Posts Tagged ‘World Economy’

How Long Can the US Dollar Remain World’s Reserve Currency

Saturday, June 30th, 2018

How Long Can the US Dollar Remain Worlds Reserve Currency?

By

Col (Retd) Bhaskar Sarkar VSM

The other day my brother sent me a Whatsapp message titled “Death of the US Dollar”. The piece stated that the Chinese Yuan has been added to IMF’s basket of currencies and China is persuading countries to use the Yuan in place of the US dollar in bilateral or even multilateral trade. Some trade deals in Yuan have been signed. The US dollar has been the world’s reserve currency since 1946. It has thus ruled the world for 72 years. Is it time for it to be replaced? This article seeks to examine when, if at all, the US dollar may be replaced as worlds reserve currency.

Strong Currency VS Weak Currency

Strong currency makes imports cheaper. Thus countries who are net importers like the US, UK and EU like to have strong currencies where as export oriented countries like Japan, China, Asian Tigers like to have weak currencies so that their exports are more competitive in price sensitive markets. Strong currencies are great for governments giving aid to developing countries, military or project expenditure abroad and tourist going abroad. A strong dollar helps the US and UK government and consumers. But it makes US and UK wages and manpower costs in manufacturing uncompetitive.

To explain the effect of currency conversion, I would like to give a few examples. I had an uncle who was an UK citizen with a pension of 1000 British pound in 2002. That was barely liveable in UK. He used to stay six months a year in Goa, India. His 1000 Pounds converted to Rs 72,000. He lived comfortably and could afford a maid and a chauffeur. One radish in Singapore costs one Singapore dollar or Rs 50. In India the same radish would cost us Rs. 5 to 10.

Frankly, I do not understand why one US dollar is Rs 68. In 1992 it was just Rs 14.

If one US dollar ever became equal to one Chinese Yuan, the US manufacturing would be highly competitive. China would not be able to sell anything in the US market. If one US dollar could come down to Rs 34, the price we pay for crude oil in Indian rupees would be half of what we pay today.

Why is dollar over valued?

The United States had remained untouched by the ravages of World War II. Its industrial production in 1945 was more than double that of annual production between the prewar years of 1935 and 1939. In contrast, Europe and East Asia were economically shattered.  The United States held most of world’s investment capital, industrial production and exports. In 1945, it produced half the world’s coal, two-thirds of the oil, and more than half of the electricity power. It held 80 percent of the world’s gold reserves. The United States started with initial economic advantage, consolidated it during and after the war and assumed leadership of the capitalist world. The United States got what it wanted through the “Benton Wood” systems for the world economy. Its dollar replaced the British pound as the world’s trading currency.  President Franklin D. Roosevelt saw the creation of the postwar order with the US at the top as a way to ensure continuing prosperity for his country.

The situation has changed. 70 years of warmongering under the Marshall Plan, policing the world and corporate greed supported by US Presidents from Regan to Obama resulted in industrial activity and manufacturing moving to Japan, Asian Tigers and China and made the US the world’s largest debtor nation. Its Public debt is over $ 20 trillion and national debt over $ 32 trillion. The gold reserve vanished when Nixon was president and the US withdrew from the gold standard. The US dollar is certainly overvalued.

So what keeps the Dollar afloat? It is because those countries which hold large reserves of dollars, China, Japan, Germany and Saudi Arabia want it to be strong so that their exports to the US remain cheap, US manufacturing cannot compete and the value of their dollar holdings is not reduced. So they keep buying US dollars when it weakens to keep it strong.

