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Currency Wars

A Matrix of Concepts
Rashmin Chandulal Sanghvi
24th January, 2011
Summary of Contents

1. Identify the problem. Currency Wars. (I)


2. Analyse past and present.
Diagnose reasons for the problem. (II to X)
3. Estimate consequences. (XI & XII)
4. Offer solution. (XIII)

Detailed Contents

If you are busy, just read the paragraphs marked with * & red
colour. Then if interested, read the whole paper.

Paragraph Paragraph Titles Page


Nos. No.
I Preface 1
* What is a Currency War 1
Illustration 1: Exploitation by Europe of its colonies. 3
Colonial Exploitation Compared with Economic 3
Exploitation
Conspiracy Theory 4
Notes 5
Matrix of Concepts. Some details & analysis of past & 7
present. From page 7 to page 60.
II Exchange Rate Determination 7
III* U.S. $ Issues 10
IV A Brief History of Money 11
* Nixon Shock 12
Currency Explosion 13
V U.S.S.R. Implosion 15
Star Wars 15
Contd…..
Contd…
Paragraph Paragraph Titles Page
Nos. Nos.
Afghanistan 16
VI South East Asian Crisis 22
Yen Carry Trade 22
Indonesian President Suharto 24
Yen as International Currency. 25
Crash of 1997 25
Some Proverbs 27
VII* China and India as Suppliers & financiers to USA. 28
VIII.* Benefits to USA of $ being the global currency: 33
IX How U.S. tries to maintain $ Hegemony! 34
* Gold Carry Trade 34
List of U.S. Strategies 37
X Practical compulsion to adopt $ as the Currency for 39
international trade:
XI Some signs of the trend for U.S. Economy. 42
American Financial Crisis of 2008. 42
XII Probable Consequences of Currency Wars 43
XIII Probable Solutions 49
XIV Relevant Issues of Interest 51
Annexures
1 Concept Vs. Definition 56
2 Cause of Inflation in India 58

This is a summary on a vast subject. Several issues are controversial


and need considerable discussion.

Short Forms:
FI = Financial Institutions including banks.
Fx = Foreign Exchange

Next page: Preface


Page No.: 1

Currency Wars.

I. Preface

I.1 Several currency wars have been fought during last hundred and
fifty years. No currency war was fought before 150 years in entire history
of money. At present (January, 2011) the currency war has already started.
If it escalates, results can be severe. Senior Economists of the world are
worried about currency wars. International Monetary Fund (IMF) and
World Bank are also worried. Let us see in details these issues in this
paper.

Currency movement and currency exchange rate can be abused to


exploit another country. There are several ways of abuse. Most ways are
difficult to understand or realise. In this article we have a look at the ways
of abuse. We take illustrations from history so that abstract concepts
become easier to understand.

It can be several decades and even hundreds of years before a


society or nation realises that it has been exploited. The exploiter can
confuse the exploited. Some people have mastered the art of exploitation.
Even when the exploited feels exploitation, he cannot pinpoint real cause
of his suffering.

2. What is Currency War?


Common Definition.

Some people have defined “Currency War” as competitive


devaluation of one‟s own currency so that exports become more
competitive and imports become costly. As a result imports are expected
to reduce and exports are expected to go up. As a further result,
employment within the country goes up and employment in the
competing country may go down. The country which devalues its
currency may get net trade surplus (exports more than imports) and its
foreign exchange reserves go up.

This policy is also referred to as “Beggar Thy Neighbour”.

At present, U.S. Government‟s allegation is: “China is keeping the


value of its currency artificially low. Hence it has a huge trade surplus
and large foreign exchange reserves. U.S. is suffering unemployment and
trade deficit because of Chinese policy.”

U.S.A. tried to push China into revaluing Yuan. China told Hillary
Clinton: “Mind your own business. Instead of advising us, ensure the
safety of your currency.” When individual pressure did not work, U.S.
tried international organisations and institutions to pressurise China.
Page No.: 2

Ultimately, in the year 2010 U.S.A. started Quantitative Easing


worth $ 600 billions. This is expected to (i) devalue U.S. $ and (ii) force
other countries to either buy $ or experience appreciation of their own
currencies.

China has refused to buckle down under U.S. pressures and U.S.
has started action. Common man does not see anything happening but
economists and finance ministers around the world consider this as
Currency War and are worried.

Another definition:

I submit that a Currency War can be conducted in several manners.


Devaluation is only one of the several ways possible. A country can
exploit others by keeping own Currency value high also. And other
countries can be reduced to „beggar‟ level by several economic means.

We will see these details in the present paper. We will also consider
the substance behind U.S. allegations.

3. I have discussed in the past – “What is a „Concept‟! How a


„Concept‟ is different from a „definition!” A discussion on “Concept Vs.
Definition” is given in Annexures. Considering concepts is more serious
than just considering definitions. When we consider a matrix of concepts,
matters become even more complex. And when we take concepts from
different disciplines, things become really difficult. I have attempted to
simplify.

4. In this paper, let us consider some concepts from history, human


psychology, Government psychology and economics altogether.
Considering all these, we try to analyse the past. Based on this analysis
we try to understand the present. Based on our understanding, we try to
project future.

5. There are good chances that we make several errors and our
projection may prove wrong.

History repeats itself.


And yet no one can predict future.
This dichotomy makes life challenging and hence interesting.

Hence we make a series of projections. Be prepared for adverse


probabilities. Plan to make the future stronger.
Page No.: 3

6. Illustration 1:
Exploitation by Europe of its colonies.

Pope Alexander VI in the 15th century told Spain & Portugal: “Go
and win the countries of the world. Who ever wins, keeps that country as
her colony”. These two countries became prosperous. Soon several others
joined them.

The Europeans took their ships and armies all over the world. They
took over the control of several nations including India by several means.
And then they justified the controls by saying: “We the white people are
supreme race. We are meant to rule over the rest of the world.” (Search on
the internet – “White Supremacy Theory. Compare it with the theory that
“Brahmins are superior to all other castes.” Consider how this bogus
theory has been perpetrated in India for many thousands of years.)

Today‟s generation will find it ridiculous. But many Indians did


believe that the white race is superior to the Indians. Many accepted the
exploitation by the white race as “normal”. But many Indians did not
accept “White Supremacy” or exploitation. They fought back. The 1857
independence war was a war against British Rule and against British
Exploitation.
Britishers were ready with “Sham, Dam, Dand, Bhed” “Fooling,
Bribing, Fighting and Dividing”. “If the colonies simply accepted to be
exploited, great. If they did not, then fight. Bribe the kings by several
means and use their names to rule the Indians and exploit them”.

Gandhiji was one of the many Indian leaders who saw through this
exploitation. He developed world‟s unique method to fight back and
drive out the shrewd Britishers. Gandhiji used “Resistance without War”
(Satyagraha) to end the exploitation. Then the Britishers used “Divide and
Rule” method to prolong their rule over India. Some other nations got
their independence by an open revolt.

When the era of colonisation was over, the Europeans and


Americans found out new and sophisticated ways of exploitation -
Economic Exploitation. In economic exploitation, there is little resistance,
your soldiers don‟t get killed and your prosperity is even better.

7. Colonial Exploitation Compared with Economic Exploitation:

Now use the illustration of „Colonisation‟ to develop a few phrases


and use them in the field of global economics.

(i) As long as one person – society or country exploits another without


the other realising it, it is simply exploitation.
Page No.: 4

(ii) If the exploited realises and yet does not fight back, it is
“exploitation of the stupid.”

(iii) If the exploited person resists, it is “Resistance”.

(iv) If the exploited person fights back, it is “War”.


Who wins or loses the war is a separate issue.
In war, all sides are hurt irrespective of who wins.

(v) One nation exploits another and there is neither resistance, nor war.
This is Equilibrium.

(vi) In resistance or war, the Equilibrium is disturbed.

8. Conspiracy Theory
8.1 Theory:
“Commit crime. Most likely, you will not be caught. If caught,
deny all allegations and confuse the public by disinformation. There are
enough gullible people to believe in your denial.”

Elaboration - Mr. P, a politician conspires to cause damage, or to gain


fraudulent advantage from his position. He succeeds in his
conspiracy/fraud. However, afterwards, he is exposed.

Mr. P is so powerful that no one can punish him. But he needs to


save his public image. What will he do?

He will flatly reject all allegations. And then he will allege that his
opponents have just cooked up the conspiracy theory to malign him. And
he will start a disinformation campaign.

People will never know the truth. They will be confused. Some will
believe in P & some will believe in the opponents. The opponents‟
allegations will be largely neutralised.

And human psychology is such that they see no fault in the rich
and powerful. While they see numerous faults in the weak. Human
naiveté crosses the limits when: The powerful abuses the weak. And
public criticises the victim instead of the aggressor. This is commonly seen
when a powerful politician or bureaucrat abuses a poor.

8.3 Illustration:
U.S. Government is exploiting others in some fields for many
decades. People have made allegations against U.S. Government.

U.S. Government‟s first response is:


Page No.: 5

“Just deny everything.


“Rely on the fact that very few will dare to criticise U.S.A.
“If some rare person still criticises; then do one or all of the
following:

(i) Make his Character Assassination.

(ii) Broadcast to the world that the critic is just creating conspiracy
theories to malign the noble U.S. Government.”

(iii) Spread massive disinformation.

Those interested in further research may study the theories that


CIA & KGB developed to spread disinformation, counter information and
confuse the opponents & the world.

U.S. Government is successful in brain washing its people into


believing that the U.S. Government and military are not doing anything
wrong in the world. And the public sees what it believes. They believe
what is beneficial to them.

9. Notes:
9.1 Several Perceptions:
History is very interesting. Same event will have infinite different
perceptions. I have noted here one perception. You may have many
different perceptions. All may be right. None complete.

Here the focus is to explain the Currency Exploitation and its


variations. So let us all focus on the exploitation; and proceed with this
main issue.

9.2 Exploitation is Universal:

Our exploitation by the white people should not be a surprise.


Some Aryans have exploited non-Aryans for thousands of years. Some
“upper caste” people have exploited “lower caste” people for thousands of
years. Some men have exploited women for longer periods.

Exploitation really acquires several ways and means and is almost


universal.

Main need is to understand exploitation. Remove exploitation.


Where others are exploiting us, throw them out. Where we have exploited
others, stop exploiting.
Page No.: 6

9.3 Currency war is only one of the several tools available to the
exploiter. Larger field is Economic Exploitation. If you want to see how
India exploits its agriculturists, read articles by Mr. Sharad Joshi (Shetkari
Sanghatana, Pune).

9.4 I am giving a history of last few decades in one paper. Some of it is


from pure memory. There can be errors. Dates & amounts may not be
exact. The attempt is to show the chronology of events. Most of the
amounts are rounded up.

I. Preface Completed

Next:
Currency war is a concept.
To understand this concept we have to consider several other concepts.
It is an interwoven multidimensional matrix.

First concept to consider:


How does one determine the foreign exchange rate!
Page No.: 7

Matrix of Concepts: Pages 7 to the end of the paper.

To understand currency wars we may have to understand a matrix


of several concepts which will together build the final concept of Currency
War & Economic exploitation.

II.1 Exchange Rate Determination: “What is the right and fair exchange rate
for a currency” is an issue on which several thesies have been written. At
the same time every person who has studied economics at college level
has studied two methods of determining exchange rate.

Should the rate of rupee be ` 45 per dollar or ` 18 per dollar (as it


was in the year 1991)!

II.2 Demand & Supply method.

If the demand for a currency is high, its exchange rate will be high.
On the other hand if the supply of the currency is more than the demand
for the currency, its rate will go down. For example, at present U.S. dollar
to Indian rupee rate is ` 45 per dollar. Now if the U.S. Government
increases the supply of the dollar by “quantitative easing”, normally the
value of dollar should go down. Hence the new rate may be say, ` 40 per
dollar or even ` 35 per dollar.

The demand of a currency should normally depend upon the


exports made by that country and the foreign investment into that
country. Thus for example, if India imports more goods than it exports,
then the demand for rupee should be lower. Hence the value of rupee
should fall. If foreigners make more & more investments into India, they
would send more foreign exchange into the country and hence value of
foreign exchange will go down whereas the value of rupee will go up.

Note: It should be understood that in real life economics individual


theories do not have complete playground. In theory, in college one would
explain an economic theory as if “all other factors remained same” (Ceteris
paribus). In real life several factors work simultaneously. Some factors are
at cross currents.

