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Casino CapitalismThe Collapse of the US Economy and the Transition to Secular Democracy in the Middle East
By Susmit Kumar
iUniverse, Inc.Copyright © 2012 Dr. Susmit Kumar
All right reserved.
Since 2010, the United States has proposed limits on "sustainable" trade surpluses and deficits. The proposal has been rebuffed by the BRIC (Brazil, Russia, India, China) countries and also Germany, which currently produces the second-largest trade surplus in the world. The US proposal is nearly the same as the one proposed by the British economist John M. Keynes and his team (the Keynesian stimulus plan is named after him) during the deliberations that led to the 1944 Bretton Woods Accord.
The Americans claim that China has been manipulating its currency yuan (renminbi) by keeping it undervalued. According to Paul Krugman, the Nobel Prize winner in economics and New York Times columnist, the United States needs to impose at least a 25 percent tax on Chinese items if China does not appreciate its currency significantly. Yes, it is true that China does manipulate its currency, but, on the other hand, the United States has been doing the same since the 1980s.
Let us first explore the following issues:
(1) During economic recessions the United States goes for budget deficit. Other countries in similar distress, however, are forced by the International Monetary Fund (IMF) to balance their budgets when they approach that institution for a loan. Generally a country applies for an IMF loan when it does not have enough FOREX (FOReign EXchange Reserve) to import goods or save its currencies against the onslaught of currency traders.
(2) During economic recessions the United States reduces it interest rate. At the moment it stands at near zero in order to spur growth and reduce unemployment. On the other hand, having to swallow the bitter pills of IMF, aid recipients are required to increase their interest rates by double digits, which leads to an increase in their unemployment rates and depresses their economies further. During the 1997 East Asian economic crisis, a popular phrase was used to characterize the IMF and its policies: For the average person the actual meaning of IMF was "I'M Finished." After watching IMF at work during the crisis, Joseph E. Stiglitz, the 2001 winner of the Nobel Prize in economics, wrote in April 2000:
I was chief economist at the World Bank from 1996 until last November, during the gravest global economic crisis in a half-century. I saw how the IMF, in tandem with the US Treasury Department, responded. And I was appalled.
The IMF may not have become the bill collector of the G-7, but it clearly worked hard (though not always successfully) to make sure that the G-7 lenders got repaid.
(3) In the IMF, major decisions, including the election of its managing director, require an 85 percent super-majority. The top three countries, having the highest votes, are the United States (16.75 percent), Japan (6.24 percent), and Germany (5.81 percent).
(4) Why was the United States able to sell a trillion dollars worth of its Treasury Bonds in 2011, whereas Greece found it difficult to shore up a mere $30 billion in bonds?
(5) According to Economics 101, money should be invested where it gets the maximum return. However, the entire world, including China and Russia, deposits its money in the United States, where it gets nearly zero interest rate right now.
(6) The United States has record trade deficits, upward of $500 billion per annum during the 2000s, whereas countries like India, South Africa, and Vietnam cannot sustain even a modest trade deficit. According to Economics 101, the US dollar should have lost its value drastically, as the United States has had trade deficits since the 1980s, except for 1991 when it received a significant amount of money from allies in the 1991 Gulf War. Instead, since the 1980s the US dollar has risen sharply against all other currencies except for major economies such as Japan and Western European countries. When I arrived in the United States two decades ago, the exchange rate for the Indian rupee against the US dollar was 15. In December 2011, it was 51 rupees for one dollar—in the last twenty-two years the Indian currency has been devalued by 250 percent against the US dollar. In February 2011, Vietnam devalued its dong by 6.7 percent, the fourth time in the last fifteen months.
The root of all these complicated issues is found in the 1944 Bretton Woods Accord. At this planning meeting for the postwar era, the United States implemented its dollar as the world currency. We will see in the second section that the US economy in itself is not an exceptional economy. The exceptional thing about the American economy is that it has been able to print its currency whenever it so desires in order to fund budget and trade deficits, whereas others cannot do such a thing. However, the enormous piles of money that are accumulating are neither realistic nor sustainable.
The 1944 Bretton Woods Agreement and the United States' $14 Trillion Credit Card
During the 1930s, countries used currency devaluations to increase their exports in order to reduce balance of payment deficits. But instead it resulted in a decline in world trade. At the time, Nazi Germany had bilateral trade agreements with several countries, while the members of the British Empire formed an exclusive trading bloc, known as the "Sterling Area." These agreements caused discriminations and obstructions in world trade.
Toward the end of World War II (WWII) there were two competing plans for the future of the global economic order—Britain's Keynes plan and United States' Harry Dexter White plan.
