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The basis for this is the $1 trillion of extra funding for the IMF - in particular item 19 of the communiqué issued by the London G20:

“We have agreed to support a general SDR allocation which will inject $250bn into the world economy and increase global liquidity.”

SDRs are Special Drawing Rights of the IMF. European Central Bank Executive Board member Juergen Stark was quoted in the German business daily Handelsblatt as saying "That is pure money creation … helicopter money for the globe.”

So, what are the possibilities and the implications?

The IMF’s mandate could encompass the role of a global, helicopter version of Ben Benanke. To quote their web site, the IMF is charged with “working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.”

Although the role of the IMF’s Special Drawing Rights has drifted, they were launched in 1969, when the U.S. dollar was attached to gold, as a new international reserve asset class to assist liquidity. They were a supplement - or alternative - to the U.S $ for trade purposes.

Under the IMF constitution, the value of SDRs is fixed according to a basket of four currencies “whose exports of goods and services during a five-year period … had the largest value and … [are] freely usable currencies”. Currently, the four currencies are U.S. dollar (44% weighting), Euro (34%), Yen (11%), and Pound (11%). The weighting is determined by the level of exports and of the reserves of the currency concerned held by IMF members.

Could SDRs resume their intended role of international reserve currency and what are the implications?

Obviously, much remains to be negotiated. What will be the distribution of seats on the IMF board – currently dominated by the U.S. and Europe? What will be the basket of currencies and with what weighting? How will SDRs be released, to whom, and with what conditions? What will be the timescale?

Much room for speculation there. Indeed, the whole thing could melt away, except that, as I have previously noted here, there is a powerful group of countries behind global currency reform. In Brown’s “new world order”, the path to any currency reform will test the truth of Charles Kindlerbergers’ theory that a single hegemony (controlling power) is necessary to international economic order or the various alternative theories.

Suppose the movement for currency reform is successful. What could be the effects?

As the U.S. $ is currently used for over 80% of international trade, there will be a drop in the demand for $ for that use. (Indeed, China is already attempting to free itself from the $ in this respect by negotiating currency swap deals for bilateral trade with, e.g. Malaysia and Argentina.) Reduction in transactions demand for the U.S.$ will reduce demand for it as a store of value. Hence, there will be downward pressure on the U.S. $ and increased cost to fund U.S. borrowing.

For other currencies, the impact will depend on whether they are included in the basket of currencies and with what weighting. The Russians have proposed regional baskets of currencies to the G20. In these terms, the central SDR basket could include a number of regional baskets, each in turn encompassing various local currencies.

This looks complicated but spreads both the benefits and costs of the reserve currency role across the wide group of currencies to be included in the SDR basket. This may be welcome to all but the U.S. and, perhaps, gold bugs.

Whilst the idea of having one’s IOUs treated as money by third parties is attractive, the role of reserve currency puts upward pressure on the exchange rate by increasing demand for that currency. In economic welfare terms, this is good news – you can buy more of other nations’ stuff. For net importers, it is good news for the same reason. For net exports it is a threat to the pattern of economic development, as exports get priced out of foreign markets: as China, Japan and Germany well know. Their currency tends to be scare overseas as they are necessarily not net exporters of IOUs. The Yen “carry trade” illustrates how this can be partially overcome, but also the consequent dangers for the domestic market concerned.

In short, the major economic powers outside America would like some role, but not necessarily a starring one, in a new SDR basket.

Similarly, in moving away from an international system dominated by the U.S., no group would wish to hand over much of the power to another party. This suggests a carve up of the U.S. imperium on a “fair shares for all” basis. The U.S. $ would fall against other major currencies but without any other major realignments. Offered a “soft landing” and faced with harsher alternatives, the U.S. might have to succumb.

What about gold? Much of the demand for gold is precautionary. If the attempt to build SDRs as a major form of international liquidity succeeds, then there is less reason to hold gold. The IMF might sell some its vast gold hoard to fund the expansion of its role and central banks might see less reason to hold gold. Thus, downward pressure on the gold price is likely – even if gold is incorporated as part of the SDR basket. Gold is unlikely to be the major component because this suits none of the major players and the quantity of gold available is now insufficient substantially to fund global liquidity without a vast upward revision in its price (which, again, suits none of the major players).

On the other hand, if the attempt to build SDRs as a major form of international liquidity fails, then gold could do well.

Looking more widely, the move to a basket of currencies and possibly gold as a new international reserve currency may sound a desirable and potentially stable global scenario, if it can be achieved. There are two big negatives:

· The difficulty of getting to there from here, in terms of a gradual reduction in the U.S.$’s role and the international negotiations required to flesh out the new system.

· The new system would be governed by some kind of international hybrid with effective accountability back to national and currency board interests. Markets might still drive movements in individual currencies within the basket but the basket could he heavily subject to opaque manipulation produced by opaque negotiations. The basket would be no stronger than the international consensus that produced it.