Economic Stability of Nations

Before we examine the possibility of the dollar being replaced by a new reserve currency, I would like to touch upon a new concept, “economic stability of nations”. Stable economies are those economies which are least affected by turmoil in the world economy like rise of protectionism, collapse of globalization or WTO, trade wars and a major war. These economies produce adequate food, raw materials and energy for the needs of their population and industries. They are not export oriented economies. The US, Russia, Australia and Canada are the most stable economies where as China, Japan and the Asian Tigers are the most unstable economies. These countries import energy, raw materials and export commodities and manufactured goods and machinery to the world. They can have serious economic and law and order problems if supply of energy is disrupted due to war or sanctions, the supply of raw materials is disrupted due to similar reasons or because the producers of raw material decide not to export ores but want to export metals. For example India has reduced export of iron ore and seeks to export iron and steel.

Development and rate of growth needs to be sustainable. The rich nations, IMF, World Bank and private investors encourage developing countries to borrow money and grow fast. Repayment is difficult. A default suits the rich nations who then take away economic sovereignty, force devaluation and exploit them as much as possible. Sri Lanka borrowed from China to build its infrastructure and fight LTTE. Unable to payback, it has sold the strategic port of Hambantota. Male and Nepal are borrowing heavily from China and will soon be gobbled up. Papua New Guinea and Gabon are cutting their rain forests and exporting timber to find money for growth. What happens when the forests are finished? Who are benefitting? The people will not benefit. Corrupt politicians and multinationals will. How long are the Gulf States going to splurge and fund dictators like Al Sisi of Egypt, terrorists and Islamic fundamentalism with their oil and gas revenues? More and more countries are trying to develop their own energy sources and increase use of renewable enrgy. The US has become a crude and gas exporter rather than a major importer. The economies of Nigeria and Venezuela have collapsed along with their oil revenues. Yet tiny Cuba with a less than Hindu rate of growth (3%) is stable and has no serious economic problems. The new government of Malaysia has wisely cancelled its bullet train project between Kualalumpur and Singapore because it is not economically viable and Malaysia would not be able to pay back the debt. Unfortunately, India persists with its bullet train and highway projects with borrowed money.

If and When Can the US Dollar be Replaced

The main requirement of the reserve currency is universal acceptability. Governments, investors, bankers and traders in different countries must be willing to accept it and exchange it for local currency at laid down rates. The British Pound, the Euro and the Yen are accepted as payment for goods and services in many countries. When Iran was under US sanction, India paid for oil imports in Euros. The requirement of US dollar or any reserve currency can be dispensed with in bilateral trade. For example, Soviet Union and India traded in Rupees for about 20 years. China accepts payment in Yuan for its exports to boost sales in countries which do not earn enough dollars to buy goods and services they need. Some countries like Singapore accept currencies of most countries in the world and convert them into local currencies. The importance of a reserve currency is slowly reducing.

The second requirement of a reserve currency is that there must be enough of it to meet the needs of the world. In Dec 2016 there were over 1.5 trillion US dollar notes in circulation. Printing of the US dollar is no longer made public. In comparison on the same day about 1 trillion Euro, 100 billion British Pound and 900 billion US dollars worth of Japanese Yen were in circulation. The figures for Chinese Yuan could not be found. (www.en.wikipedia.org/wiki/Circulation_(currency) . It will be seen that the US dollar has the largest numbers in circulation with Euro a close second. The notes in circulation of any other country are not adequate to meet the needs of the world.

Conclusion

The US economy does not dominate the world anymore like it used to up to the sixties. Its gold reserves are gone. From the largest lender nation it has become the largest debtor nation. But it is still the world’s largest economy. Its main competitors, Europe and China have a long way to go before they can overtake the US. Both are unstable economies because they are heavily dependent on other countries for their energy and raw material needs and for markets to sell their products.

US and EU sanctions are forcing countries to trade without using the reserve currency. Bilateral trade in local currency is becoming more common. It is also a tool to increase export to countries with low dollar reserves. Thus the importance of holding foreign exchange reserves in US dollars is reducing. But the US dollar will remain strong and the reserve currency of the world as long as two out of EU, China and Japan want it to remain so.