And all markets are manipulated by interested parties. A simple


illustration is the share market. A stock analyst may study the balance
sheet and may work out a value of the share as the right value. However,
when one goes into the share market, the price at which the share would
be traded may be quite different from the fundamental value. In fact, it
would be a rare event when the real market price would be nearer the
intrinsic value of shares. In the same manner the real value of a currency
may be widely different from its intrinsic value.
Page No.: 8

While several forces are acting simultaneously, some are


understandable, some are beyond the understanding of a commercial
man. In philosophy, one‟s intentions (Bhavna) have a great influence on
the force of money and weapons. Hence final results will depend upon
the thinking and intentions. Some aspects of this concept are known as
“Will Power”, “Power of Positive Thinking”. “Impact of Negative
Thinking” and so on.

Intentions are unknown and keep changing. They affect future.


Hence prediction of future is not possible. We can only project
probabilities.

II.3 Purchasing Power Parity (PPP):

When the real value of Indian rupee in India is compared with the
real value of dollar in U.S.A., one can get the fundamental exchange rate of
the currency. To find the real value of a currency in a country, a practical
method is to find a representative basket of goods & services which are
common in both countries. For example, if a basket of goods & services
costs ` 50,000 in India and $ 5,000 in U.S.A., then the exchange rate for the
two currencies should be ` 10 per dollar.

A representative basket of goods & services may be considered as


the normal consumption by a family over a period of one month. Consider
a family of five persons living a middle class standard of living in India.
One would say that the family can live with an income of ` 50,000 per
month at a middle class standard of living. At the same time, a family of
five persons living a similar standard of living in U.S.A. may need $ 5,000
per month. Hence under the PPP method the value should be ` 10 equal to
a dollar.

II.4 In reality, for determining correct exchange rate what is more


important is the goods & services which are being traded in the
international market. In other words, India exports iron ore, cotton yarn,
handicrafts & software services. India imports machinery, chemicals &
electronics. In all these considerations, the family consumption does not
figure in. Hence the PPP rate does not really work in the international
market.

The PPP rate is a guideline and not final determining factor.

And yet, IMF World Bank and important international institutions


now prepare comparative statistics on PPP basis. According to these
comparisons, dollar is overvalued four times its intrinsic value; or rupee is
undervalued to one fourth its intrinsic value.
Page No.: 9

University of Pennsylvania has prepared World GDP tables on


PPP. A summary:

Country GDP at Market Rate GDP at PPP rate


$ Trillions $ Trillions
China 5.7 14.8

USA 14.6 14.6

India 1.4 4.4

II.5 There are allegations that multinational corporations in association


with their governments try to suppress the prices of commodities. Hence
they get the commodities at a cheap rate. They also try to sell their own
products at high rates. This is a simple exercise of exploiting the countries
having poor knowledge of economics by those people who are experts in
economics.

II.6 For last forty years U.S.A. has been having a trade deficit. In other
words, the value of goods & services imported by U.S.A. are far greater
than the value of goods & services exported by U.S.A. As a simple logic,
the value of dollar should be depreciating. However, all over the world
people invest in U.S.A. Hence there is a huge inward flow of foreign
exchange into U.S.A. Hence the value of dollar has remained high.

Some beliefs have been perpetrated by certain authorities.


Especially the U.S. Government. “U.S. Dollar is a safe haven.” “U.S.
dollar is as valuable as gold but more convenient & efficient than gold.”
At some time (before 1972), these beliefs had substance. Over period,
substance has gone down and today they are myths. But old beliefs die
hard.

These and similar myths have made people believe that it would be
better to invest in U.S. dollar rather than their own currency. Hence there
has remained a continuous flow of money into the U.S.A. We will see in
this article, how these myths came into being and how today economists
realise their true substance (or absence of substance).

II. Exchange Rate determination issues completed

Next: A summary of issues on US $.


Page No.: 10

III. U.S. $. Issues:


III.1. We will see how U.S. became Super Power No. 1 and how $ became
a global currency. What advantages U.S. has enjoyed. How U.S. has tried
to maintain $ as the global currency. Some of the wars & strategies that
U.S. Government has executed to maintain $ hegemony. Whichever nation
tried to move away from $ as international currency has been attacked.

Today what is the position! Can U.S. maintain that hegemony? Are
we in for a “tectonic shift” in the global economy? What can happen if $
collapses like the Russian Rouble? Will India benefit or suffer?

We cannot predict future. But based on our analysis we can make a


“Case Scenario”. We can make several different projections. And be
prepared for the same. Also, expect the unexpected. Something may
happen which we cannot even project today.

III.2. Devaluation of Dollar. Following is a simple statement driving home a


point. Real implications are too many and complex.
In the year 2006 the price of gold was $ 400 per ounce. Today
(January, 2011) the price of gold is $ 1400 per ounce. This means that in
four years time dollar has depreciated to 28% of its value in the year 2006.
In other words there has been a devaluation of 72%.

In the year 2006 the parity between Indian rupee and U.S. dollar
was Rs. 45 equal to a dollar. Today also the parity is ` 45 equal to a dollar.
Hence while we believe that in terms of dollar, rupee has not been
devalued, in reality against gold rupee has depreciated by 72%.

See the gold price chart. Why it remained steady for long period &
why it has started steep climb up!

III. List of Initial thoughts on U.S. $ completed.


Page No.: 11

IV. A brief history of money.

Share market friends may say: “Just tell us how the index will move
in future. Why bother about the history!” It is said: “One who does not
study history is condemned to repeat history”.

A brief history of money may be useful. Under barter system lot of


economic exploitations would not be possible. Even under a gold
standard it would not be possible. The fact that Governments have a
licence (given by them to them) to print paper currency without any legal
or practical limitation has created several possibilities. We consider a few
possibilities here.

IV.1 Initially there was barter system. Then came the coins. Coins were
made of metal and carried the intrinsic value of the money. For example,
Indian rupee was made of silver (rupa). Hence a Government could create
only so many coins as the stock of silver available with the Government
permitted.

When there was a physical restriction on supply of money, there


was no question of over supply. Hence there was no question of inflation
caused by Governments. There could be price rise caused by droughts or
similar other scarcities. But not an inflation caused by deficit financing by
the Government.

The Chinese people invented paper and paper currency. Paper


currency is more convenient in handling as well as storage. Hence it was
more popular.

Under the gold standard a Government would specify the value of


its currency in terms of weight of gold. The Government would be
required to maintain stock of gold. Actual money created by the
Government would be physically limited by the quantity of gold with the
Government.

In the early part of 20th century there were huge fluctuations in


international money markets. Governments misbehaved. People lost trust
in the paper currency issued by Governments. Huge flights of capital
ruined certain nations. Then, to bring some form of stability, gold standard
was imposed.

In early 20th century, U.S. & Europe were developed. Rest of the
world was mainly colony of some European country or other. In the two
world wars, Europe was economically destroyed. U.S.A. was not affected.
At the end of 2nd world war, U.S.A. & U.S.S.R. emerged as the two Super
Page No.: 12

Powers. In 1991 & 1992, U.S.S.R. was destroyed economically &


disintegrated politically. That left U.S.A. as the Super Power No. 1.

In the year 1934 U.S. Government declared that the value of U.S.
dollar would be: One ounce of gold equal to $ 35. In other words, any
Government or Central Bank having $ paper currency was legally entitled
to go to U.S. Government / Federal Reserve and demand physical delivery
of gold. This was the solemn promice made by the Government of U.S.A.

At that time very few Governments had the capability to make such
a promice. U.S. was super power. And U.S. dollar was backed 100% by
gold. Hence it became the most popular currency around the world.

Let us consider those times when banking systems were not as


developed and efficient as they are today. Computers & internet were not
yet developed. If some one had to make an international transaction worth
say, Rs. 100 crores, how would he do it! If he paid in terms of rupees
(paper currency), the foreigners would not be interested. If he wanted to
pay in terms of gold or silver, he would require (at those prices) plane load
of gold. However, U.S. dollar was accepted all over the world. High
denomination notes of the dollar would work far more efficiently than
gold or any other currency. Hence dollar was accepted by everybody.

British economy was on the down trend. Once upon a time Britain
ruled scores of countries. In an open, forceful & cruel manner it exploited
all its colonies and became rich. However, after the Second World War
more & more colonies started becoming independent. The sources of
exploitation reduced. British economy started shrinking. Hence British
pound lost its importance. Simultaneously U.S. dollar gained importance.
Slowly the dollar became the world currency. This is when people started
saying that dollar was better than gold. It became the global currency.

IV.2 Nixon Shock:

After the 2nd world war, U.S. & U.S.S.R were locked in Cold War.
Both nations tried to have military & naval presence through out the
world. They developed several bases in island countries & had their
nuclear armed sub-marines around the world. U.S. started having balance
of payment deficits. In 1968, there was a Gold Run. People wanted to hold
gold instead of $. U.S. gold reserves started depleting.

In the year 1972 the French Government had accumulated a few


million dollars. The French were more inclined towards Russia than
towards U.S.A. The French Government asked U.S. Government to take
back its dollar notes and give equivalent gold.
Page No.: 13

President Nixon simply refused to pay the gold. International


Money markets had a big crisis. This refusal to honour promice is known
as the “Nixon Shock”. However, nobody had the capability or authority
to punish the U.S. Government for breaking the promice. Bretton Woods
system collapsed. $ depreciated by 50% against gold. World started
floating rates for currencies. (This is a short summary. For details, see
internet on Bretton Woods Agreements & their collapse.)

All countries abandoned relationship with gold. They printed


paper currency without strict restrictions.

IV.3 Currency Explosion.

Once the Governments accepted that they could print currency


notes irrespective of the size of gold reserves, they had a free run. Today
U.S. Government has 8,000 tonnes of gold. This would be roughly worth $
360 billions. And the money supply in terms of dollars is: 9 trillions.

The foreign exchange reserves held by U.S.A. are negligible. Total


reserves held by U.S.A. (other than gold) are less than $ 100 billions. If the
earlier system of issuing money to the extent of reserves held was
continued, then the total money supply (M0) in U.S.A. would have to be
limited to $ 460 billions. This would be impractical. However, assume that
a country is required to maintain a percentage of money supply as
reserves. Then also this money supply would be restricted. In U.S., there is
just no relationship between money supply and reserves. American
Federal Reserves Chairman has publicly stated: “U.S. does not need any
reserve.” This is currency explosion. Same story is applicable to almost all
countries. However, Germany and under its leadership European Union
have adopted some prudential standards. Hence they cannot issue
currency beyond certain limits.

When a Government spends more than the total revenue earned by


it, it is resorting to deficit financing. The Central Bank of the country
simply issues currency notes without any backing by reserves.

In a country like India if the Government issues money by resorting


to deficit financing, it causes inflation. If the inflation is beyond acceptable
limits (probably 15% per year) then the Government in power looses
elections. Hence in a democracy there is a limit beyond which the
Government cannot print notes.

However, when U.S. Government prints notes, these are lifted by


Central Banks around the world (as their Fx reserves) and even private
individuals and corporations holding foreign exchange savings. Consider
the case of a rich man. If he has no foreign exchange restrictions, he would
Page No.: 14

like to spread his assets into different currencies to reduce the risks
inherent in single currency. The first foreign currency which any
individual or corporation would hold will be U.S. dollar.

Thus even if U.S. Government resorts to deficit financing, there is


no inflation within U.S.A. For U.S. Government it is simply like getting
money out of thin air without any consequences. This liberty made the
U.S. Government resort to deficit financing without any limits. With
unrestricted money supply the U.S. Government could conduct star wars
and defeat U.S.S.R. in an economic war.

U.S. external debt is $ 14 trillions. US need not repay this loan.


Noone asks for repayment. And in case, some one asks for a repayment,
U.S. can print more notes and hand over the notes. The word has gifted
$14 trillions to U.S.A.

This is a major benefit that the U.S. had for having $ as a global
currency.

All Governments have abused paper currency systems to the


detriment of their citizens. U. S. Government has abused the system &
broken its commitments to the detriment of people outside U.S.A.

IV. Brief History of Money completed.

Next:
How USSR was destroyed by using “Economics”.

See how history, economics, politics, psychology etc. are interwoven.


