Dollar Must go!
G-20 informal meet at Nanjing has commenced. The meeting was proposed by French President Sarkozy to deflect attention and criticism from Arab forays. The Chinese organizers have confirmed that the main agenda of the meeting is “to discuss international monetary system reform”. There is uproar against role of dollar as international transaction as well as reserve currency. American hegemony has its roots in this bizarre monetary system which came to carve out the international financial and economic system after the end of the Second World War. While America is in throngs of economic meltdown, the dollar still maintains its strong position. every American leader swear to maintain a strong dollar and dollar –dominated world financial system. It is a fact of history that when East Asian crisis happened a la’ currency speculators with deep embeddedness in American administration, the Asian tigers were forced to follow a prudent policy of macroeconomic management. The budget deficits were curtailed. Fiscal deficit was to be brought down. Currencies were devalued and in the ensuing melee the cheap assets in these nations were purchased by the western companies. But, when America is facing the crisis of over indebtedness, huge budget deficit, the Government is not doing anything as it advised others and conducted moral posturing vis-à-vis Asian nations. Interest rates have been reduced. Currencies are being printed with no cost to heat the economy. The budget deficit is ballooning. Interestingly, the Government is following the Strong dollar policy and in no mood to devalue its garbage-monetary unit any more.
The shots have been fired. We know how China’s Chief Banker Governor Zhou Xiaochuan raised the issue of making SDR as international reserve currency just before the Yekaterinburg Summit held in Russia to evolve a mechanism to change the archaic international financial system. China has built up the tempo again by pitting one of the best brains to fire salvo against dollar. Professor Xu Hongcai has raised the issue of the dollar's dominance and the U.S. Federal Reserve Board's loose monetary policy that have created international flows of speculative capital and forced developing countries to build up huge levels of foreign-exchange reserves. Hongcai has called for "accelerating yuan internationalization to form a new structure of mutual competition among the U.S. dollar, euro and the yuan.”.Xu is not alone in this pronouncement. Russian President Medvedev has been consistently saying that Chinese yuan be accorded this coveted status. On the other hand, American Treasury Secretary Timothy Geithner is drumbeating about the maintenance of stronger norms for exchange rates of currencies and has called for appreciation of yuan against the US dollar. This is funny. Americans, if feel threatened by cheap Chinese exports, can always resort to devaluation of dollar. China is maintaining a trade deficit with many of the regions and its revaluation may affect adversely exports from various other economies to China. No one can take a risk to cause contagion of slow down in the global economy after American economy has begun to sink.
But, why the American administration does not want to do this. Let me elaborate. I have been writing and speaking on this bedrock of American hegemony since 2003, and feel elated to find dollar under heavy fire from allies like France, the competitors and compatriots like End the Fed Movement of Senator Ron Paul and the countless ideologues of the Tea Party Movement.
Let us summarize:
The Second World War put America as the forefront of global system. America was the largest producer of oil. The USA orchestrated weakling European powers at San Francisco and Bretton Woods. The UN, IMF, WB and GATT were created to institutionalize American hegemony. Dollar became the international reserve and transaction currency on the precondition of dollar-gold convertibility as prescribed by Harry J.White. John Maynard Keynes’ proposal for an international body to issue bank note, bancor, was turned down. At this juncture, USA ran a trade surplus and accumulated 60% of world’s central bank gold with its private Federal Reserve System that guaranteed the stability of Bretton Woods system.
The first jolt to this dollar primacy occurred during 1960s. USA began to run massive balance of payment deficit and budget deficit due to economic competition abroad and domestic tax cuts during Vietnam War that was targeted to gain domestic legitimacy for an aggressive international posture. French President Charles de Gaulle put up a European vision to challenge America. De Gaulle asked the US to convert Eurodollars for gold.
US shuddered at the horrible prospect. If other European countries decided to convert accumulated Eurodollars earned by running trade surplus vis-à-vis the USA at one go, the Federal Reserve System would have crumbled and so would dollar primacy. Nixon therefore decided to end the gold-dollar convertibility in 1971 and the Bretton Wood System collapsed by 1974, paving way for a flexible exchange rate system, also known as Bretton Woods II system .
Once the fixed exchange rate system was discarded, global trade in currencies accelerated. Capital became mobile and capitalism developed disjunctive spheres within as finance capitalism slowly got delinked from productive sphere. The ultra mobile nature of capital generated excessive pressure on third world countries to succumb to the dictates of international bodies so as to invite capital for nascent industries.
At this juncture, Europe began to seriously pursue an independent European monetary system. The US had other plans to deepen its financial supremacy. In 1973, OPEC countries hiked oil price several times in the wake of Arab – Israel war. America’s oil production had peaked. It needed new source for increasing demand of oil at home.
Henry Kissinger entered into secret negotiation with the OPEC leader, Saudi Arabia to denominate oil bills in dollar. The emergence of oil-dollar axis allowed America to widen its primacy internationally.
There are very few international supplier of oil. Most of these supplies are denominated in dollar. Every oil-importing nation require dollar for its progress in a world where progress is described in terms of high energy consumption.
Dollar can be obtained only in two ways – either as loan from the US and US controlled multilateral bodies or by exporting more and more goods as well as services to the USA.
It is no coincidence that neoliberal philosophy of economic growth emphasizes export led growth. Economic theories have been manipulated to show currency devaluation as a measure to boost export. Rest of the world, particularly developing world, enters into competitive devaluation vis-à-vis dollar to increase its market share in the USA. As a result, the US became the biggest consumer of goods at the cheapest price that brought consumer revolution there.
