It’s fake money, without real growth or savings backing it.
India is running after dollars created out of thin air, that comes as FII and FDI to buy high-value real assets.
As the rupee threatens to fall to Rs 60 per US dollar, the Finance
Minister is running around the world seeking foreign investment into
India to get enough dollars to defend the rupee. Meanwhile, the public
simply doubled the quantum of imports in April 2013 mocking the
Government’s desperate attempts to stanch the flow through repeated
hikes in import duty over the last one year. . To bring down gold
imports, the Finance Minister is advising Indians to buy stocks and not
gold, but they are not obliging.
Even as India's woes continue on the external front, it is time that we
understood what is the value of the valuable foreign investment we are
seeking to overcome our present problems on the external side. If not
today, soon this question is bound to present itself. Read on. The US
has in the last several decades flooded the world economy with US
dollars and co-opted the rest of the world into its economy. Some
two-thirds of the physical dollars printed are circulating outside the
US and as much of the global forex reserves are being held in dollar
assets.
Division of dollars
A research paper by Joseph Botta (BIS Paper No 15, 2003)
published by Bank of International Settlement traced the cross-border
dollar holdings from 1980 till 2001 and projected what would be the
future dollar holdings till 2005. The paper brings out that, from 1980
till 2001, year after year two-thirds of the dollars printed by the US
was held outside the US.
Considering that, year after year, the amount of dollars held outside
the US was exactly two-thirds (and inside the US exactly one-third) of
the dollars created by US Fed, this could never have happened by free
market demand and supply.
This amazingly precise division of dollars between the US and the rest
of the world, year after year, could have happened only by design. But
how did the dollar populate and dominate the world? Read on.
This process commenced with the post World War II Breton Woods structure
which made the dollar the global currency with the backing of US gold
reserves. But, when, in 1971, the US unilaterally went back on its
commitment to back the dollar with its gold reserves, the dollar had so
populated the world that the holders of dollars had to hold the dollar
rather than junk it. At that time some 40 per cent of the dollars
printed by US Fed was held outside the US. Considered equivalent to gold
itself, till then the dollars were good investment. Thereafter, the
dollar, for almost a couple of decades, ceased to be great as
investment. Instead, it became the compulsory working capital for global
trade. How?
The US and Arab countries worked together to drive up the oil prices and
made the oil exporters insist on payment only in dollars. It had two
effects. One, every oil importer needed to stock dollars to buy oil and
two, the Arab countries saddled with petro-dollars out of sale of oil
for dollars had to invest it in low-yielding US Federal, State and
Municipal bonds.
The dollar that went out of the US thus came into the US via the Middle
East. And the dollar-starved countries had to seek to export to the US
or get US aid or loan to fund their needs. Arab oil made the dollar as
valuable as oil and more valuable than gold. And later, with the
evaporation of the global socialist order, the US as the unchallenged
superpower made the dollar the unchallengeable currency.
The power of the dollar became manifest in falling gold prices in dollar
terms from $460 an ounce (oz) in 1981, to $362 in 1991, and to $279 in
2000. Gold was $445 an oz in 2005.So, gold prices were lower with the
dollar becoming more valuable in 2005 as compared to 1981. It was from
2006 that gold began looking up – $603 an oz in 2006, $872 in 2008, $972
in 2009, $1225 in 2010, $1572 in 2011, peaking at $1800 and now
hovering below $1400 an oz.
To measure the power of the dollar, if, instead of in gold, $460 had
been invested in 1981 in long-term US bonds, according to the formula in
measuringworth.com, it would have yielded $3460 in 2005 as against the
gold value of $445 an oz in 2005 – meaning that 2005 gold commanded in
2005 just a seventh of its value in 1981. So, besides being the sole
source of working capital for the burgeoning global economy, it also
became more valuable than gold.
Economic performance
Look at US national and global economic performance in this period. In
the 32 years between 1976 and 2009, the US ran current account deficits
in 29 years, with a net aggregate current account deficit of $7.9
trillion – meaning, that much of dollars was exported out of the US.
