Special Drawing Rights are defined on the IMF website as "The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries. SDRs are allocated to member countries in proportion to their IMF quotas. The SDR also serves as the unit of account of the IMF and some other international organizations. Its value is based on a basket of key international currencies."
This is a very radical idea and cannot be dismissed because (a) Zhou truly does hold the fate of the Dollar and the US economy in his back pocket; (b) the IMF Board of Governors has advocated expansion of the SDR allocations since 1997, with 131 members (77.7%) officially endorsing the proposal. 85% is needed to implement recommendations from the internal SDR review committee, which convenes every 5 years (next 2010). The US controls 16.75% of the total IMF vote, which granting the Obama administration de facto veto of all IMF resolutions. Zhou's plan called for additional currencies to be added to the basket used to value SDRs; encouraged SDRs to be accepted in international trade and investment so they can become established reserve; SDR denominated securities to be introduced. Obama has indicated he opposes any and all such measures.
It is hard to imagine the Dollar, the underlying grease that makes the world work smoothly for American businesses and politicians, is actually on the verge of becoming merely "part of the basket" as opposed to the peg to which each currency is valued. China is the largest holder of US debt and has tremendous leverage in the debate over the realignment of international currency regimes.
What is to prevent Beijing from coordinating a massive pooling of US debt holders in a Chinese managed international and developing market counter-part to the Federal Reserve? The collective Treasury holdings of the central banks in the 131 dissenting IMF member-states, Ivy League university endowments and personal fortunes of Billionaire philanthropists like Warren Buffett and Bill Gates alone would be enough to leverage a new mint for global reserve notes. It would be like stock-piling gold in Fort Knox to guarantee US debt to its creditors during the Depression (or at least I think it would be).
At what could have been a watershed in American history, Obama and his half-staffed Treasury Department have gone nearly 100 days in the opposite direction of the hopeful, Reagan-esque vision that candidate Obama was so widely praised for forging during his two-year campaign. The president has been either uncertain or unsatisfied with the qualifications of applicants for many critical bureaucratic appoints under his chief deputies. These posts are critical for managing relations with foreign central banks and finance ministers.
Beijing ordered Zhou to make his aggressive proposal at a crucial moment for Tim Geithner, who had only begun to unveil their plans to combat the morgaged backed securities ailing the financial markets and clearly failed to fully ascertain the significance of Zhou's comments. Geithner was initially receptive and open to suggestions from Zhou, but his comments spurred a 4.2% decline in the Dollar across all currencies in less than 10 minutes. 15 minutes later he backtracked, and in his second press conference Obama reaffirmed the strength and long-term viability of the Dollar as the global reserve currency. Perhaps Geithner has yet to be briefed by his Under-Secretary for Foreign Affairs on the concerns of Chinese policy-makers.
**I searched for photos of Secretary Geithner with the Zhou, and found none - though I did find dozens of candid snapshots of Geithner's predecessor Hank Paulson enjoying face-time with China's top banker. Perhaps Geithner should call on Paulson to fill the void while he continues to recruit his underlings...