On the other hand, huge reserve of petrodollar is recycled into American bond market. US derive three kinds of benefit from this recycling. First, American current account deficit is balanced. Second, the surplus capital is loaned to correct balance of payment deficit of those developing countries which face instability in its economy due to mobile nature of capital. Third, share indices and asset prices in the US are kept at maximum which reflects erroneously strong fundamentals in the American economy.
These factors make dollar stable. Devaluation of other currencies vis-à-vis dollar maintains a strong dollar, hence, its primacy continues unabated.
It is paying merely a fiat currency i.e. dollar in lieu of ‘real physical goods’ as dollar can be printed without any limit after the collapse of dollar – gold convertibility in 1971. It is how the USA is exporting dollar at no cost to oil-producing countries. As a result, mere 4% of world population in the US consumes more than 25% of world oil production.
Free oil for fiat dollar has turned US into one of the least productive nations of the world. Non-oil producing nations will continue accumulating dollars by exporting goods and services at cheapest possible price to the US. American public is thereby internationally subsidized for their profligate consumption and continue to abstain from obstructing the administration’s imperial policies aimed at replicating the system in subtler forms every now and then.
US do not want this system to go which is the last resort of the naked emperor.
The developing nations accumulate dollar by hard labour. The profit is recycled into American Treasury market. Now, America is so much indebted that it cannot afford to pay higher interest on its securities and bonds else that will cause higher budget deficit and more constraints over economy. The US has reduced the interest rate to a record low of 0.25%. Again this is contrary to the practice prescribed by Americans during the East Asia crisis. The country like India, China, Brazil are forced to accumulate dollar for uninterrupted supply of oil since oil bills are denominated in dollar. When this much of the forex is parked back in American economies, the return is not only poor but rather negative. Let us see how it functions. India has $303 billion in its forex reserves, much of which is in dollar. The return for the year ending June, 2010 was mere 2.09%. Though, the average inflation in India during same period was 8.31% In India, average term deposit for a year gives as much as 9% return. So, there is at least 4 times less return in this Bretton Woods II System. Now, the RBI purchases dollar from the market to maintain weak local currency under the pressure of exporter lobby. The RBI releases equivalent amount of local currency viz. rupee in domestic economy. So, against the dollar hoarding, local currency is released causing spike in money supply. This also causes inflation in domestic economy. The government comes under the fire for high inflation and takes monetary measures to stem the rising indices. The government issues Market Stabilization Bonds to reabsorb the excess money supply. The government pays 9% of these bonds. So, the local government has multiple losses-low return, high interest payment on Market Stabilization Bonds, high inflation.
Now India loses almost 1lakh crore for parking its forex reserve in US and other European economies. One has not taken into account the loss of taxpayers money on market stabilization. Thus, almost 2 lakh crore is annually lost to maintain an archaic and imperial monetary system of dollar dominance. China has accumulated nearly $2.85 trillion in forex reserves. About 2 trillion dollar has been recycled into US Treasury. One can see the magnitude of loss China is accruing due to dollar dominance.
The problem with the emerging powers is that they are tied into the game of depreciation blackmail. If China wants to sell some of American bonds, it will cause dollar to devalue and that will cause depreciation of China’s reserve. How can nations be rescued from this game of brinkmanship pursued by American policy makers?
Recently, Federal Reserve has pursued a policy of printing dollar to a tune of hundreds of billions. It is to be noted that the American Administration can accumulate debts by merely raising the debt ceiling. Dollar is printed against Debt, public or private by the Federal Reserve. When the debt accumulates in economy, the Federal Reserve lends to the government as well as the Banks. Now, the Federal Reserve can print dollar against the accumulated debt. It is doing the same. This excess printing of dollar does cause some kickstart in economy. But, the administration does not want the inflation to rise. Therefore, we have seen the longest period of lowest inflation in American history due to intervention of the State. This dollar as well as inflation is then exported out in the name of capital flow. The dollar flows to emerging economies through the FIIs. This causes bullish trend in share markets of emerging economies. The bullish share market causes asset indices move up. Asset bubbles build up that causes consumption spree. On the other hand, the absorption of capital inflow from making the local currency stronger has inflationary impact over the economy. This way the inflation to be caused by printing of excess dollar in America hits hard the poor of the emerging economies.
What is the cost of printing dollar for the US? Nothing except more and more debt.
There is no gold or any currency or any asset to back up dollar. Dollar is a mere fiat paper currency. With no cost the US consumes the global resources and production at the cheapest cost. It is the time that dollar be given a good bye. With the US-backed regimes on freefall in the Middle East, the oil-dollar nexus will soon be dismantled. Iran is already using alternative ways to export the energy resources. The GCC went off dollar billing two years back. GCC consists of nations like Saudi Arabia, Kuwait, Qatar, Abu Dhabi. Venezuela is pitting for SDR and Yuan. with the democratic revolution sweeping up the Middle East, China realized that the foundation of Bretton Woods System would wither away. For China, this is the opportune time to hit hard at dollar so that it can extricate itself from strangulation of dollar-blackmail.
China has support of Russia and its neighbouring countries, including Japan. Now, France has given full support for reform of international monetary system,. America is worried. It realizes the days of dollar dominance are few. Though, it wanted to bandwagon all major economies in a global macroeconomic hara-kiri, the world has slowly realized the futility of regarding American posturing.
G-20 has made the agenda of reform of international monetary system as the priority for 2011. With formal declaration of China as the numero uno economic power next year, in all probability, the dollar will disappear from international monetary map as the currency of credibility. Dollar is sinking. Bye, Bye Dollar. Sayonara, dollar.
(Niraj, 1530hrs., 31March,2011)
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