Keynes favored a world currency, to be called bancor, and managed by a global bank and an International Clearing Union. That "neutral" world currency would be exchangeable with national currencies at fixed rates of exchange. Under Keynes's plan, both debtors and creditors would be required to change their policies. A country with a large trade deficit would pay interest on its account and devalue its currency to prevent the export of capital. On the other hand, a country with a large trade surplus would increase the value of its currency to permit the export of capital. A country with a bancor credit balance more than half the size of its overdraft facility would be required to pay interest on it. Keynes went so far as to propose the severe penalty of confiscation of surplus if at the end of the year the country's credit balance exceeded the total value of its permitted overdraft.
Under the White plan, the United States was given veto power in the workings of the IMF and the International Bank for Reconstruction and Development (IBRD, later incorporated into the present World Bank). The IMF was to be based in Washington, DC, and staffed by US economists and US Treasury officials mainly.
When the future of world trade was discussed, and the Bretton Woods conference was planned in the early 1940s, many Third World countries were still under colonial rule and had absolutely no say in those discussions. The main deliberations took place between the United States and Britain exclusively, and at Bretton Woods all other countries were invited simply for the formal signing-in ceremony. At the time of the conference the US gross domestic product (GDP) amounted to almost half of the world's GDP. The US gold reserves stood at $20 billion, almost two-thirds of the world's total of $33 billion. Because of the two world wars the European countries were deeply in debt and had transferred huge amounts of gold to the United States. They also needed money from the United States for their postwar reconstruction. Therefore the United States was able to impose its will and its plan at Bretton Woods.
Under the Bretton Woods agreement, a system of fixed exchange rates was announced using the US dollar as a reserve currency. The United States committed to convert dollars into gold at $35 an ounce. At the conference itself the IMF and the IBRD were established. In 1971, the Nixon administration unilaterally cancelled the direct convertibility of the US dollar to gold and effectively ended the Bretton Woods system of international financial exchange.
Had Germany developed long-range missiles and destroyed US industries like it destroyed the British industries during World War II, the United States might not have emerged as the postwar economic superpower. However, the United States emerged as the right country at the right time. Had the same treaty been signed in the late 1950s or later, the United States would not have had the final say on the treaty, and a global currency and even an International Clearing House as proposed by Keynes may have come into existence.
John Maynard Keynes was a brilliant economist who foresaw a global crisis due to large trade imbalances that would lead to instability in the global economy. His proposals may have been construed as if he represented a country—the United Kingdom—in decline and in huge debt, a country that would be accumulating large trade deficits for the foreseeable future. It is worth mentioning that Keynes resigned from the British Treasury, as he was against the large reparation amount imposed on Germany in the 1919 Versailles Peace Treaty after World War I. The stupendous burden thus imposed on Germany is considered to be a main cause for the rise of Hitler.
Right now the Americans find themselves in the same situation as the Europeans were in then (i.e., in overpowering debt). The country needs funding for its economy to recover from the current economic crisis. Hence, if the United States and the Euro countries remain in economic crises, and there is another Bretton Woods conference, countries like China may impose their will, and the United States may be at the receiving end of the stick due to it being in massive debt.
The United States imports goods and services from other countries by simply giving them pieces of paper (i.e., newly issued dollars). In return, the manufacturing countries deposit the same pieces of paper in the United States. It is nothing but a Ponzi scheme run by the United States. According to economist Allan H. Meltzer at Carnegie Mellon University:
We [United States] get cheap goods in exchange for pieces of paper, which we can print at a great rate.
However, the mountain of US bonds that foreigners are accumulating continue to lead the country into deeper debt in order for it to fund its import binge. According to William R. Cline, a scholar at the Institute for International Economics:
Sooner or later, the rest of the world will decide that the US is no longer a safe bet for lending more money.
According to Lou Crandall, chief economist at Wrightson ICAP, which analyzes Treasury financing trends:
While the current market for [US] Treasuries is booming, it's unclear whether demand for debt can be sustained. There's a time bomb somewhere, but we don't know exactly where on the calendar it's planted.
Due to the exponential rise in money supply, the US Federal Reserve Bank decided in March 2006 to cease publication of the amount of its entire supply of money (M3). For their analysis, economists define three different forms of money supply in an economy—M1, M2, and M3.
(1) M1: All physical money, such as coins and currency, demand deposits, which are checking accounts, and Negotiable Order of Withdrawal (NOW) Accounts. It is a very liquid measure of the money supply (i.e., money that can quickly be converted to currency).
(2) M2: It is M1 plus all time-related deposits, savings deposits, and noninstitutional money-market funds. It is a measure of amount of money in circulation. It is used by economists in their forecast of inflation.
