Modern Money Operations  

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The IMF has been making a lot of noise recently, but their biggest move almost managed to slip

through completely unnoticed.

The Executive Board of the International Monetary Fund (IMF) today approved a ten-fold expansion of the Fund's New Arrangements to Borrow (NAB, and transfer the Fund's premier standing credit arrangement into a more flexible and effective tool of crisis management.

The NAB will be increased by SDR 333.5 billion (about US$500 billion) to Special Drawing Rights (SDRs) 367.5 billion (about US$550 billion), representing a major increase in the resources available for the Fund's lending to its members.  The U.S. is a major member.

This IMF program didn't even exist until a year ago, when the IMF began issuing SDRs

for the first time since the 1970's. The IMF has only sold SDRs in times of global financial crisis.

It makes a person wonder "Why now?" Why is the IMF suddenly tripling its lending facilities? 

What do they know that we don't?

Additionally, let's look at the announcements of the past few weeks.

 The IMF has been busy issuing warnings over the past couple weeks. If this massive expansion of lending resources is a direct reaction to their recent statements, then we are looking at a severe financial shock in the near future.

Two weeks ago the monetary fund's chief, Dominique Strauss-Kahn, said that Europe needed a "Fire Brigade" to deal with any potential banking crisis.

"What I think is needed is a European Resolution Authority, armed with the mandate and the tools to deal cost-effectively with failing cross-border banks," the monetary fund's chief, Dominique Strauss-Kahn, said in the text of a speech delivered to a conference on banking supervision in Brussels.

The weakness of the European banking sector is not a secret. German banks are unable to lend. High unemployment in Spain is threatening their banking system. Sweden's banks were overextended in the Baltics. Britain's banks came within just three hours of total collapse. Ireland's banks require another round of bailouts. Austrian banks are overexposed to eastern Europe. 

The list goes on and on.

In fact, Europe's financial system weakness is so well-known that American fund managers consider Europe to be a 'No-Go Zone'.

Of course Greece is getting the lion's share of the blame for this condition. The on-again off-again bailout from the

EU/IMF has been the gossip of the markets for months. The term PIIGS even has its own wikipedia page.

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"Current fiscal policy is unsustainable in every country (in its study). Drastic improvements in the structural primary balance will be necessary to prevent debt ratios from exploding."

...Historical data shows that once public debts near 100pc of GDP they act as a ball and chain on wealth creation.

If countries do not retrench quickly, they will create a market fear of "monetization" that becomes self-fulfilling. "Monetary policy may ultimately become impotent to control inflation, regardless of the fighting credentials of the central bank" it said.

Which brings us back to the IMF's new lending capabilities. Debtor nations being forced to monetize en mass because they can no longer support their spending habits causes price inflation, which hurts almost everyone. But it hurts the people who hold that nation's debt the most.

That's where the SDR comes in. They simply swap out their dollar-based debt for SDRs.
It should be noted that SDR is merely a ledger entry. It's a composite of major reserve currencies, rather than a new currency by itself, but it does help diversify.

The reason for the IMF rolling this out now might be two-fold: 1) an approaching financial crisis that the IMF needs to build up its reserves to prepare for, and b) the demands of Asian creditors to diversify their holdings in order to help avoid the impact of that coming financial crisis.

When you look at this chart above, and see the projections of debt/GDP ratios of 200%, 300%, and 400% by 2040, remember the quote above: "Historical data shows that once public debts near 100% of GDP they act as a ball and chain on wealth creation."

So if 100% public debt to GDP is a ball and chain, then what do you think 300% debt/GDP does to an economy and its ability to pay its debts?