Page No.: 15

V. U.S.S.R. Implosion

V.1 Let us understand what happened in Russia in 1990 when the


exchange parity between Rouble and dollar stood at 4 Roubles to 1 US
dollar. Rouble was considered strong, whilst USD was considered
speculative. When Gorbachev introduced democracy in parts, there was
revolt and counter revolt. Then Yeltsin came to power. But he had no clue
of market economics. In communist Russia, prices of all commodities were
determined by the Government. There was no inflation for decades. In
short, there was no market economy in Russia.

V.2 Now consider a short history from 2nd world war to 1990. After
Second World War U.S.A & U.S.S.R emerged as the two super powers in
the world. Europe was seriously damaged. Britain which claimed earlier
to be super power No. 1 had economically collapsed and was on a further
downward slide.

U.S.A. & U.S.S.R. were competing to become or to remain No. 1.


For several reasons their competition also involved hatred and a desire to
kill or damage. Both nations had different kinds of races. Sending rockets
in the sky, sending the first man on moon, developing the latest weapons,
establishing strong influence in Asia, Africa & Latin America as well as
Europe … etc. were the races between the two.

V.3 Star Wars: Reagan became President of U.S.A. In the year 1983 he
started the “Star Wars”. Let us understand what is “Star Wars”.

Both the nations had developed guided missiles with nuclear war
heads. These were the missiles which could fly a few thousand kilometres
without a pilot & strike the target. They use Global Positioning System
(GPS), radars, satellite communication systems and computers. They could
be exploded by remote controls. These missiles were costly weapons.

U.S.A. could send missiles to destroy several cities in U.S.S.R. In the


same manner U.S.S.R. could send missiles to destroy several cities in
U.S.A. The theme was to cause maximum damage to the enemy without
harming a single soldier from own military. The missiles were based at
several locations within both countries. Now an enemy would first target
the missile bases. Hence both nations kept missiles on moving bases like
nuclear submarines. This gave them strategic advantages.

Then they developed missiles to destroy incoming missiles from


enemy nations. This is a difficult exercise. To target a stationary city like
Moscow or Washington is easier. But to target a flying object is more
difficult. Hence both the nations were spending billions of dollars in
Page No.: 16

development, production and deployment of missiles and counter


missiles.

The third stage of missiles was as under: Say U.S.A. would send a
missile to attack Moscow. Moscow would send a counter missile to
destroy the American missile in sky. The U.S. missile would send small
missiles to destroy the Russian counter missiles. Imagine the amount of
technology required for all these unmanned vehicles of death. It was all a
hugely costly exercise.

Observation so far: Both super powers were in a weapons race


burning billions of dollars with no end of race in sight.

V.4 Afghanistan:

The Afghan people are the most indomitable people in the world.
Nobody can rule over them. Some 200 years back England was ruling over
India – which included current Pakistan & Bangladesh. Afghanistan was a
neighbouring country. England wanted to conquer Afghanistan. When it
sent its army to Afghanistan, the whole of the army was killed by the
Afghans. England suffered such huge losses that since then it has never
tried to conquer Afghanistan.

Geographically, U.S.S.R. is locked in the North by frozen sea of the


North Pole. It has no access to the Indian Ocean in the South. U.S.S.R. had
a dream to win over Afghanistan and then parts of Iran or Pakistan. This
way it could establish a direct access to the Indian ocean and could have
ocean transport all over the year.

U.S.S.R. did not learn from the lessons of British defeat in


Afghanistan. In size, wealth & military power, Afghanistan is so small as
compared to USSR. USSR attacked Afghanistan and its military quickly
took over Afghanistan. The real war started thereafter. Afghans fought a
guerrilla war. The guerrillas caused maximum damage to the U.S.S.R.
military.

Please see map in the next paragraph. This is an old map of U.S.S.R.
as it existed before 1991. We can see that U.S.S.R. was really a large
country locked in from most sides.
Page No.: 17

V.5 U.S.A. saw a golden opportunity of causing damage to U.S.S.R.


U.S.A. would also love to frustrate U.S.S.R. strategy of accessing Indian
ocean through Afghanistan & Pakistan. Through Pakistan U.S.A. financed
the Afghan guerrillas. Taliban was created by U.S.A. For ten years
U.S.S.R. was bleeding men, material & money in its Afghanistan war. This
was happening on top of huge military expenses in the Star Wars.
Ultimately, in the year 1990 U.S.S.R. was nearing insolvency. Of course,
U.S.S.R. was never required to publish its Government Balance Sheet. So
nobody knew that U.S.S.R. Government was insolvent. However, the U.S.
Page No.: 18

Government anticipated U.S.S.R. insolvency. In fact, that was the target.


This is the time when Mikhail Gorbachev became the President of U.S.S.R.

V.6 Gorbachev realised that his Government was insolvent and he


would never be able to rule Afghanistan. Hence he voluntarily started
withdrawing military from Afghanistan. The Taliban took over the rule
over Afghanistan. (The facts are not as simple as this sentence. There are
several tribes & groups in Afghanistan. Each tribe wanted its own rule.
There was severe infighting. The rest is a different history.)

Gorbachev also knew that his Government was not rich enough to
fight Star Wars. He voluntarily announced restrictions on creation of
further missiles. He requested that U.S. should follow but never insisted
on it.

He started glasnost & perestroika. In other words, in the year 1990


U.S.S.R. started liberalising its politics as well as economics in a significant
manner. The KGB afraid of losing its power arrested Gorbachev. In a
counter revolution, in August 1991 Yeltsin took the power back from the
KGB and became President. This was a historic period for U.S.S.R. (1991-
92.)

Yeltsin was a hero for re-establishing freedom from KGB. However,


his knowledge of economics was poor. His Government was insolvent.
With the upset at Central Government level, several things were jolted.

V.7 U.S.A. knew that behind withdrawal of military from Afghanistan


and voluntary restriction on star wars, the real reason was the insolvency
of U.S.S.R. Iron was hot. U.S.A. wanted to strike.

Geographically U.S.S.R. is in the North of the Northern


Hemisphere. Vast parts of its land remain frozen for half a year or more.
Moscow needs to import its daily supply of milk, vegetables & fish from
Europe. So far these imports were paid by exporting gold, platinum,
diamond & crude oil. Even today Russia is extremely rich in natural
mineral resources.

Poor Yeltsin suffering from financial shortage asked for a large loan
from G4 Nations. U.S.A., U.K., France & Germany (G4) together offered a
loan of $ 30 billions (at that time it was a huge loan). However, the loan
was conditional on U.S.S.R. removing several economic regulations.
Yeltsin trusted the G4. He scrapped by simple Presidential decrees several
laws. At one stroke U.S.S.R. ceased to be a communist country and
became more capitalist than U.S.A.
Page No.: 19

V.8 Now remember the fact that U.S.S.R. was communist since 1917.
Under the communist regime commodity prices had no freedom to move
with economic forces. For example, if price of bread was one Rouble in the
year 1917, it was one Rouble even in the year 1990. This is an illustration to
say that entire economy was regulated.

Suddenly the whole country was shocked to find that all


regulations disappeared. Nobody knew what should be the price for its
products. Government had no idea of how to fix the prices or how to
ensure supplies. At this time G4 decided that they do not want to import
anything from U.S.S.R. Not even oil or gold. And they insisted on cash
payment for milk, vegetables & fish. And the assured loan of $ 30 billions
was simply not given.

The result was as expected by U.S.A. U.S.S.R. collapsed.

Government had no money. Therefore Russia was forced to


withdraw army from Afghanistan and Eastern Europe. Thousands of
soldiers were retrenched. They became mafia who knew nothing else than
to run guns. Through all these events started massive depreciation of
Rouble. From four Roubles to a dollar - to eight Roubles to a dollar,
from eight to twenty and from twenty to hundred Roubles to a dollar.
Nobody knew what was happening. Yet no one outside Russia was
concerned because the world did not use Russian Rouble for international
trade and western countries wanted Russia to fall. The exchange parity
deteriorated so much that today it is almost 31,500 Roubles to one US
dollar. Russia has simply deleted three zeros from its currency. So 1,000
erstwhile Roubles are now called one Rouble. Current parity is 31.5
Roubles to a dollar.

No economic theory can explain this, be it purchasing power


parity, chart, fundamentals, technicals - nothing could justify depreciation
of four Roubles to a dollar to 31,500 Roubles to a dollar. Russian economy
was totally in shambles. (I have written a separate paper explaining that
Economy is dominated by sentiment. Sentiment and logic have no
relationship. The paper is on my website.)

Eight East European countries dominated by U.S.S.R. became free.


Most dramatic was the fall of Berlin Wall. Fourteen other nations merged
by U.S.S.R. into itself also became free. U.S.S.R. was divided into several
countries. The major portion that remained separate is now known as
Russia.

V.9 Now consider this entire history again. U.S.A. used pure economic
forces to destroy super power No.2. In the process U.S.A. did not suffer a
single soldier. USA spent huge amount of money on helping Taliban and
Page No.: 20

Pakistan. However, this was financed by issuing $ notes which the world
took away happily. See paragraph IV.3 above. Today U.S.S.R. does not
exist. U.S.S.R. has been destroyed. You can call this as economic murder or
currency murder.

Whereas U.S.S.R. wanted to expand & access Indian Ocean by


annexing Afghanistan, it got broken up & Russia got further away from
Indian Ocean. See the next map. Such a great victory for USA!

Notes:

1. It may be noted that the collapse of USSR was also a collapse of


controlled economy. Main reason for collapse was internal chaos. USA
planned & used the opportunity to destroy USSR & remove competition to
its status as super power No. 1.

2. By now, this article could have disturbed some readers. Purpose of


this article is to expose exploitation. It is no surprise that even today some
people believe that they are superior to others because of – Colour of Skin,
Caste, Religion, Gender; or simply without any reason. And they are
convinced that they have right to exploit others. Some exploiters don‟t
even know that they are exploiting others. Let us call them Illusioned
Exploiters.
Page No.: 21

Some persons may be exploiter in one aspect of life and exploited in


another aspect.

Ways of nature (Maya) are infinite.

3. Many times the exploiter turns exploited. Tables get turned. A


man may be exploiting his wife. He may not even realise when the wife
starts exploiting him. He may not realise the exploitation for the whole of
his life. Same goes for societies & nations. If this article can reduce
exploitation any where, the efforts will be worth while.

4. Some authors write articles on pure economics. Here we are


considering economics together with history, psychology and philosophy.

Life is not lived in compartments.

V. USSR Implosion completed.

See how USA played strategic game to defeat USSR by using


Economic exploitation as well as by supporting the Taliban.

Afghanistan became the instrument for making USSR insolvent.


Now, with the same instrument, USA has become insolvent. The Afghan
war expenditure is bleeding US budget. US rule does not prevail even in
Kabul.

Next:
How a cartel created South East Asian Crisis.
Bankers made a killing in Fx derivatives.
G4 achieved their political objectives.
IMF & UN helped.
Page No.: 22

VI. South East Asian Crisis. 1997.

VI.1 Countries mainly affected by the South East Asian (SEA) Crisis:

Indonesia, Malaysia, Thailand, South Korea and Philippines.

In nature, several streams of events simultaneously develop.


Eventually, the combined result of these streams is some thing too radical
to guess. Let us see some such streams of events.

VI.2 Yen Carry Trade.

Japan is a net exporter. As a country it has surplus money. It does


not know what to do with the money. (Problems of the rich are different
from the problems of the poor.)

Japan cannot have as much growth in the economy as it wants.


Since 1986 to 2000 it was stagnating. After 2000 had some growth only to
go down with 2008 American crisis.
Page No.: 23

Within Japan interest rate on Yen loans is almost zero. It has been
so for more than two decades.

Around late eighties, some smart bankers developed an idea. An


Indonesian (for example) can borrow in Yen @ 1% interest and invest in
Indonesian rupee and earn 20% return. Same potential for Malaysia, South
Korea and Thailand.

Even Indians could earn a huge net profit by adopting Yen Carry
Trade. But under FERA, RBI would not permit an ECB for speculation.

These five South East Asian (SEA) nations were growing rapidly.
They were praised as South East Asian Tigers. Their Finance Ministers
were being awarded “Best Finance Minister of the year” awards.

In these growing markets, Western Financial Institutions including


banks (FIs) started investing. Hence share markets went up. That lifted
property prices also. “Smart” bankers told natives to carry out Yen Carry
Trade.

