs is already substantial. In a 2004 paper for Congress's Joint Economic Committee, Carnegie Mellon economist Adam Lerrick explained that SDRs cost U.S. taxpayers $330 million per year. With the U.S. "contribution" to the 1997 resolution total U.S. exposure would be about $12 billion. Mr. Lerrick estimated that the total cost of this proposed expansion to U.S. taxpayers could reach $750 million annually. With this in mind and given the lack of conditionality for what amounts to foreign aid, Congress refused to approve the IMF proposal.

Mr. Aso of Japan didn't specify amounts he will endorse in London. But Ted Truman, a former assistant secretary of the Treasury under Bill Clinton who is now advising Mr. Geithner, is calling for "an immediate, one-time allocation of $250 billion" in SDRs. He says his goal is to put into action the "many well-intentioned pledges to adopt expansionary policies, avoid protectionism, stabilize and reform the financial system, mobilize the IMF and multilateral development banks to help the weakest countries, and combat poverty" that will come out of the London meeting. Wow, free money can certainly do magical things.

As for getting this through Congress, Mr. Truman adds that the Treasury Secretary "can vote for an SDR allocation of up to $250 billion, or somewhat larger, as long as he consults with key members of the U.S. Congress 90 days before he casts his vote. Thus, the actual allocation could occur by mid-summer, much sooner than most other crisis-mitigation measures would begin to take effect." We're told by others that this is, at best, an "unusual interpretation" of U.S. law.

Since IMF financing is "off-budget," meaning that it doesn't show up as an annual U.S. expenditure, all this is an off-the-books future liability. But no one should mistake this as charity for the deserving poor. As we wrote in an editorial in 2004, a doubling of SDR credits would make Iran eligible for a total of $465 million, Syria $90 million, Robert Mugabe's Zimbabwe $115 million, Sudan $100 million, Venezuela $840 million and Burma $80 million.

If Americans decide they want to give more to the neediest, there are honest ways to do it. But to simply blanket the world with conjured dollars and ask already-stretched American taxpayers to pay for it is bad economic policy and even worse governance.



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