During this period the US national debt rose 39 times, from $381 billion
to $14.4 trillion; and US external debt 137 times, $100 billion to
$13.7 trillion.
Against which the US GDP rose just 14 times from $1 trillion to $14
trillion. And the net US global investment positive at $165 billion in
1975 became negative at $3.47 trillion – that is, the US got more
investments into US than it invested abroad after 1975. Any other
country's currency would have crashed in value with this kind of
economic performance.
Yet, instead of falling, the trade weighted dollar index which was 34 in
1975 rose almost four times to 127 in 2002, and even after the worst
crisis of US, stood at 106 in 2009 and now it is around 100. And the Dow
which was 632 in 1975 topped 14000 on October 12, 2007, fell to 6600 in
March 2009 and again rose beyond the pre 2008-crisis levels and now
hovers around – believe it! – 15000.
How, despite the poor account of the US economy, the US stock values
have hit the roof is best brought out by David A. Stockman, former
Republican Congressman and President Ronald Reagon's Budget Director
(1981-85). Stockman wrote in the New York Times on March 30,
2013: “Since S&P 500 first breached its current level, in March
2000, the mad money printers at the Federal Reserve have expanded their
balance sheet six-fold (to $3.2 trillion from $500 billion).
Yet, during that stretch, economic output has grown by an average 1.7
per cent a year (lowest since the Civil War) real business investment
has crawled forward at only 0.8 per cent annually; the payroll job has
crept at a negligible 0.1 per cent annually; real median family income
growth has dropped by 8 per cent; and the number of full-time middle
class jobs, 6 per cent.
The real net-worth of the bottom 90 per cent has dropped by one-fourth.
The number of food stamp and disability recipients has more than doubled
to 59 million, about one in five Americans.” Stockman added, “Sooner or
later – within a few years, I predict – this latest Wall Street bubble
inflated by egregious flood of phoney-money from the Federal Reserve
rather than real economic gain, will explode too.”
It is obvious that the US economy has done nothing to deserve such high
value either for its stocks in the US or for its dollar outside. In the
absence of any rational explanation within economics, in 2006, two
Harvard economists even tried an exotic explanation outside economics,
in physics, for the high value of the dollar in the low-performing US
economy. They said that like the unseen “dark matter” sustains the
universe, the dollar sustains the global economy and entices people to
invest in dollars.
Exploding the theory
But the dark matter theory was exploded in the 2008 crisis . What
sustains the US economy now? In a word, what David Stockman said:
phoney-money. It bears respectable technical names – Quantitative Easing
(QE) and monetary base. QE means this: when the market is unwilling to
borrow money from central banks even at nil rate of interest, the
central banks entice the market operators and buy the private
investments in bonds and securities, and thus release digitally created
dollars to private sellers, thus letting new – phoney – money into the
financial system.
US Fed has created $2.35 trillion digital money since 2008. The European
Central Bank has, through its computers, issued euros for $1.14
trillion. UK created digital sterling for $588 billion. And Japan has
released yen for $848 billion through its computer servers and plans to
release another $1.35 trillion in the next 18 months.
In the last four years, $4.928 trillion phoney dollars, euros, sterling
and yen have been pumped into the global economy, with another $.1.4
trillion entering at the rate of $72 billion a month from Japan. This
non-existent cash is created by computers without real growth or
savings. But it is driving up the stock indices all over the world.
Stockman calls it phony-money and the BBC, money from thin air. The
risks that phoney-money exposes the world economy to, is again a topic
by itself .
This phoney promissory note is intended to buy out stocks, assets and
wealth and release cash into the respective economies to sustain the
asset prices. It is this false money that comes in as FDI and FII
investments and buys up high value real assets in the rest of the world,
including India.
It is this money out of thin air which we welcome with a red carpet
under our cross-border investment policies and trade treaties to sell
our real assets for. Is this not colonisation by phoney-money?
(The author is a commentator on political and economic affairs, and a corporate advisor.)
(This article was published on June 13, 2013)
Source: http://www.thehindubusinessline.com/opinion/colonisation-the-phoneymoney-way/article4811060.ece
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