Only problem was: International money markets will not convert


Yen directly into Indonesian rupee, Thai Bhat, Malaysian Ringgit or
Korean Won. Hence the “smart” borrowers adopted the following route.
Borrow in Yen. Convert the Yen into U.S. $. Convert U.S. $ into domestic
currency. Invest in the share market or property market.

This longer route meant additional cost of conversions of


currencies. Since there was a wide margin between cost of borrowing and
the return on investment, the borrowers took the cost in their stride.

These countries did not have “Reserve Bank of India” to regulate


their markets. Their Central Banks did not insist on strict margin
restriction. American Bankers / financial institutions insisted that they are
self regulated institutions. The domestic central banks should not try to
regulate them. People borrowed without any restrictions. Compare a
person with margin restriction and another person without margin
restriction. Illustration:

Mr. I in India has ` 1,00,000. If he borrows anything, he has to


provide atleast 25% margin. This means, he cannot borrow more than
` 3,00,000. Total funds available with him will be ` 4,00,000.

Mr. M in Malaysia has no borrowing restrictions. While the


Malaysian Government or Central Bank did not impose any margins, the
lending bank may, at its own discretion impose margins. Let us say a
margin of 5% was required. This means, the borrower could borrow
Page No.: 24

nineteen times his funds. The Malaysian borrower M had, say, `1,00,000.
He could borrow even ` 19,00,000 and play on ` 20,00,000.

The margin restrictions reduce the chances of profits as well as


losses. When there was no margin restriction, the “tigers” had almost no
restriction on their profits.

This cycle of growing prices building asset bubble went on for a


few years. All the five South East Asian Tigers had fully liberalised their
economies. They had no foreign exchange controls. Share markets and
banking systems were fully digitalised. Shares worth millions of dollars
could be sold in less than one hour, proceeds could be realised and
remitted out of the country in a day.

(See internet on a “Cartel of Bankers” speculating on international


currencies.)

VI.3 President Suharto. This is another stream of developments.

Indonesia became independent and Sukarno became President.


After many years, Suharto became President. (This is another long story.)
(History is nothing but Hi Story.) Communists were very strong in
Sukarno‟s Indonesia. They were causing “Trouble” for industries.
Government threw open the military on the communists. Over half a
million communists were simply killed. Indonesia became a capitalist
country. Indonesia had full support from the G7 (U.S.A., U.K., Germany,
France, Canada, Italy & Japan). They supported Indonesia and the country
started growing. “Aid Indonesia Consortium” was providing all kinds of
help to Indonesia. At one time, annual aid to Indonesia was around U.S. $
5 billions.

President Suharto liberalised Indonesian economy. Hence


substantial foreign investments started flowing into the country. Within a
few years foreign investments were far more than $ 5 billions.

Indonesia consists of more than 17,000 islands. Pre independence,


during the colonial days, while most of the islands were ruled by
Netherlands, some were ruled by Portugal. One far away island of Timor
was ruled by two countries. On independence this island was divided into
two parts – East Timor & West Timor. West Timor became part of
Indonesia while East Timor continued under Portugal. In 1975, it was
merged with Indonesia by throwing out Portugal. (Some thing like Goa in
India.) This was supported by USA. Then the equations changed. US
wanted East Timor to be independent. To compare, it was like the island
of Div claiming independence from India. President Suharto would not
allow such absurdity.
Page No.: 25

However, G7 is known for “Divide & Rule”. They wanted an


independent foot hold in the Pacific ocean. They asked President Suharto
to “liberate” East Timor. Suharto refused. Aid Indonesia Consortium
threatened Suharto with action if he would not comply with their request.
Substantial foreign investments had given an independence from the Aid
Indonesia Consortium to Suharto. He refused to buckle down.

Nothing happened. For a few years the investments into Indonesia


grew continuously. Suharto was praised in the western media as a
progressive, pragmatic expert leader of the country.

Nature plays several series of events simultaneously. For example:


Mahabharat is not one story. There are several stories simultaneously
building up. Ultimately all the stories climaxed into the Kurukshetra war.
See the next series of developments.

VI.4 Yen as International Currency.

Japan had emerged as a major exporter to U.S.A. U.S. dollar had


already become the global currency. After the 1972 fall in the value of U.S.
$, U.S.A. forced Japan to revalue its currency. Hence the cost of
production in Japan went up. To maintain its competitive age, Japan
outsourced its production to South East Asian Countries – South Korea,
Indonesia, Malaysia & Thailand. All these five countries turned into major
exporters. However, their exports were to Japan and not to U.S.A. If
Malaysia exported components to Japan, it was invoicing in U.S. $. Any
fluctuation in dollar would affect the profitability of the Malaysian
exporter. It made sense to invoice in either Malaysian ringgits or in
Japanese Yen.

Prime Minister Mahathir Mohammad was a radical independent


politician. He decided that it was better for Malaysia to adopt Japanese
Yen as the currency for international trade. He also convinced some of the
South East Asian Tigers to change to Yen as the trade currency.

Moving from $ to Yen for international trade would mean erosion


in demand for $. It was enough for U.S.A. to attack the SEA tigers.

VI.5 Crash of 1997.

In the year 1997, Yen appreciated slightly as compared to U.S. $.


The Japanese banks which had given Yen loan, demanded additional
funds for margins.
Page No.: 26

Since the Malaysian borrowers had fully invested borrowed money


in the domestic markets, they had no liquid money. Hence they had to sell
some of the shares. However, before the domestic borrowers could even
think, the cartel of the bankers at one stroke sold all their shares and
investments in the five SEA countries. Hence the share prices dropped.
The domestic investors following FIIs were late. There were two kinds of
problems. (i) They needed money for margins. (ii) Share prices had
dropped. Hence they had to sell more shares than they had anticipated. So
everyone wanted to sell. There was a mad rush. The asset bubble burst.
Within a few weeks the share markets crashed. Property markets
followed. The FIIs took all their money out of SEA. Hence their
currencies dropped. Within six months all the five tigers were insolvent.

In Indonesia the Rupiyah depreciated from 2600 per dollar to


16,000 per dollar. There was massive inflation. All the individuals &
companies who had borrowed in Fx, went insolvent. Economy collapsed.
People lost their jobs. Inflation & unemployment together caused massive
unrest in the country. There was a revolt. Some historians say that this
revolution was instigated by CIA. Suddenly several charges of corruption
came up against Suharto and his family members. Ultimately Suharto had
to resign from his post. With the change in power G7 nations jumped up
with their demand for independent East Timor. United Nations swiftly
sent its army to East Timor and “liberated” it.

After two years IMF President Michel Camdessus retired. In his


retirement speech he said: “I am happy that during my presidency our
target of removing President Suharto was achieved.”

I read this speech on IMF website during those years. After some
time I wanted to copy and save the speech and hence went to IMF website.
This speech was removed.

VI.6 Notes:
The 1997 crisis was known as South East Asian or SEA Crisis.
Initially this crisis affected South Korea, Thailand, Indonesia, Philippines
and Malaysia. All these five countries were economically ruined.
Essentially they were attacked by G7 Governments through the cartel of
financial institutions which speculate in foreign exchange. Having
succeeded in making huge gains by selling short the currencies of these
five countries, the cartel then attacked Mexico, Argentina & Russia. These
attacks were again successful and the currencies of these countries
depreciated drastically. Then there were attacks on China & India.
However, because of substantial foreign exchange regulations in these two
countries, the speculators did not succeed. They did not dare attack U.S.
currency.
Page No.: 27

One can say that many countries around the world were attacked.
Still the name of the crisis remained South East Asian Crisis.

Current crisis started in September, 2008 with U.S. banks &


financial institutions. It quickly spread into Europe. Rest of the world is
affected to a much lower extent. In fact some countries are prospering
irrespective of this crisis. Correct name of the crisis of the years 2008 to
2010 should be “American Financial Crisis” or “Western Financial
Crisis”. In this article we will refer to the current crisis as the American
Crisis.

VI. South East Asian Crisis completed.

US Government used its clout with the financial institutions to


make SEA nations insolvent. It then used U.N. & other friendly nations to
dethrone President Suharto & “liberate” East Timor. Achieving political
goals through economics. U.S. also sent a message to the world that who
ever tries to avoid $ as the International currency, will meet the fate of
the SEA nations.

Some Proverbs:

African Proverb:
When Elephants fight, grass gets crushed and trees get hurt.

Greek Proverb:
When a demon becomes so huge that no one can defeat him; God
plants seeds of destruction within the demon himself.

Indian Beliefs.
Law of Karma – What ever you cause to others will come back to
you.

History repeats itself. And yet no one can project future.

Next: Third world as the lender of money & supplier of goods to USA.
Page No.: 28

VII. China and India as Suppliers & Financiers to USA.

VII.1 U.S.A. has developed a strategy to supply imported goods to its


residents at low price. As a strategy, U.S. decided to stick to export of
services, weapons & high value technology products. It was a deliberate
policy to shift commodities production to the third world. This would
reduce the cost of production. Since third world had low over heads, low
cost of labour, nil or negligible pollution control laws, & insignificant
damages liabilities, their cost of production was lower than the cost of
production in U.S.A.

VII.2 U.S. MNCs set up subsidiaries in the third world. Outsourced


production & reserved marketing rights within U.S.A. to themselves. The
trend was so set up that the marketing & distribution margins were far
more than the production margins. Then they claimed that there was
great technology innovation in U.S.A. & hence they were making good
profits. Even Economist Magazine published articles claiming that U.S.
economy has great “Factor Productivity Growth”, it will have permanent
growth & there will be no recession in U.S.A. McKinsey & Company
published a report in the year 2001 & world media carried the reports that
U.S.A. had achieved permanent increase in the rate of growth in
productivity. Hence U.S. companies will make super profits. Will continue
to make super profits. They were not interested in commodities
production. It was for the third world to produce at low cost & supply to
U.S.A. See the report on this web link.

http://www.mckinsey.com/mgi/reports/pdfs/productivity/usprod.pdf

Several well known economists have written articles on this subject.

In my submission, innovation was not the chief contributor. Real


contribution was by: (i) Exploitation of the third world through the
currency manipulation. (ii) Forcing low prices on commodity suppliers &
pushing high prices on U.S. products & services. All lobbies worked with
the active collaboration of the U.S.A. Government. After all, “the business
of U.S. is Business”.

Consider an illustration. Indian ready made garment


manufacturers were supplying garments at a cost of $ 4 to $ 5 to the U.S.
chain stores. They in turn sold within U.S.A. at $ 20. It was evident that
Indian manufacturer (as well as the farmer growing cotton) would earn a
small margin & the U.S. distribution system would earn super profits.

VII.3 This was not enough. They still wanted lower costs. Hence U.S.
experts together with IMF & World Bank experts advised commodity
supplier countries to depreciate their currencies. Benefit for the third
Page No.: 29

world were supposed to be: within the country all suppliers of goods &
services including labour still get their prices. And yet outside the country,
they could achieve competitive strength.

VII.4 Even Indian Government went on a long cycle of devaluation of


rupee. Remember, in the year 1981, rupee rate was: $ 1 = ` 8. Now it is
` 45. Indian Government & RBI understanding was: with every
depreciation of Rupee: (i) Imports become costly. Exports become cheap.
Hence Indian trade balance improves. Fx reserve position improves. (ii)
Customs duty – which gave more than direct tax revenue, would increase.
(iii) There will be more employment in India.

Little did Indian Government & RBI realise that (i) Continuous
depreciation of rupee was increasing cost of production in India. Imported
products & especially crude oil increased cost of production. (ii) With high
cost of imported machinery, Indian factories were becoming less
competitive. (iii) It was a strong incentive for Indian rich to transfer their
wealth to Swiss & other foreign accounts. (iv) It was a strong disincentive
for any one to invest in India.

And when all commodity suppliers devalued their currencies, only


countries that benefited were the developed importers of commodity
goods. Especially U.S.A. (This paragraph VII.4 is a small summary. It
deserves entire paper.)

Who is more guilty of this misleading depreciation of rupee! U.S. or


Indian Government! To be ignorant is a crime in this world. Punishment
of the crime is that you will be exploited.

What were all the Indian experts doing! Were they only repeating
what the U.S. experts told them!

Ultimately, India became near – insolvent in the year 1991. With


massive liberalisation of the economy, entire picture has changed. That is a
separate interesting story.