(3) M3: It is M2 plus all large time deposits, institutional money-market funds, short-term repurchase agreements, and other larger liquid assets. It is a measure of the entire supply of money within an economy.
Figure 1.1 shows the US M3 from 1960 to 2006 (January data for each other). Since the Reagan years, it has been increasing exponentially. During 1980–96, the annual increase in M3 varied between $200 billion and $300 billion a year, and then in the early years of the Bush administration in the 2000s, it increased to $500 billion to $850 billion a year.
In early 2011, the daily amount of global currency trading was about $4 trillion—85 percent of it was in US dollars, down from the high of 90 percent in 2001. At the same time, the daily trading of US Treasury Bonds was about $580 billion; whereas British gilts and German bonds were only $34 billion and $28 billion, respectively. Had there been a global currency, all these transactions would have happened in the "bancor," and all the countries would have kept their FOREX in that global currency as well, and not in US dollars. Also, the United States would have been in the same boat as countries such as Thailand, Indonesia, Mexico, India, and Vietnam (i.e., the United States would not have been able to fund its twin deficits by just printing its own currency).
Let us have a look at the importance of the US dollar in global trade. Most of the global trade is conducted in US dollars. During recent years India has been purchasing crude oil worth $12 billion a year from Iran. Prior to the US economic sanctions against Iran, India paid Iran in dollars for its crude oil imports via a US bank. When the sanctions were enforced, banks trading in dollars started refusing to be the medium of transfer of money from India to Iran to avoid punishment for acting against the sanctions. Finally, in early 2012, after several months of backlog in payment, Iran had to accept a major portion of the payment in India's rupee for its petrol export and invest the amount in India, as no other country will accept Indian rupee because of its frequent devaluations.
If a country such as India does not have enough US dollars to pay for its imports, then it has to devalue its currency to increase its exports. For instance, the manufacturing cost of a Ralph Loren brand of shirt may be 100 Indian rupees (i.e., $2 at the present exchange rate of $1 to 50 rupees) in India, whereas in Bangladesh the manufacturing cost of the same item could be $1.50 measured in Bangladesh's currency. If India devalues its currency by 100 percent (i.e., the exchange rate now becomes $1 to 100 rupees), then the manufacturing cost of the same cloth would be reduced to $1 in India. India's share of exports would increase at the expense of Bangladesh (it may even result in the shutdown of Bangladesh's cloth industry), and India would earn more dollars. On the downside, India's imports would become costlier. Say, before such a devaluation, petrol costs 200 rupees ($4) a gallon at the local pump. After the devaluation it would cost 400 rupees a gallon (i.e., the same $4 a gallon). India imports 70 percent of its petrol; therefore, the petrol price is determined by the import price. Such doubling of the price of petrol would increase the cost of transportation, leading to an increase in consumer goods prices. Devaluation of every one rupee (against the dollar) impacts the cost of diesel, gas, and petrol by 80 billion rupees ($1.7 billion) per year. In January 2012, state-owned oil companies in India were losing 435 crore rupees ($100 million) each day, as they are forced to sell diesel, domestic LPG, and kerosene much below the cost to keep inflation in check. Apart from this, the real estate and other businesses would also be devalued by half in dollar terms, turning them into takeover targets of foreign investors. A sharp devaluation or frequent devaluations result in flight of capital. During the 1997 East Asian crisis and the 1998 Russian currency crisis, the wealthy people of those countries converted their local money into dollars and exported it, causing the crisis to deepen further. The United States, however, just prints its currency and gives it to all its trading partners as payment for its imports.
Had there been a global currency, the US economy would have collapsed in the 1980s; Reaganomics would have died in its infancy. Reaganomics was paid for by Japan (the main takers of US dollars at the time) during the 1980s and into the early 1990s, and since then by China primarily.
Therefore, we may conclude that capitalism was never successful in the United States. For the last thirty years the US economy has been thriving due to its manipulation of its currency and the global trade.
At present the situation is changing fast. In 2011 the BRIC countries signed an agreement to grant loans to each other in their own national currencies and not in US dollars. The BRIC deal has far-reaching geopolitical importance, as it will undermine the status of the dollar as a reserve currency. Russia and China presently trade oil in rubles. China has replaced the United States as the main trading partner of several countries in Africa, Asia, and Latin America, and China is now requesting them to trade in their own currencies or in yuan rather than in the US dollar. Firms in Russia, Vietnam, and Thailand have already started trading in Chinese currency instead of in the American currency.
Excerpted from Casino Capitalism by Susmit Kumar Copyright © 2012 by Dr. Susmit Kumar. Excerpted by permission of iUniverse, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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