(Col Sarkar has written two books on economics, “Economic Nationalism: The Strategy for Survival of Developing Nations” and “Growth and Decline of Economies of Europe and US: http://smashwords.com/b/231033)

Mayhem in the Market

Wednesday, February 7th, 2018

Mayhem in the Market

By

Col (Retd) Bhaskar Sarkar VSM

Markets around the world have been jumping up and down, mostly down, since February 2, 2018. The reason for the slide in the Indian Markets could be due to the Indian budget. But what about the markets around the world? I see almost every English Channel around the world every day. I have seen no major upheaval anywhere. It is true that markets have been rising every day for years. At best a correction is due and desirable. At the worst, the bubble is beginning to burst and a collapse is around the corner.

Most analysts will have us believe that the downswing is just a normal correction. There is nothing to worry about market stability. The fundamentals are excellent. Just buy at the dips at the dips is what they advise.

The pessimists like me are not so sure. I believe that if there is smoke, there must be a fire somewhere. What could trigger a collapse of the market like in 2007/08?

Possible Reasons

Collapse of the UD dollar could be one reason for collapse. One of my friends had warned me about this about 3 months back. In my opinion the US dollar is overvalued. The US is the world’s biggest debtor with a debt of over $20 trillion. It printed the Greenback on as required basis since 2000. It has a large trade deficit and astronomical defence expenditure. The Quantitative Easing (QE) at $90 billion per month for about 8 years has created a huge liquidity in the market which has been pushing up share prices as unlimited money supply chases limited number of shares. The US dollar remains strong because most major economies of the world want it to remain high so that their products remain cheap and competitive on the US market. However, as the US tries to restrict imports from China, Japan, Korea, EU and Mexico by imposing import duties, the incentive to keep the dollar strong may be reducing. As China seeks to enhance its super power status, it would like to project the Chinese Yuan as the most stable currency. So it could decide to destabilize the dollar by selling some of its huge holdings of US bonds. Chinese rating agencies do not rate the US dollar very high. US do not have reserves to defend the dollar.

Stock valuations

I read somewhere that the price of a stock should be around 15 to 20 times the earning per share. Today, prices of most shares are above 30 times the earning per share. Thus a major correction becomes a distinct possibility.

War

There are many conflict zones in the world like North Korea, South China Sea, Iran, Syria, and Afghanistan. There is a possibility of a clash between the US and Turkey as Turkey tries to pushback the Kurds from its borders. There is also the possibility of a clash between Israel and Hezbollah over Israeli missile attacks on Hezbollah and Iranian bases in Syria. But these would not destabilize the world. Threat of war is least likely to be spooking the markets.

US Politics

US politics has turned ugly since Trump won the Presidency. There seems to be pathological hatred between the Republicans and the Democrats which is not good for the US and the world. Winning and losing elections is a part of democracy and the will of the people should be accepted gracefully. Unfortunately, that is not happening. Democrats want to discredit Trump. In his State of the Union speech, Trump claimed credit for the rise is US markets over the last year. Some Democrat moneybags may be trying to crash the market to discredit Trump. Republican moneybags could be trying to stabilize the market and hence the rebound. This could be the reason for the recent volatility.

LCGT

The 10% tax proposed on Long Term Capital gains could have spooked the Indian stock market. Most Indians hate paying tax and will go to any length to avoid paying it. The withdrawal of tax on Long Term Capital gains has encouraged all and sundry to invest in mutual funds in the hope of tax free gains. I have never been able to understand why governments of all hues have tried to encourage speculative activity by making it tax free while making manufacturers, traders, service providers, salaried class and consultants pay tax through their noses. This not only totally unfair but diverts funds from productive activities which create employment and real wealth to speculative activity which does not create employment and generates virtual wealth which can disappear in a day. I congratulate Mr. Jaitly on introducing the tax and hope that the next budget will make tax on capital gains from shares at par with any other capital gains. This tax has no effect on the global market.