VII.5 Loan to US:

When a person holds any currency note, in effect, he has given loan
to the Government issuing that Currency. If you hold ` 100 with you, you
have given a loan of ` 100 to the Indian Government. The paper note has
no intrinsic value. It is just a piece of paper. It is true that when you give
that note to the shop keeper, he will give goods worth ` 100 to you. Today,
we all need money to transact our business. And in India, rupee is the
legal tender. Fact remains that when the Government issues paper
Page No.: 30

currency it is getting value for nothing. Any one who takes money, is
giving a loan to Government.

When an Indian black money holder holds $ in Swiss bank, he has


given loan to the US Government. He could hold gold or any other real
asset. But he chose to hold an IOU by the US Government. When the RBI
holds say, $ 200 billion in Fx reserve, RBI has given loan to the US
Government. In reality, central banks hold a combination of treasury
bonds & currency account. Bonds are of course plain simple loans. But we
do not consider them as loan given to USA. We consider it as our reserve.
What is the value of that reserve!

In the year 1991 Indian Fx reserve was less than $ 5 billions. Since
then, the Fx reserves have increased to approximately $ 300 billions. Out of
this amount, let us say, the dollar component is worth $ 200 billions.
(Actual mix of reserve is a secret maintained by RBI.) Thus in last 20 years,
India has lent approximately $ 195 billions to the US Government.

China has lent, say, $ 1.5 to $ 2 trillions to US Government. (Total


Chinese reserves are more than $ 2.6 trillions.)

Japan has lent say, $ 700 billions to the US Government. (Total


Japanese reserves are more than $ 1 trillion.)

Whole world together has lent $ 14 trillions to the US Government.


Almost no one realises that he/she has given loan to the Government. But
that is the underlying fact.

VII.6 Forced Loan to US:

China, Japan & India have decided that they will not allow their
currencies to appreciate against US dollar. Any appreciation of their
currency & their exports will be hurt.

Now US either deliberately or helplessly depreciates $. These three


nations have no option but to buy dollars & sell their own currencies in the
market. In this way, they will make a competitive depreciation of their
own currencies. But qua the $, their currencies will maintain value.

If you want to maintain the value of your currency against $, you


have to keep buying $ continuously.

By quantitative easing of $ 600 billions, US Government has/will


depreciate $. In a competitive effort, all three nations will buy $ and will
not allow their currencies to rise. Whether they like it or not, they have to
keep lending to US.
Page No.: 31

This is the Currency War. In this war US fires at every body & the
victims still support US. The day we stop trusting dollar, our exploitation
will stop. China, Germany, Brazil & several countries are trying to find a
way out. So far, there is little success. So far.

VII.7 We are familiar with the India story. Similar was the case with
China. It was encouraged & praised as a miracle economy when it
supplied toys & shoes at low cost to U.S.A. China developed special
economic zones simply to export goods. Chinese outside the SEZs
remained poor. They were starved & are being starved (comparatively) so
that Chinese SEZs could export goods at low cost to U.S.A. China
developed huge export surpluses. Where do you invest the surplus! In
U.S. currency & treasury bonds only!

See the story in perspective. China would supply goods to U.S.A.


U.S. Government will simply issue IOUs to China. All treasury bonds &
even currency notes are simply IOUs. Their value is equal to the
capacity & intentions of the issuer. China was lending to USA &
supplying goods to USA by keeping her own people poor. US residents
enjoyed wasteful consumption at a low cost.

VII.8 With this policy, U.S.A. was very happy that Chinese & Japanese
currencies had low values. When the Japanese auto & electronics
industries grew so well that their competition started hurting U.S.
production & ego, they forced Japan to revalue Japanese yen – year 1986.
China is far behind Japan in terms of technology input in exports. Hence
U.S.A. never asked China to revalue its currency. Until the 21st Century..
when U.S. economy had started facing difficulties & unemployment
started soaring. It is unwritten law that all countries around the world
should so arrange their currencies & economies that U.S.A. should benefit.
China became the first country to oppose U.S. instructions. Hence the
beginning of current Currency War.

VII.9 Now who is causing the currency war: China or U.S.A.!

VII.10 When you keep issuing IOUs & no one ever asks for repayment, in
essence you are not paying any one any thing.

U.S.A. owes to the world 14 trillion dollars and U.S. is incapable of


repaying the loans. It has got a continuous trade deficit for many decades.
Supposing the world becomes wiser & asks for repayment. What will U.S.
do! Well it will refuse to pay. That is what it did in 1972. The Nixon Shock
has showed us what lies in future.
Page No.: 32

Conclusion: U.S.A. has developed a strategy: (i) to supply imported


goods to its residents at low price. (ii) To get a high price for its own
services & products.(iii) To transfer the global resources to U.S. & to enjoy
the same at the cost of rest of the world. (iv) If any thing goes wrong,
blame the world.

Further notes:

1. Exporters of India are giving out Indian resources at low or Nil cost
to U.S.A. while half the Indian population is poor. And the export lobby
claims that they are the saviours of Indian economy & they deserve
incentive in the form of continuous depreciation of Rupee. And even RBI
buys the argument!

Similarly, Japan has supplied goods & services to USA. Keeping


large masses of Japanese population at lower middle class so that the U.S.
residents enjoy luxuries of life at little cost. This is another long story.
Interested readers may search on internet. If you want news which are not
biased by western interests, find Japanese authors in Japan who write in
English.

History keeps repeating itself with all the countries.

2. During last 500 years, the Chinese did not allow any European
nation to rule them. They are not allowing the white to exploit them even
now.

3. It may be interesting to note that the Britishers minted money by


buying opium from Afghanistan & India and selling it to China. British
authorities were smugglers and drug peddlers. Chinese prevented the
British traders from selling opium in China. This caused the famous
“Opium Wars” in the years 1839 to 1842. It is an interesting reading to see
how the Britishers & the Chinese report different versions of the same
wars in their own history.

VII. China and India as Suppliers & financiers to USA. Completed.

This is a long story told in 5 pages. On internet you may find books or
essays written on each paragraph.

Next:

See how US has reaped enormous benefits by making $ as International


trading currency.
Page No.: 33

VIII. Benefits to USA of $ being the global currency:

In paragraph IV.3, “Currency Explosion”, on pages 13 & 14, we


have seen the benefit that U.S. has enjoyed for having $ as global currency.
Now let us consider an illustration.

Let us assume that U.S. owes $ 2 trillions to China. Current


(January 2011) rate is 7 Yuans equal to $ 1. (7 Yuans = $ 1). Now US is
pushing China to revalue Yuan. Assume that Yuan is revalued so that
new rate is 6 Yuans = $ 1.

As far as US Government & Central Bank (Federal Reserve) are


concerned, they have made no loss or profit. Their borrowing is expressed
in their own currency. It remains same.

As far as Chinese Government & Chinese Central Bank are


concerned, they have lost 2 trillions Yuans. Earlier their balance sheet
showed Fx reserve of (2 x 7) 14 trillions Yuans. Now with revalued Yuan,
they will have Fx reserve of 12 trillion Yuans.

Logic: This is one of the several reasons why China is resisting


revaluation of Yuan & U.S. is pushing.

US keeps pushing currencies around the world to adjust their


values such that US benefits. Since all transactions are mentioned in $,
generally, US is not affected by rate fluctuations. Other countries may lose
or gain. Generally, lose.

The benefit of your currency being accepted outside your country


is that you keep issuing IOUs & the world believes that it has received its
payment. You never have to repay. If one individual asks for repayment,
there are ten more to accept your IOUs. In effect, the world is gifting you
trillions of dollars. So you enjoy the luxuries of life. Why save! The world
is saving for your benefit.

There are more benefits. Let us keep them for some future
discussion.

VIII Benefits of $ being Global Currency completed.

Next:
How US maintains its hegemony over world trade!
Page No.: 34

IX. How U.S. tries to maintain $ Hegemony!

There are several ways that U.S. employs to ensure that the $
remains global currency. U.S. will not give up the tremendous advantages
that it has got used to. We will see some of these ways in brief.

When some one considers value of rupee, he would say 45 rupees


are equal to $1. However, if he wants to value $, how would he state the
value? $ is valued in terms of gold. If gold price rises, it means $ value
has depreciated. It is in the interest of U.S. Government that gold price
remains steady or goes down. U.S. would want people to invest in $
rather than in gold.

How do you control the value of gold?

IX.1 Gold Carry Trade


U.S. Government and a small, select cartel of FIs played this game.
It is explained in some hypothetical steps.

1.1 U.S. Government would lease gold to Union Bank of Switzerland


(UBS), Goldman Sachs, Lehman Brothers, Citibank, etc. Let us say, 100
tonnes of gold is leased.

Gold may or may not move out physically. “In these days of
digitalisation, who wants the real thing! Virtual is better than the real.”
The custodian will issue receipts to the FIIs that it is holding gold on
behalf of the FIIs. Receipts will be in smaller quantities. Some people do
insist on physical delivery. Women would rather wear jewellery than hold
digital receipt of gold. “One Asset in hand is better than two digital
assets.”
Where required, gold will be delivered.

1.2 FIs will pay a small lease rent to the Government.

1.3 FIs will sell gold in the „spot‟ market. They will get cash which will
be used in the banking business to earn income. Net of lease rent, FIs will
earn profits.

1.4 FIs will buy gold in „futures‟. As far as FIs are concerned, they
have sold gold and bought gold. Hence technically, the gold taken on
lease is still with them. It is possible that for all the transactions – lease –
sale on spot – buy in futures – only custodian‟s receipts have changed
hands.

1.5 It is also possible that some gold is actually delivered in the market.
In fact it is planned to continue deliveries in the market so that gold prices
Page No.: 35

continuously go on reducing or at least remain stable. In last ten years,


several Central Banks around the world and U.S. Government have sold
hundreds of tonnes of gold. And gold prices remained range bound for
almost twenty five years after the Nixon shock was over. (Barring a few
disturbances for specific reasons.)

This way, they make no losses on “sale and buy” operations. The
cartel was happy & confident in Gold Carry Trade. Bankers who made
profits out of air, were taking huge bonuses and congratulating them
selves for being so intelligent. U.S. Government was happy that $ to gold
price was stable. This process could continue with some disturbances till
the year 2006.

1.6 Banks could legally say that they have fulfilled all banking reserve
ratios and the balance sheet is great. They are earning profits and every
thing is rosy.

1.7 U.S. Government can legally claim that it is still owning 8000 MTs
of gold. A part of this gold may have physically moved out, got
converted into jewellery or may be lying in some one‟s lockers as his/ her
investment. Even if some gold is lying in Fort Knox as custodian, it has
been sold out virtually by the banks.

1.9 After the dot com bust and Enron plus Arthur Andersen collapses
in 2001, world had started losing confidence in U.S. By 2006 the trend
became intense. More and more people were buying gold instead of
hoarding $. By 2008 gold buying rush became gold buying avalanche.
Today, prices have risen from $ 400 per ounce to $ 1400 per ounce.

1.10 All the banks which had conducted Gold Carry Trade had to stop
selling gold and start buying gold. But if all the banks need to buy say,
2000 tonnes of gold, it is simply not available in the market. (This explains
steep rise in gold prices between 2006 & 2010.) All these banks could have
incurred huge losses.

American Government does not make losses – as long as banks are


able to keep their promice. However, many banks have gone insolvent.
U.S. Government has bailed out the banks. Consider how much leased
gold is recovered and how much – not recovered. This will remain a top
secret until some one leaks out the facts.

Conclusion: The Gold Carry Trade cartel has failed. So have the banks.
Bail Out doles kept some banks running & some went insolvent. And no
one has blamed the Gold Carry Trade. US Government keeps bailing out
others. Who will bail out US Government!
Page No.: 36

IX.2 If Any one refuses to accept $ as currency, attack & destroy.

2.1 The South East Asian crisis was created because of several reasons.
One was: they dared to move to Yen instead of $ as global currency.

2.2 Whole world knows that:


(i) Saddam Hussein of Iraq was not involved in the World Trade Centre
attack.
(ii) There were no weapons of mass destruction in Iraq.

Iraq was attacked only because Saddam dared to sell oil in Euros.
Saddam was humiliated & killed.

2.3 Iran became dominant in Asia. When a compliant Shah was the
ruler, U.S. armed Iran. However Ayatollah Khomeini took over the control
of Iran & disturbed U.S. plans. Iran was attacked by Iraq in the year 1980.
It is rumoured that Iraq (Saddam Hussein) was instigated by U.S. to attack
Iran. U.S., U.S.S.R. & Spain supplied weapons to both sides - Iraq & Iran.
They made money. Iraq & Iran were seriously damaged.

