‘The IMF has now been drawn into the US Cold War orbit.’
So said economist and political analyst Michael Hudson this week.
The International Monetary Fund (IMF) just threw out 50 years of precedent to prop up the ailing Ukraine economy and do a dirty deal on behalf of Washington.
It’s going to further inflame tensions between the US and Russia.
Russian President Vladimir Putin says he will go to court over it.
Today’s Daily Reckoning will explain why…
The real agenda of the IMF is not what you think
You might think the IMF is a relatively benign force in the world.
And you would certainly get that impression if you happened to go their website.
You might see this image, for example, in the section ‘About the IMF’…
Aw, shucks, it’s IMF President Christine Largarde with some happy kids learning things.
Such a nice image…
The IMF likes to pretend it spends a lot of time helping developing countries.
Here’s the real deal according to Strategic Investor editor Jim Rickards: the IMF has always been the finance arm of the ‘Washington Consensus’ agenda of the US.
That includes its subordinate allies in Europe, and British Commonwealth nations such as Australia, Canada and New Zealand.
In the Eurozone crisis, the main job of the IMF was to prop up the euro and prevent any of the member countries defaulting.
So what’s it done now?
The Financial Times reported on 10 December: ‘The IMF’s board on Tuesday voted to change the fund’s longstanding policy that it could not disburse rescue funds to any country that defaults on another IMF member.’
OK, so what?
This is important because Ukraine owes Russia US$3 billion. The due date is December 20. Russian lent the money to the previous Ukrainian government in 2013.
Most likely, Ukraine won’t pay. The Ukrainian government is basically bankrupt.
Under the previous IMF rules, defaulting on the loan to Russia would disqualify Ukraine from further IMF assistance.
This is the policy framework the IMF has used for half a century.
The Ukrainian currency and economy are in tatters. With no IMF loans, the place would probably collapse. Under the old rules, that means Russia could have put pressure on Ukraine to pay up or face that outcome.
But the US/IMF don’t mind if Russia gets stiffed. So they just changed the rules. As far as Ukraine is concerned, the US/IMF have let it off the hook.
It if it doesn’t pay, there’ll be no adverse consequences.
Consider the hypocrisy of this position in contrast to Greece. The IMF refused to lend the Greek government money unless strict criteria were met.
But I guess Greece isn’t as strategically close to Russia as some other countries…
That aside, Michael Hudson makes a further point. The outcome is bigger than that.
The world just split in two.
BRICs versus NATO
According to Hudson, the IMF has announced its new policy. He puts it like this:
‘We only enforce debts owed in US dollars to US allies.’This means that what was simmering as a Cold War against Russia has now turned into a full-blown division of the world into the Dollar Bloc (with its satellite Euro and other pro-US currencies) and the BRICS or other countries not in the US financial and military orbit.
The US will do everything it can to preserve the dollarised global financial system. This is the system that the French originally exposed when they highlighted the US dollar ‘exorbitant privilege’ back in the 1960s.
However, China is now in a position to try and bring the US dollar’s influence down. In 2016 leadership of the G20 nations passes to China.
According to Bloomberg on 7 December, China is setting up a ‘working group’ to strengthen the role of the IMF’s currency unit (the Special Drawing Right) which is set to include China’s yuan next year.
And further, ‘China also wants a discussion around whether some commodities should be priced in the IMF’s reserve currency, known as Special Drawing Right or SDR, according to a European official involved in the G-20 talks.’
Where this leads to is anyone’s guess. But it’s one reason why, over at Cycles, Trends and Forecasts, we keep saying to strap yourself in for a wild ride over the next 10 years.
The US dollar underpins the entire global financial system. That’s not going to change without some major upheaval.
Financial markets are on the same roller coaster and you can’t get off even if you wanted to.
If you want the best way to navigate the volatility, go here.
Associate Editor, Cycles, Trends and Forecasts
Ed Note: This article originally appeared in Money Morning.