Global Monetary Shenangians

In today’ hyper-charged  world where different centres of power are emerging  nuclear arsenal has become frightening mantelpiece . It involves more optics and less operational value. Financial war has become “Hyper-strategic” weapon, as it can easily be masked and juggled with. Government itself doesn’t generate any money. It doesn’t have any of its own money, It prints money, get it by Tax collection, borrow from local private banks or from abroad.

                In Corrupt nations elite echelons of society conduct like lechers not leaders, as parasites on host body of the community more like the  “rent seekers”. They like to stash wealth by non productive  means. This is how post modern finance works.

            On August 15, 1971, President Richard Nixon banned dollars to gold conversion and introduced the new economic policy. Dollar crisis spreads through equity and commodity market . When dollar collapses, dollar denominated markets also collapse, Panic spreads quickly throughout the world. Deflation is closely correlated and  normally accompanies deflation. There is tug of war between inflation and deflation and Dollar serves as a rope to bear the stress.

            Printing dollar out of thin air  in US means, inflation in China, higher food and other commodity prices elsewhere. Devaluation of dollar in US makes exports expensive from others  countries  to US, which results in  more unemployment in developing economies. To tackle this other countries have to devalue their local currencies to keep their exports alive. Which cause inflation in their own countries.

            Some economists lobby for global currency called SDR (special drawing rights). It would be extremely dicey  to have SDR without tackling current currency pligt. Pentagon is cognizant of  how financial markets work under the age of greed, shortsightedness, deregulation, speculative mindset and bad intent, In the best of times Wall street is like wild west, but with globalization it has become more out of control.

            There are four components to GDP growth i.e 1. Consumption 2. Investment. 3. Government spending,4. Net exports. Currency wars are usually fought internationally but are driven by domestic  distress i.e insufficient  internal growth. In case of total financial melt down, US still had massive gold reserve, which is not stored in civil banks but military bases i.e Fort knox in Kentucky , west point along Hudson river in New york, which ensures the connection between national wealth and national security. Dollar or any other paper currency can be printed by the central bank but a currency backed by hard asset or commoditiy has real value attached to it and can’t be printed out of thin air.

            In order to cut exports cost   US cuts interests rates. Which makes dollar less attractive in foreign market or by devaluation of dollar.  A worst form of protectionism, by devaluation, embargoes and tarrifs on exports from other countries.  

            Gold has always been a “Gold standard” as a currency. It had been standard since 600 B:C to modern Turkey.  England had gold backed currency from 1717 until it debased it in 1931. France in 1936 debased its currency from gold, Germany until 1915 had the fourth largest gold reserves after US, Russia and France.

            Before 1945 pound sterling was the major reserve currency in the world, reduced to 26 % in 1965. US dollar is 61 %  of identified reserves  currencies as of 2011, it was 71% in 2000, euro is about 26 % in 2011. This is due to expansion of trade between Europe and Asia and within Asia itself.  Perhaps it is 49 % which is tipping point when dollar  will lose dominance and its importance as world’s single major reserve currency. Charles deGaule in 1965 said in a speech that world should return to gold standard , It is the reserve which doesn’t have any particular country’s mark.

            Chinese case is rather very compelling and there are many lessons to be learned from Chinese miracle. Modern Chinese miracle began  in 1975 , announced by Zhou Enlai with modernization  in four main areas, Agriculture, industry, defence and technology.

            Deng Xiao Peng in 1979 took monumental decision to establish special economic zones offering enabling and encouraging work rules, reduced regulation and tax benefits designed to entice foreign investment, particularly in manufacturing, assembly and textile industries.  China launched a program of development of economic zones along the coastal cities of eastern china in 1984.  In 1997 US trade deficit with china was 50 billion $, which increased to 234 billion $ in 2006 .  Chinese growth is mainly driven by foreign direct investment which is 48 % of total GDP while it is 12%  in US. China has emerged as the manufacturing powerhouse over few decades, together it manged to pull out millions of slum dwellers from abject poverty.

            Euro in the eurozone is a sweet spot for Germany.  As export nation Germany favours weaker Euro. Weaker Euro is in favour of Germany, it makes German exports and from the countries who trade in euro cheaper and more competitive . European debt crisis over the years gave Germany a dominant position in Eurozone because it has surplus Euro liquidity for years. Germany has emerged as the major lender in Euro zone and thus it managed to extend its political clout as well.

            In global vista if a country has annual trade surplus in excess of 4% of GDP, it  is an indicator that currency of surplus country to be re-valued in order to shift the trade balance from the surplus country towards trade deficit country. This is something which happens under classical gold standard automatically. With paper currencies countries themselves artificially revalue.

            For every war there is neutral venue, and in currency war Dubai is the venue .Dubai is world’s largest trans-shipment point for paper currencies. There are some secure sites near Dubai international airport where massive amounts of banknotes are stored, awaiting return to their issuing banks.

            Gold is not only a commodity but money which has a real value attached to it. All discovered gold can be fit into cube of 20 meters cube  on each side. Gold supply per year is  around 1.5 % .  Financial worth of Nation’s currency is its Achilles heel .  If currency collapses everything else collapse. Paper currency can be produced at anytime by any central bank but Gold or any other currency backed by hard asset can’t be produced . Having and international reserve currency backed by hard asset i.e Gold, Silver or any other agreed commodity would end the unfair play of manipulating with local currencies. This would create an autonomous balance between trade-surplus and trade- deficit countries. Countries which have more the 4 % of their GDP and surplus would loose the advantage and their exports would not remain competitive.