Conclusion

I am not an investor, financial advisor or fortune teller. I am an humble writer who is not being paid for this piece. So it is not even paid news. I have no idea as to how the markets will behave in the coming days. For all you know, by the time this is published, if at all, the Bulls may be charging up the mountain again. However, I am convinced that if there is danger to economic stability in the world it lies in the value of the US dollar and US politics. If you are an investor using your own money, please go ahead and do what you please. If you are playing the market with someone else’s money or borrowed money, you may like cash your holdings and wait on the sidelines for better times.

Why Economies of the Developed World are not Improving

Friday, October 19th, 2012

Why Economies of the Developed World are not Improving

By

Bhaskar Sarkar

Bhaskar Sarkar’s  Author Profile: http://www.smashwords.com/profile/view/Bhaskarsarkar1940

The economies of the developed world have been in doldrums since 2000. The Dot.Com bubble of 2002 and the Sub-Prime Meltdown of 2008 have seriously affected the economies of the US and Western Europe. The growth rate of the US is barely above 1%. The growth rates of most economies of Western Europe are negative. Unemployment, poverty, hunger and economic inequalities are rising to alarming levels. There is no dearth of investable capital. But the world leaders have been unable to stop the economic downturn, the misery of at least one third of their people and revive the economies.

The learned economists of the world may like to consider the reasons given below.

Inability to Reconcile to Realities in a Changing World

The governments, politicians, economists and intellectual of the world seem to be unable to understand the realities in a changing world. The investor of Europe and the U.S. hold most of the investable capital in the world. But manufacturing and business processes in the developed countries are no longer competitive when compared with the developing world. Multinational companies of the developed world are unwilling to invest in Europe and the US. Developed countries have increasing budget deficits, trade deficits, unemployment, poverty, and hunger.

Use of GDP as a Planning Tool

Per Capita GDP does not reflect the prosperity of the people of a country. It should not be treated as an index for any kind of economic planning. Any poverty alleviation program that is based on per capita GDP will only benefit big business and not the people whose poverty needs to be alleviated.

GDP growth rate should never be a factor in economic planning. Poverty alleviation, income growth of individuals, employment generation, infrastructure development, environment protection, conservation of natural resources, balanced trade, inclusive and sustainable growth should be objective of economic planning at all levels in any country.

Use of GDP for Measuring State of Economy

GDP is widely used by economists to gauge the health of an economy, as its indicators are relatively easily identified. The governments of almost all countries of the world use growth rate of GDP for economic planning and assessing the state of the economy. GDP has grave limitations when comparing economies of different countries. For example, the poverty threshold in the US is $ 17500 for family of four or about $12 per head per day while for the developing countries poverty threshold is $2 per day. GDP does not take into account equal value for equal work. For example when a barber gives a haircut in the US, GDP increase by $ 10 but when a barber gives a haircut in India, the GDP increases by about 50 cents. GDP does not take into account free services like domestic work, open source soft wares and internet services like Yahoo, Linux, Google and a host of other activities.

Use of GDP growth rate for economic planning leads to many distortions. Government policies are always encouraging or some times forcing people to spend. The savings bank interest in many countries is zero or close to zero. People have no incentive for saving. Pensioners are unable to invest their retirement benefits in safe bank fixed deposits and get reasonable returns. In India, senior citizen can get as mush as 9.5 to 10 percent interest on bank fixed deposits. They do not have to invest in mutual funds or pension funds which are subject to market risks. Stock market melt downs, as we all know, occur every few years. High interests will not only encourage the economically disadvantaged to save for the proverbial rainy day but discourage speculation with borrowed money. It will increase social security in the developed world.