2.4 U.S.S.R. was destroyed because it was competing with U.S.A.

2.5 Euro was attacked. And even now, at every opportunity, American
experts would denounce Euro. But Euro has survived US attacks. With
Euro, a large market for US $ has vanished.

IX.3 China:
I feel US may have developed a strategy to break and destroy
Chinese economy. U.S. cannot tolerate any one challenging its Super
Power Status. It may take them 20 years or 30 years or 2 years to achieve
their goal. And the strategy may have started before ten years. After
China is finished – some people may realise the strategy. Most will never
realise.

One Possibility: US owes approximately $ 2 trillions to China. One


day, US can declare that it will not honour its debt.

There will be a global crisis. China will lose $ 2 trillions. US $ will


be devalued. Who will win and who will lose?

In 1972 Nixon told France that it will not honour commitment at $


35 per ounce of gold.

In the year 1979 Ayatollah Khomeini became the ruler of Iran. USA
seized all Iranian assets in USA and refused to honour its debt to Iran.

It can do the same to China.


Page No.: 37

IX.4 List of U.S. Strategies

This is a summarised list of a few of the U.S. strategies. Some are


already discussed at length in this paper.

4.1 Promising full convertibility into gold, becoming a prominent


currency and then breaking the promice. Nixon Shock.

4.2 Series of wars to maintain dollar hegemony. While U.S.


Government is against Diamond Trading Corporation (DTC), global
diamond trade is in dollar. Crude oil and gold are traded in $ - though
U.S.A. exports neither.

4.3 Series of strategies to maintain high value of dollar like Gold Carry
Trade. Asking other countries to devalue or revalue their currencies.
Japanese Yen fluctuations. Indian Rupee devaluations & depreciations.

4.4 Suppressing the prices of commodities supplied by others. Crude


oil price strategy. Chinese commodity supplies at low prices.

4.5 Maintaining double standards. KYOTO agreement. Nuclear NPT,


WTO. Attacking Swiss and other tax havens. Permitting Delaware as tax
haven within U.S.A.

4.6 Subverting international institutions to own advantage: U.N., IMF,


World Bank. Attempting to subvert even OECD and other regional
international bodies.

4.7 Siphoning off whole world‟s savings & consuming the same: Euro
dollar, Petro dollar, Japanese & Chinese dollar.

4.8 Scuttling the IMF SDR & replacing it by U.S. $ as the international
currency.

4.9 Pentagon. Continuously having some war some where in non-


white countries. Outside North America & Europe. Selling weapons to
both sides of warring nations.

4.10 Lobbies in U.S.A. Pentagon, Insurance, Pharmaceutical industry,


Banking & Financial Institutions. Permitting all these lobbies to grow in
wealth & power at the cost of the consumer. Then subsidising consumer
by exchange rate policy & $ hegemony.

4.11 Installing dictatorial Governments that suit U.S. policies – Pakistan,


Panama, Peru, Iraq, Afghanistan, Nicaragua & so on.
Page No.: 38

Conclusion: U.S. has adopted several means to maintain $ hegemony.


These have become apparent. World is losing confidence in U.S. That is
the beginning of end for U.S. hegemony. Paragraph 4 covers a broader
issue: How U.S. maintains its status as Super Power No. 1. Awareness &
acceptance of the root cause of the problem is the first step towards
solution.

IX. “How U.S. tries to maintain $ Hegemony”. Completed.

Next:
It has become practically impossible for any one to trade
internationally in any other currency.
Page No.: 39

X. Practical Compulsion to adopt $ as a Global Currency:

Once $ became global currency it became a necessity to trade in $.


Small entities just cannot survive if they do international trade in any
other currency. U.S. does not even have to lift a finger to cause losses to
small entities.

X.1 Illustration:

Shipping Corporation of India (SCI) has to quote its freight in U.S.$.


Even if it lifts cargo from Mumbai to supply to Africa, the freight will be
quoted in $. Actual payment may be made in rupee – but converted into
rupee at the rate prevailing on the day of payment.

SCI tried to quote freight rate in different currencies. For example,


for freight from U.K. to Finland – in Euro, for Asian trade, in rupee etc. In
six months time SCI had to return to U.S. $.

Why?
Almost All the shipping costs are quoted in $. Crude oil is traded
in $. Expatriates‟ salaries are quoted in $. Several port services are quoted
in $. Together, more than 70% of its costs are quoted in $. Even ship
purchase cost would be in terms of $ - even if it is built by South Korea.
ECB (loan) on ship would be in $.

Now consider an illustration – (all figures are assumed.)

SCI quoted freight in rupees – say ` 45,000. SCI‟s Profit & loss
account - currency wise Break-up is as under:

$ `
Revenue 100% 1000 45,000
Cost in $ 70% 700 31,500
Cost in INR 20% 200 9,000
Profit in INR 10% 100 4,500

Its costs are 90% or say, `. 40,500. On the date the freight is quoted,
the $ - Rupee rate was say, ` 45 equal to a $.

Now its revenue is fixed in terms of rupee. It will get only


` 45,000 irrespective of the conversion rate when SCI pays its costs.
Supposing, at the time of payment of costs, the rate changes into Rs. 50
equal to a $. The costs are fixed in $. So SCI will have a cost as under:
($ 700 x 50 = ` 35,000 + ` 9,000) ` 44,000. Large part of its profit is wiped
out.
Page No.: 40

Consider, the rate had changed into say ` 40 = 1 $.


SCI‟s profit would jump to ` 9,000.

SCI Profit & Loss A/c

@ ` 50 = $ 1. @ ` 40 = $ 1

Revenue 45,000 45,000

Cost 9,000 + 35,000 (700 x 50) = 44,000 9,000 + 28,000 = 34,000

Profit 1,000 9,000

In other words, the variation is in $ cost. $ 700 x ` 5 = ` 3,500. With


INR going down to ` 50, SCI‟s profit is reduced by Rs. 3,500 & with INR
going up to ` 40, SCI‟s profit is increased by ` 3,500.

Such a huge fluctuation in profits just because of exchange rate


fluctuation is something beyond the control of SCI. In reality, SCI had to
revert to quoting the freight in terms of $. It can manage shipping
business, not exchange rate fluctuations.

The issue is, if SCI had quoted freight also in $ then its picture
would be as under:

$ @ 50 `
Revenue 1000 50,000
Cost in $ 700 35,000
Cost in INR 9,000
Profit in INR 6,000

With depreciation in Indian rupee, SCI‟s profit would still be


protected.

Indian companies‟ experience in the year 2009 has proved that $


keeps moving unexpectedly. Hence even forward booking of $ can be
disastrous. Companies have incurred huge losses in hedging.

X.2 Some implications of $ being global currency

Gold is traded in $. Let us say, an Indian importer imports gold in


different ways:

(i) Directly from South African Mines;


(ii) From Traders in London or Dubai.
Page No.: 41

At all places gold will be quoted in $ though USA does not supply
gold. Even South African mines will quote gold in $ and not in Rand.

Hence whenever Rupee - $ parity changes – gold price in India


changes – though whole of the gold comes from Non-U.S. sources.
Fluctuation in Rand does not affect us.

When $ gold price went up from $ 400 per ounce to $ 1400 per
ounce, it was actually a massive devaluation of $. If South African mines
were quoting gold in Rand, Indian gold prices would have remained
` 9,000 per 10 gm. & not shot up to 20,000 per 10 gm. (One American
Ounce = 31.1 Grammes.)

X. Compulsion to adopt $ as a Global Currency completed.

Next:
While US is trying desperately to maintain its hegemony,
is it likely to succeed for long!
Page No.: 42

XI Some signs of the trend for U.S. Economy.

XI.1 Its crude oil price strategy is slipping out of its hands.

XI.2 Gold price strategy has already slipped out of the Cartel‟s hands.

XI.3 Articulately developed myths have started breaking down:

(i) “U.S. is invincible.” World Trade Centre Attack and U.S. failure to
catch Bin Laden.
(ii) “Americans are honest.” Enron, Arthur Andersen & scores of other
scandals in U.S.
(iii) “U.S. Economy is strong.” Dot com bust,

(iv) American Financial Crisis of 2008 to 2010. This is a subject by itself.


It is not covered in this paper. In brief, whole crisis was caused because of
the Bankers‟ greed. American financial crisis also pulled down all those
who had invested in U.S. economy, or simply in $ lying any where in the
world. People dependent on exports to U.S. are also affected. In near
future, they may be in for a rude shock.

XI.4 SEA countries, Iraq, Iran, Venezuela and China – all have tried to do
international trade in currencies other than $. There will be more
attempts.

XI.5 Creation of Euro has eroded demand for $.

XI.6 Saudi Arabia, China and some other Governments have started buying
gold and selling $.

Despite all these facts, one may observe that the common man still
thinks: “U. S. is a great economy”. Sage Tulsidas had said: “Samarth Ko
Nahi Dos Gosain”. (Ordinary people do not find faults with the wealthy &
the powerful.) Our sages were great experts in human & society
psychology. (Individual thinking & collective thinking.)

Many people in & outside U.S. believe that U.S. is a dynamic


country. It has always come out a winner from any crisis. It will again
come out a winner after the current Currency Wars. Let us watch how
events develop.

XI. Observations on economic trends completed.

Next:
If & when US economy collapses, $ loses its hegemony, what will
happen!
Page No.: 43

XII. Probable Consequences of Currency Wars.

When USSR collapsed, not many were bothered. World trade was
not affected. However, when US (the largest buyer in the world) collapses,
what can happen! Let us see a few probabilities.

XII.1 One Possible Scene: US economic demise.

World is losing confidence in US.

Arabians may stop investing in $ & instead invest elsewhere. They


stop selling crude oil in $ and accept all other major currencies of the
world.

Russia, India and China trade in ACU or Yuan.


All countries ask for cash payments in currencies other than $.
Then US will have to live within its means. American will have to give up
luxuries of life and live as rest of the world lives. This will mean a drop in
U.S. GDP – recession.

$ will devalue to say, Rs. 10 equal to a $. All goods imported into


U.S. will be 4 times costlier. Hence there will be huge inflation in USA.

Recession coupled with inflation means stagflation.

XII.2 U.S. & China War

US and China may have an open traditional war. It will be real


third world war. It will also be a disaster for almost the whole world.

Both – USA and China are powerful and stubborn.


One is declining super power and the other is rising super power.
Like Jungle animals, they may decide – who is right – by fighting.

Lehman Brothers and AIG believed: “We are too big to fail.” They
failed. World believes that a war between two nuclear powers is
unthinkable because of its harsh consequences. We hope, the unthinkable
does not materialise.

XII.3 U.S. learns to live within its means.

US people and Government learn to live within their means. They


generate trade surplus and start paying off loans to the world.

World maintains patience till US repays the loans.


Page No.: 44

US stops fighting Afghan and Iraq wars, evacuates its entire


military and machinery from the two countries. US reduces its military
presence all over the world and accepts to be one of the first five countries
rather than Super Power No. 1.

Only in such a situation (by reducing its war expenditure) can US


hope to reduce its budgetary deficits.

Do we see signs of a wiser, tamer USA stopping its lordship over


other countries!

When Obama came to power, world was hopeful of a wiser U.S.


Government. Obama promised the electorate to close Iraq & Afghan wars.
That was in 2008. In 2010 Obama has increased war machinery in
Afghanistan.

XII.4 Material Wealth Vs. Spirituality:

In the 20th century after 1960‟s (it took 20 years to recover from
world wars) and in the 21st century we have seen tremendous growth in
trade, science, technology and new instruments like computers, internet,
wireless communications and so on. All these have made us richer in
terms of wealth and military power.

The spiritual evolution has not kept pace. There has been some
growth but no way as much as the growth in wealth and power.

Wealth without wisdom is dangerous.


Power without wisdom is dangerous.
Wealth and Power together without spiritual evolution are
disastrous.

U.S. Government has proved in last 75 years that it has no wisdom.


It is a rogue Government attacking and killing people all over the world.

Sometimes purely for ego – Hiroshima and Nagasaki.


Sometimes to spread capitalism and prevent socialism.
Mainly to maintain its Super Power Status.

It supported Pakistan against India and equipped Pakistan to keep


fighting with India.

