I recently read an article that sounded like a conspiracy theory. It states that SDRs, or special drawing rights, an unknown international currency, are going to turn into a universal currency. Firstly, it states that when SDRs come up, the financial system is having issues. So, the upcoming approval of $650 billion in SDRs signals that we’re close to a currency reset. Therefore, we need to prepare ourselves for this currency reset.
The piece completely missed the mark. Special drawing rights aren’t some conspiracy to completely reset the financial system. SDRs are currently just a way for struggling countries to get a cash injection for their economy.
The upcoming approval of $650 billion in SDRs wasn’t some sort of sign that the world financial system was going to be overthrown. It was simply a way for developing nations to get financial assistance from the IMF. SDRs won’t be overthrowing the US dollar as a reserve asset, and they don’t mean that everyone needs to rush to crypto.
What are SDRs?
SDRs are a currency and an emergency overdraft fund for developing nations.
SDRs were originally created to serve as a reserve asset, essentially a universal currency that central banks use to settle transactions. The value of one SDR was made up of a little bit of money from several currencies: the Dollar, Yuan, Euro, Yen, and Pounds. Unlike nearly all currencies that come specifically from one or multiple countries, SDRs were essentially created to transcend all nations, making it an international currency.
This has made people speculate about the possibility of SDRs becoming a universal currency that everyone uses in their daily lives. However, most countries, institutions, and people today don’t use the currency SDR in daily life.
The Emergency Overdraft
Secondly, SDRs also serves as an emergency overdraft fund for nations. SDRs are really pieces of paper that entitle countries to exchange that piece of paper for money, in any currency. These can be converted into any currency that countries use to fund their governments.
Today, we usually use SDRs to help struggling nations get cash. Countries are allocated a certain amount of SDRs by the International Monetary Fund. They can convert the SDRs into any other currency, such as Euros, Dollars, or Yuan.
This allows countries to get the money that they desperately need to run their government.
Why were SDRs recently in the News?
SDRs were recently in the news because the IMF was about to approve $650 billion dollars worth of SDRs. This was due to the COVID-19 pandemic, which caused many countries to get lower tax revenues. The new SDRs allowed developing countries to get access to funds that they needed.
So is the world going to end?
Look, there is a concern that Stocks are incredibly overvalued. The price to earnings of stocks is significantly higher than what they were a long time ago, but the recent approval of more SDRs isn’t going to eventually cause a reset of the financial systems. Simply put, SDRs are a way for countries to get enough money to fund their government.