Whenever there is an economic slowdown, governments tend to release stimulus packages. In other words it increases liquidity and encourages banks to lend indiscriminately. This encourages people to borrow and invest in real estate or the stock market. The construction industry crates jobs and statistical growth is achieved. The rises in the share market gives a good feeling. Property prices and share prices keep rising till something happens. There is turmoil in the Middle East and oil prices shoot up or there is a change in government policy and liquidity dries up. As property and share prices crash, people are unable to pay their mortgages and bank loans. There is a financial crisis. Banks go bankrupt and need bailouts. Jobs are lost. The economically vulnerable are ruined. It happened during the Carter presidency, the Regan presidency and the Bush presidency.

Loss of Businesses Competitiveness

The strength of the U.S. Dollar, Euro and Pound is the real cause of loss of business competitiveness of the developed world. The minimum wage for an unskilled person in the US is $ 7.2 per hr or about $ 57 per day. This would translate to about Rupees 3000 per day in India. The minimum wage in India is around Rupees 220 per day or less than four dollars per day. The labor rates in China, Vietnam, Bangladesh and many other developing countries could be even lesser. How can American or European manufacturers compete with manufacturing in the developing world?

Deregulation of Banking

Bankers are supposed to be conservative and risk averse. But most modern bankers are just the opposite. The Chairmen, CEOs and senior staff with multi million dollar packages are under enormous pressure from shareholders to earn profit. They tend to lend without assessing the repaying abilities of the borrower and the quality of the collateral securities if any. To make matters worse, their cash to deposit and reserve ratios are very low and they borrow from wholesale lenders and lend to retail lenders at higher interests. So when there is an economic slow down and borrowers begin to default on a large scale, banks get into trouble. When the banks default on payments to the wholesale lenders, there is further melt down of the kind we saw during the “Great Depression” of 1929 to 37, depression of 1982-83 or during the Sub-Prime Crisis of 2008.

Government Attempts to Boost Economy

Whenever GDP growth slows down, governments attempt to boost growth with stimulus packages, low interests etc. This creates excess liquidity with investors and banks. Excessive liquidity and cheap credit lead to bull runs on the stock market and a boom in the property market. Real estate prices collapse due to the recession. Collapse of real estate prices caused the Savings and Loans Crisis of the 80s and to the Sub-Prime Crisis of 2007.

Globalization

The concept of Globalization of the world economy was thought out by the Washington Consensus to perpetuate US domination of the world economy. The basic aim of economic globalization is to open up the entire world economy to multinational companies by removing trade barriers imposed by Developing Countries through import restrictions, duties and restrictions on inflow of foreign capital. Globalization has helped export oriented economies of Asia. Globalization has not reversed the pattern of poverty for 30 per cent Americans and Europeans. It is only accentuating it. The U.S. and European markets are flooded with Chinese and Asian imports. Globalization is not working for the U.S. or Europe. Like many other strategies born out of capitalist greed, globalization is bound to fail. U.S. and European economies can thrive only if they can find a way to find a way to globalize trade without hurting its own citizen.

Out sourcing

Out sourcing increases the profits of American and European corporations but reduce employment in their own countries. Unless this is stopped, America and Europe will become countries of high net worth individuals, waiters, taxi drivers, the unemployed and the hungry.

Making the Investor the King

The private investors of the world have most of the investable surplus funds. Governments of most nations of the world have a deficit budget and are short of investable funds. It is therefore only natural that the global investors try to put pressures on the governments to grant them concessions in return for investing. Tax breaks are the main cause of the woeful state of government finances around the world. If the corporations gang up and form cartels, why cannot governments gang up and pass similar taxation laws and launch a war on tax havens and tax cheats?

Conclusion

Non availability of slaves and colonies is the primary cause of the decline of the economies of the developed countries. But that cannot change. What can change are government policies in the developed world which benefit the rich and the corporations at the expense of the middle class, working class and the poor. The financial conditions of central governments, state governments, town councils and municipalities are not going to improve unless there is a major change in economic policies of the developed nations.

This blog is an extract of the book, (Growth and Decline of Economies of Europe and the US.

To sample or purchase Growth and Decline of Economies of Europe and US: http://smashwords.com/b/231033