Most of the times it has fought wars to keep growing its trade and
continue exploitation of natural resources of other nations.

Now its power is waning.


Page No.: 45

It knows, it is living a luxurious life on borrowed money. But it


cannot give up luxuries of life.

At the same time China has emerged as a powerful nation. China is


biggest lender to USA.

Both are powerful nations.


US has tried to sub-due and exploit China.
Failed in Subduing China. Succeeded in exploiting China.

But now China may not permit further exploitation (To the extent it
understands exploitation.)

Both US and Chinese Governments are insolvent in spirituality.


(Generally all Governments are insolvent in spirituality. But at least some
of them are cautious.) These two Governments – are they wise enough to
avoid an open war?

We will know in ten years.

Is Indian Government wise enough to stay away from two


elephants fighting?

XII.5 Psychological Reactions:

Consider psychology. A rich man or a man in authority is


accustomed to Power. When he starts losing power, he has fear of losing
further power. Fear makes him angry. Anger makes him attack the cause
of fear – where he is losing power.

When a rich man becomes poor, he gets into depression. He may


even commit suicide. When a Government bureaucrat retires, he loses
power. If he has not trained himself to a life without power, he may get
into depression.

Human individual psychology applies to Governments and nations


also. Attacks by US are due to their fear of losing power and losing $
hegemony.

XII.6 What will happen when U.S. $ collapses?

All those people who own $ assets will lose their assets.
India may hold $ 150 billions as Fx reserves. This will evaporate.
India will suffer a loss of upto $ 150 billions.

China will suffer a loss of upto $ 2 trillions.


Page No.: 46

Whole world together will suffer a loss of $ 14 trillions.

U.S present generation has over spent money by $ 50 trillions.


(This includes internal & external debt & unaccounted provision for social
security & medical benefits.) It owes this to future generations. The future
generations will lose $ 50 trillions. In other words, US future generations
will start with a huge negative balance. They will have to work much
harder just to survive – because their present generation is living beyond
its means.

Countries like Japan, China etc. which live on exports to US will


see recessions. China has already started taking steps to prevent this
situation. It is developing domestic demand and trying to reduce its
reliance an exports to US. China is also focussing on other world markets
for its exports.

Companies like Indian software exporters are unique. They have


grown even in the dot com bust of 2000 and the American Financial crisis
of 2008 to 2010. However, if $ / American economy actually collapses, can
they grow! Probably they may find US markets being reduced drastically.
Their share prices may crash. When the shareholders suffer losses,
Mumbai property markets can slide down.

Within USA unemployment can rise to 20% or more. There can be


food riots. Unemployed Americans will attack foreigners and especially
the coloured people. NRIs and NR Chinese will return to their home land
– only to find that the skills in which they specialise are no longer
required. Or they can get only one-fifth of the salaries they were enjoying
in US before 2006. Their savings left in USA might evaporate.

XII.7 $ Slide to Crash.

We have seen in the paragraph V on USSR implosion that the


rouble crashed from 4 to 31,500 roubles per $. There was no reason for it to
crash below 8 roubles per $.

Value of a currency is a matter of confidence in a Government.


Confidence is human sentiment. Sentiment is not reasonable.

When people lose faith in $, it may not stop at ` 10 per $. It can


crash to $100 per rupee.

One can argue that USSR had no economists, no think tank on


exchange rate parity. They did not save rouble from the crash. But USA
Page No.: 47

has great wizards in economics & a fantastic “Think Tank”. It will save $
from a disaster.

Well, recent past has shown that US has made several blunders. The
think tank could not avoid the dot com bust or the American crisis of
2008-2010.
Only time will tell whether US $ crashes or survives.

XII.8 Commodity Suppliers will benefit.

At present, suppliers to US are supplying the goods at low prices,


by sacrificing the needs of their domestic population. When one third of
Indian have insufficient clothes to wear, we are exporting ready made
garments & cotton yarn. When US economy collapses, this cotton will be
available for our own people.

Similarly, a lot of goods which are being exported will remain


within India. There will be a reduction in prices.

U.S. will have to stop its excessive & wasteful consumption. The
resources saved will be available for the rest of the world.

Let us say, $ is reduced to ` 10. Crude oil is quoted in $. Assuming


it continues to be quoted in $, the cost of crude oil will go down by 75%.
Imagine petrol being available for ` 15 per litre. Entire cost of transport
can go down. This can reduce cost of production in India. There can be a
further reduction in prices. We can achieve GDP growth with a fall in
prices.

Indians who have stored their black money abroad & especially in
$, will have to remit the funds into India. We will have more capital
available for our own capital programmes.

Caution: (i) Nothing will work on its own. India will have to work
hard & strategically to gain its rightful benefits. If it does not work, some
one else will take away the benefits.

(ii) These are thoughts on probabilities. Noone may consider


these as prediction of what will happen.

XII.9 Mafia: Now U.S. strengths have turned into a problem. An albatross
around its neck.

U.S. trade deficit is $ 600 Bn. per year.


U.S. budget deficit is $ 700 Bn. per year.
Page No.: 48

Every day it needs to borrow $ 2 billion. If U.S. does not get more
foreign money every day, its financial wheels will stop. U.S. Government
will not be able to pay salaries to its staff and to its military.

If China and Japan stop subscribing to U.S. Treasury bonds for one
month, U.S. wheels will stop. Alternatively, U.S. has to continue printing
notes and issuing within U.S.A. This will cause inflation. Americans are
not used to severe inflation for many years.

U.S. will not be able to maintain its nuclear installations at


hundreds of places in different countries and in different sub marines
around the world. U.S. army, air force and navy will have to be called
back from the whole world.

Remember: When USSR Government called back its military from


Afghanistan and Eastern Europe, USSR Government was insolvent.
Government retrenched the personnel called back from front. These
people only knew using guns. They had no other skill. So they formed
mafia gangs – total number going upto 4000. In Russia, no businessman is
safe without protection from some mafia.

When U.S. Government will call back its Marines from the world
and release them on innocent U.S. residents – there will be more mafia
gangs. Guantanamo Bay and several other incidents around the world
have proved that these gangs will be more cruel than Russian gangs. And
U.S. may have many mafia gangs already working in U.S. Will U.S. be safe
haven for anyone! Even proper American natives may start thinking of
migrating elsewhere.

It is said: What you cause to others comes back to you. Timing


and form is uncertain. But coming back is certain.

XII.10 Inflation:
Current inflation in India and government‟s helplessness in
controlling inflation is a direct result of Currency Wars. It is discussed in
Annexure 2.

XII. Consequences of Currency Wars completed.

We have seen several probabilities which may result if the Currency


wars escalate. Let us hope that US becomes wiser, less aggressive & lives
within its means.
Next:

Is it possible to remove $ hegemony & stop the exploitation


of the rest of the world! What are the alternatives!
Page No.: 49

XIII. Probable Solutions:

XIII.1 IMF / SDR:

Original idea was that International Monetary Fund (IMF) would


create Special Drawing Rights (SDR). These SDRs would work as the
International Currency. All the members of IMF would have quotas fixed
based on some formula.

If SDRs had actually been used as international currency, then all


the member nations would have benefited. As and when the need for
additional money was required, IMF would issue additional SDRs. This
would be a simple gift to each nation.

Today world has almost gifted $ 14 trillions to USA. This gift


would have gone to all the nation members of IMF instead of exclusively
to USA.
A gift of $ 14 trillions is worth much more. To appreciate this issue
consider an illustration:

Two young CAs pass exams, obtain certificate of practice and start
practice. Both are equally competent. However, one CA has no capital.
He starts practice from home. Another CA gets a gift of Rs. 5 crores. He
buys good office and installs necessary infrastructure. He will get a good
head start. The CA without capital can eventually cover up the distance.
But initially the rich CA gets a benefit.

Plain gift of massive fund has its own tremendous value for USA
and tremendous loss for rest of the IMF members.

Remember, IMF has worked as an institution “Of the US, For the
US, By the US”. It will not allow any great solution if that solution does
not serve US interests. World will have to replace IMF by a truly
independent global institution. And then issue an independent global
currency. Sounds very difficult. Nothing worthwhile has ever been easy.

XIII.2 Alternative to Global Currency

US $ will lose its status as Global Currency.


World will have to find other ways of doing global business.

Can we do away with US $?


World will have to do away with $ and stop gifting trillions to US.

Assume that India starts trading with all its international markets in
their own currencies. Indian imports are annually worth $ 300 Billions.
Page No.: 50

India may insist on even US companies to invoice in Indian rupees. For


business with Europe, all invoicing may be in € or Re. For business with
China, all invoicing may be in Yuan or Re. And so on.

China has already made an offer to India: For bilateral trade China
is ready to avoid $ and deal in Rupee or Yuan. If India accepts this
proposal, to that extent need for $ will be reduced.

With a proper exchange clearing house, it is possible to reduce the


invoicing in $ to minimum. Each country may have its own clearing
house for scores of currencies. Simultaneously reduce the holding of US $
as Fx reserve to minimum.

Sounds simple. This is what Saddam Hussein of Iraq wanted to do.


This is what SEA nations wanted to do. US will certainly attack India if
India adopted this course of action.

It has to be done collectively and strategically.

XIII. Probable solutions to do away with $ hegemony completed.

Next:

Main paper is completed here. There are some relevant issues.


In the next paragraph we discuss some economics & some
philosophy.
Page No.: 51

XIV. Relevant Issues of Interest

XIV.1 Money Creation:

How does a country create money?


Central bank passes a journal entry in its books.

It debits Government (loan to Government) and credits a reserve


account in its own books. Then for the amount concerned, it prints notes
and gives to Government / or credits Government account. Government
can then use the credit balance for its payments.

In the past, when cheques used to take 1 to 4 weeks for clearance,


businessmen also created money. They would issue more cheques then
their credit balance with bank. Now with immediate clearance on
computer, this avenue is limited.

XIV.2 Gold weight & rate.

Normal metric ounce is = 28.35 grammes.


However, US uses troy ounce for gold. It is = 31.10 grammes.
Hence one tonne of 1,000 Kg is = 32,154 troy ounces.

When the price is $ 1,400 per ounce, it is $ 45,015,000 per Mt. (32,154*
1,400). ($ 45 millions per tonne.)
Hence $ one billion will get 22.21 tonnes of gold.
8,000 Mts. of gold = $ 360 billions.

XIV.3 Expansionist policy.

Expansion of the Kingdom by attacking neighbours is a tradition


followed for last few thousand years. Why did Kings expand their
Kingdoms! To get more resources, more wealth, more revenues – which
otherwise did not belong to them.

USA has held Saudi Arabia; and through it oil exporting nations as
its virtual colonies. For several decades U.S. could control the price of
crude oil. We, the Indians may not see the truth. But those who are
exploited, do see it. They have a seething anger at USA. Hence Bin
Laden‟s attack on U.S. World Trade Centre in September, 2001.

Even after the tradition of Kingdoms is replaced by capitalism/


socialism/ communism – the expansionary habits of Governments have
not reduced.
Page No.: 52

We (human beings) are still an underdeveloped form of life


practising jungle law more than logic and fairness. We are driven by
greed and fear. Not by love and truth.

History has shown us that:

Whenever a man, a society or a nation becomes more powerful, it


wants to grow-
Man in wealth,
Society in wealth and culture,
Nation in wealth and geography.

More powerful person is less tolerant of others‟ opinions and


ideology.

One nation wants to acquire the land of its neighbour as long as it


considers the two separate. When the Kingdoms of Pune and Surat were
separate, Shivaji Raja considered it legitimate to attack Surat and to rob it –
repeatedly.

Pre-British within India there were 700 Kingdoms and all wanted to
expand. More powerful would usurp the land of its neighbour.
Neighbour either surrendered or fought back. There was always a war
somewhere or the other.

Today, with one country – India – all the wars within India have
reduced to some border skirmishes between states (similar to Maharashtra
and Karnataka border disputes). Whole country considers parties to the
dispute as stupid politicians.

In the 20th Century, Europe considered itself to be most advanced


continent. It could be true in material terms. But there was no spiritual
evolution. Hence Europe fought two wars. Both the wars were caused by
Colonial Exploitation available to U.K., France, Spain, Portugal, etc. and
not available to Germany. Germany started wars to extend its boundaries
to Atlantic Ocean and to make own colonies.

Separatists keep fighting.


Unitists see no reason to fight.
When man will evolve and become human; U.S., U.S.S.R., U.K.,
China and all expansionists will be considered stupid.

XIV.4 Advait..

Every one will have different opinions, beliefs and ideologies.


And yet, at the root, we are all one.
Page No.: 53

We are like leaves of the same tree.

If we consider ourselves as separate:


Our different opinions will hurt egos and cause clashes.
When we evolve spiritually, we realise the unity in all and futility
of fights over differences.

An evolved person does not want to rule over anyone and does not
permit any one to rule him.

XIV.5 Law of Karma

Theory:
In India, all the three religions – Hindu, Jain and Buddha have fully
developed literature on the “Law of Karma”. It says, “Everyone will
experience the consequences of what she/ he does”. “What you cause to
others, shall be caused to you by nature”. “However the timing and form
of your experience cannot be predicted.”

I personally submit: “The law of Karma applies to a society and


even a nation.”

Indian philosophy says, “A person will face the consequences of


(i) what he himself does, (ii) what he abets and (iii) what he confirms /
accepts.”

If the Government commits a fraud and people enjoy the fruits of


the fraud without protesting or asking the Government to stop the frauds;
then the Government and the people – both will face the consequences.

The butcher kills the goat. One who eats the mutton has not killed
the goat. Still he is also a partner in the act of “himsa” and he has to face
the consequences. Butcher has killed the goat for his customer. The cause
of killing is the customer. Customer has to face the consequences.

Even the Christians say “you shall reap as you sow”. This means,
the law of Karma is understood almost universally – in several different
ways.
Now add the “Law of Karma” to entire discussion on economics.

One section of the law of Karma says – if you remain a silent


spectator of a fraud; and you do not protest against the fraud; you are
“Guilty of Silence” where you should speak up.

The law of Karma and the theory of Punarjanma (Reincarnation)


constitute one complimentary set of theories. You will never know the
Page No.: 54

time when you face the consequences. Hence to a person unaware of this
set of theories, this ”Samsar” (world) appears to be unjust and unfair.

A person commits Karma by action, speech and thought. Ordinary


base level people commit sins in action. An evolved person will not
commit a sin even in thought.

Law of Karma - Illustration:

U.S. Government is at a base level. It kills lakhs of people just to


maintain crude oil at a low price and to maintain dollar hegemony.

It will be a long & arduous journey before it evolves into a civilised


person – and stops committing heinous atrocities. In fact, mankind on
earth needs substantial evolution.

Application of Theory:

U.S. caused the SEA crisis by first creating asset bubbles and then
pricking the bubbles. Between 1990 and 2010 U.S. has experienced asset
bubbles and in September, 2008, nature pricked the US asset bubbles.

U.S. destroyed U.S.S.R. by (i) Dragging U.S.S.R. in massive costly


star wars (ii) bleeding U.S.S.R. in Afghan wars and ultimately making
U.S.S.R. insolvent.

Now U.S. itself has become insolvent because of excessive


consumptions and continuous wars.

XIV.6 Maya:
All this is simply a drama of Greed and Fear. All individuals and
all entities are in the grip of Maya. Some “smart” people have perfected
the play of Greed. The societies that permit unbridled greed are bound to
collapse.

The percentage of greedy people in USA, China and in India (any


society for that matter) may be same. Indian politicians and industrialists
have proved this. Indian regulatory system has worked better than the
U.S. regulatory system. Indian culture denounces greed whereas U.S.
culture praised greed.

Hence the difference in the two countries.


So far.
Even in India, greed is gaining respect in several fields. Beware.
Page No.: 55

If we study international economics in depth, we understand the


Indian concept of Maya. What appears does not exist. What exists, does
not appear. And knowingly, we are tempted by what is apparent.

XIV.7 Un Ekant Vad:


On each issue covered in this paper, considerable information is
available on the internet. Most authors give facts in a “Politically Correct”
manner. Hence the real issues are left for the reader to discern. In this
paper I am submitting my frank views. I am open to discuss & learn more
on the subject.

On each issue, there can be several different views. That is Un


Ekant Vad at its peak. We cannot try to get unanimity on such subjects.

Conclusion:

U.S. has exploited rest of the world for last sixty years. It has used
cunning strategies & even wars to obtain & maintain $ hegemony. Free
availability of large funds flows has made U.S. egotist & intolerant of
democracy in global matters. It has pushed itself into the quagmire of wars
in Iraq & Afghanistan.

Now US has lost grip on all the cartels it created. The probability is
more in favour of a terrible crash in US $ & US economy. Low chances for
US behaving wisely & conservatively. I personally see very little chances
of US retaining its super power status for long.

Whether US becomes wiser; or a crash forces it to be wiser, rest of


the world can benefit tremendously by stopping the free gifts to US &
using the scarce resources for domestic needs.

American Financial Crisis of 2008-2010 can be summarised as


under: It was caused by the greed of American bankers and financial
institutions. This entire paper has given an analysis and summary of the
past – 2nd World War to 2006. The past has lead to American Financial
Crisis.
What will be the future?

I am placing an analysis. Every one may make his own informed


opinion. Finally no one knows what will happen. But be prepared

Many Thanks
Rashmin Sanghvi
Page No.: 56

An illustration of Concept Vs. Definition

Ahimsa

Ahimsa (non-violence) is a “word” also & a “concept”. As a word, it


simply means non-violence. However, consider it a concept & a whole world of
thinking opens up behind it. Jain & Baudhh religions are almost entirely built
around the concept of Ahimsa. Consider some illustrations of Ahimsak (non-
violent) thinking & we know what is a concept.

Display of one‟s wealth, power, degree etc. is a himsa (violence).


Talking aggressively is also a himsa.
Driving car in a way that causes inconvenience to others is himsa.
Aggressive tax planning which is far removed from truth & substance is
also a himsa. Tax evasion is not even to be discussed by a true Ahimsak (follower
of non-violence).

If a person keeps fighting with all & sundry over petty matters; you cannot
even discuss Ahimsa with him. However, consider a Jain who would not even
eat green vegetables in monsoon. He is a wealthy person being proud of his
wealth & eager to display his wealth. He is unfit for finer discussion on Ahimsa.
You will be able to discuss the finer aspects of the concept with a non-vegetarian
person who is sensitive to the feelings of others. Eating habits do not determine
the level of thinking & sensitiveness of a person.

Now we know the difference between a „word‟ & a „concept‟. „Concept‟


has a lot of thinking gone into it. And if one does not know a concept, we cannot
discuss the subject with him. Intellectual discussion with a person not
appreciating a concept would be futile.

Now consider Unekantvad (Un-Ekant-Vad).

(i) When both Jain & Baudhh religions talk of Ahimsa, why do we need
two different religions!

Consider Upanishads. One would conclude that under Hindu religion


also, himsa is impossible. Any himsak (violent) person is not a follower of true
Hindu, Christian or Muslim religion.

And yet every Ahimsak person also has a different way of thinking &
living.

(ii) A tax consultant may not believe that Ahimsa & tax evasion have any
relationship. But a tax commissioner may agree more readily. But on this issue,
we will have strong views from many CAs.
Page No.: 57

It is the law of nature that every one will think & act differently – even on
one and the same concept. This is called Unekantvad.

We have considered here two concepts:


“Concept”; and “Unekantvad”.
For understanding these two concepts, we have considered the illustration
of the concept of “Ahimsa”.
Page No.: 58

Cause of Current Inflation in India!

Why there is so much inflation in India?


Why Petrol prices are increasing?
For earlier six years Government could contain inflation below 8%.
Why Government of India is finding itself helpless?

Let us try to find answers to these issues.

1. There is a Currency War going on in the world.


According to USA, Chinese Yuan is undervalued. It causes
increased Chinese exports to U.S. and forces unemployment within USA.
U.S. tried to push China into appreciating Yuan but failed.

Hence USA has started depreciating $ by Quantitative Easing II.


Amount involved is $ 600 bn. of money supply. This money goes into the
whole world as hot money.

China and India do not want their currencies to appreciate against


$. For retaining the parity of their currencies, Central banks of these two
countries buy $ and sell their own currencies. Since the supply of Yuan &
Rupee increases against $, these currencies get depreciated and the parity
is maintained with a depreciating $. With continuous buying of $, their
foreign exchange reserves continuously go up. This has nothing to do with
exports by the country.

Brazil, Germany are also vocal critics of USA. Almost the whole
world is affected. However, developing countries are affected more than
the developed / rich countries.

When US Fed issues money supply, rest of the world takes up $.


But when China issues Yuan or India issues rupee, no one outside the
countries buys these currencies. Hence the domestic money supply goes
up. Too much money supply chases available stock of goods. According
to the Economics Law of Demand and Supply, prices of goods have to go
up. There is bound to be inflation. Prices of shares and property also go
up. An asset bubble starts building up.

Government of India is helpless in preventing this inflation.

China openly criticises USA. Hence the world perceives it as a


Currency War between USA and China. India, as a matter of political
strategy does not criticise USA. Hence common man does not perceive a
war between USA and India. Fact is, India is also in the grip of inflation, a
victim of Currency War unleashed by USA.
Page No.: 59

In case you would like to see global expert economists‟ views, see the
following web links:

(i) Wall Street Journal:


http://online.wsj.com/article/SB10001424052748704405704576064252782421930.html

(ii) Financial Sense:


http://www.financialsensearchive.com/fsu/editorials/schiff/2008/0222.html

(iii) Octaviourzua:
http://octaviourzua.com/investing-strategies/how-does-the-us-export-inflation/

Each one is an excellent, short article. Their conclusion is: USA is


exporting its inflation to the rest of the world.

2. Consider economics in another way.

Globally crude oil is quoted & traded in $. OPEC (Oil Exporting


Countries) realise that when $ depreciates, if they keep the oil price steady
in $ terms, they are the losers. They get less in real terms. Hence every
time $ depreciates, they will try their best to raise oil price. Hence the
current increase in oil price from $ 70 to $ 100 per barrel.

For India the oil price in terms of $ goes up by 40%. If India could
buy crude oil by paying in rupee or Euro or gold – without involving $;
then the crude oil price for India would have remained steady. But that is
not possible. Hence India is forced to raise petrol prices.

Within India, as a matter of policy, diesel prices are generally not


increased. Hence the increase in cost is passed on to petrol. (There is a
complex equation. To the extent, India produces its own oil, India is not
affected by the increase in the cost of imported oil.)

Conclusion: Because oil is quoted and traded in $, movements in $


value affect oil importers & exporters.

3. An international cartel conducted Gold Carry Trade. Hence gold


prices remained generally steady between the years 1980 to 2000.The cartel
started losing its grip around 2000 - 2001. Around the year 2006 the cartel
failed. And gold prices shot up from $ 400 per ounce to $ 1400 per ounce.

So if your family members are getting married and you have to


shell out more money to buy gold, you know the cause. When you buy
petrol and pay more, you know the cause.

4. Look at it in yet another way.


Page No.: 60

Within India, the issuer of money supply (Rupee) is Government of


India. Whenever Indian Government increases money supply, there is
inflation in India. General public cannot fight back.

Similarly, $ is the global currency. Supply of $ is exclusively in the


hands of US Government. Rest of the world is a helpless victim when
USA increases money supply and forces inflation on the world.

5. In the year 2010, monsoon was extended by more than one month.
This has spoiled the monsoon crop as well as winter crop. Hence food and
vegetable supply has gone down. Prices have to go up. This is another
factor beyond the control of Indian Government.

In real life, there are several forces and counter forces acting on the
economy. Inflation is the result of these forces.

6. Is there a way out of US imposed inflation?

Well European Union has developed Euro and significantly


reduced the importance of $ within Europe. South East Asia, Iraq and Iran
have tried to do international business in currencies other than $. They
have all been attacked by USA. Venezuela, Zambia and China are trading
at least partly in currencies other than $. These issues need more detailed
study.

India, USSR and a few Asian countries developed Asian Currency


Union (ACU). It was damaged when USSR collapsed in 1992. Last strokes
to ACU are being given by Indian Government and RBI by refusing to
trade with Iran in ACU. There are reports that this action is taken under
the pressures from USA.

7. If you can see on the web all the links given on page 59 , consider
the following: When the information on India‟s biggest current economic
problem (inflation) is so easily available on the web for free, how is it that
almost the whole of the media is ignorant about it? Why no one in India
is discussing the real cause of inflation?

Thanks.

Rashmin Sanghvi