European Central Bank council member Ewald Nowotny said a “tri-polar” global currency system is developing between Asia, Europe and the U.S … leaders of the U.S., France and the European Commission will ask other world leaders to join in a series of summits on the global financial crisis beginning in the U.S. soon after the Nov. 4 presidential election, President George W. Bush, French President Nicolas Sarkozy and European Commission President Jose Barroso said in a joint statement yesterday.
European leaders have pressed to convene an emergency meeting of the world’s richest nations, known as the Group of Eight, joined by others such as India and China, to overhaul the world’s financial regulatory systems. … Sarkozy wants the G8 to consider re-anchoring their currencies, the hallmark of the 1944 Bretton Woods agreement that also gave birth to the International Monetary Fund and World Bank.
Europe’s Been Onto Something … While the US gently weeps
The EU region calling for a ‘G8 + India & China’ conference to thrash out this global monetary issue – and has been twisting the knife in the reluctant US side. The US has been dragging its feet. While the EU has been going gung-ho on this, the US has been floating many trial balloons. Warren Buffet, Paul Volcker and Lawrence Summers have been co-opted by the likely President of the US - Barack Obama. There has been talk of a manipulation in bullion prices - which may be required for re-anchoring currencies. Interesting deals – considered impossible till a few years, are being done in a tearing hurry.
Imagine! The EU in the middle of a global crisis goes out and restores diplomatic ties with Cuba.
The US Gameplan
US analysts, led by Paul Krugman, have been calling for Barack Obama (or maybe McCain) to emulate Roosevelt - who waded into WW2, with 25,000 tons of nationalized gold. If gold is nationalized, it may depress demand in the short term – giving rise to huge volatility in gold prices. But Warren Buffett has been on the silver bandwagon for a while – and that is making the gold-silver equation hazy. What if Warren Buffet becomes the new US Treasury Chief? There is the real risk of another fraud like the gold standard happening all over again.
The US has been making its moves – differently. Paul Krugman’s Nobel Prize is an indication of this. Will the US use Paul Krugman as the Keynes of the Bretton Woods. The background of Bretton Woods itself, is of course something that the US and Europe do not want the world at large to know. The other ploy that is being bandied about is the re-launch of the fraud called the Gold Standard - now in a better packing.
What Has Been India Upto?
While the US has been resisting calls for action, busy doing post-mortem, Asia and Europe have been moving. Interestingly, Manmohan Singh has done some huge work in the last 60 days – the nuclear deal with the USA and NSG, the IBSA Summit, the ASEAN free trade agreement – and now his three Asian nation visits. India’s Trade and Commerce Minister, Kamal Nath, has been talking about a multi-lateral set up. The UN was made to issue a statement on this. Am I reading too much into this? At times, India has seemed clueless.
After the ministerial meeting, both Prime Minister Manmohan Singh and Finance Minister PC Chidambaram talked about how the ‘developed’ world’ was now ‘listening’ to the developing world – and was willing to ‘give more representation.’
This language itself indicates the distance that the Third World needs to travel.
China and Russia
The big issue is of course, China and Russia. China has 2 trillion of US dollars – and what does China do with this? Russia has come out from a default about a decade ago – with a nearly US$400 billion reserves – flexing its muscles in Georgia and dependent on a high oil prices. What happens to Russia if a new Pacific Republic (Cuba, Haiti, West Indies, etc) were to start drilling for oil? In 5 years, the world would be awash with oil – and Russia’s mineral earnings could evaporate. This crisis seems to have made the Chinese Premier shaky. So, the world may not trust China and Russia too much. Russia and China can be the party poopers – but they cannot be the life of the party.
For financial and military reasons, the inclusion of Russia and China is useful – though not essential to the emergence of a tri-polar currency system. The cost of Russian and Chinese inclusion is high degree of influence that these ‘super powers’ will want – which the developing world will not approve.
Why supplant one form of exploitation with another?
Contours Of The Deal
The EU-USA-Asia may agree on a broad a global regulatory and oversight body to monitor and maintain oversight over a multiple currency regime – an improved, better IMF.
The new 3rd currency may take some time to figure out. Not that it is difficult, expensive, or impossible. Some of Asia may want to cling to the dollar skirt. The new currency may be an Asian-Developing world currency. This may see the emergence of a tri-polar currency regime – which the US and Europe duopoly is desperate to avoid.
The 2ndlook proposal for the Third Global Reserve Currency has been in circulation for some time now.
Prequel to Bretton
Keynes’ first book that gained him some following in the world of economics was the ‘Indian Currency And Finance‘. This work examined in significant detail the workings of the Indian currency system. The Indian colonial currency system was anchored to the British pound – and various other local Indian currencies were in use – and even legal tender in large parts of India.
Thus there was always great pressure on Britain to keep the British pound on gold standard – as there was always the option for the common citizen to use coinage from other kingdoms and princely states. In 1900, the British colonial Government tried to enforce circulation of British sovereigns in India - which failed.
Of course, gold importation into India was severely restricted. The gold blockade against India was effective as the major gold production centres were under Anglo Saxon occupation (Australia, Canada, USA, South Africa, Rhodesia, Ghana, etc.).
The Birth Of Bretton Woods
As WW2 was winding down, the Anglo Saxon Bloc went ahead and devised the Bretton Woods system. This system was a copy of the Indian currency system – where instead of the British pound, the American dollar became the Index currency.
Instead of milking only India, the Anglo Saxon Bloc could now milk the whole world. Keynes noted how America when dealing ‘her dependencies, she has herself imitated almost slavishly, India.’ So, when the time came, it took very little time for the US to scale the Indian currency model on the rest of the world.
The success of Bretton Woods-I depended on blockading India from buying gold – which was effectively done by Morarji Desai. (I wonder why the ungrateful Anglo Saxon Bloc has not made a statue of Morarji Desai at Mount Rushmore). He has after all been the single biggest contributor to their prosperity for the last 50 years.
What was Bretton Woods
The world stamped their approval on Bretton Woods.
As per the agreement, all countries of the world would use the dollar as the index currency – for international trade and foreign exchange reserves and for nominal exchange rate fixation. This system allowed the USA to print ‘excess’ dollars. These ‘excess’ initially in limited quantities, but soon at an accelerating pace. Today the USA has flooded the world (and the USA markets with more than US$50 trillion) of excess currency. The housing bubble, the M&A frenzy, the credit crisis are by products of this printing of dollars. With these excess dollars, the US consumers and others bought what they wanted – and US went ahead and printed some more dollars.
Behind Bretton Woods – Gold
If the Bretton Woods system was defective, unfair, weighted et al, why was it accepted? Why did the world believe that only the Anglo-Saxon Bloc could deliver.
In 1944, the Anglo Saxon Bloc (countries, colonies and companies) controlled more than 90% of gold production and reserves. The largest private gold reserve in the world, India was still a British colony. Hence, it was fait accompli.
For the last 150 years, the ABC countries (America, Australia, Britain, Canada) comprising the Anglo Saxon bloc (countries, colonies and companies) have controlled 90% of the world’s gold production. Till (a large part of) India was a British Colony, they also controlled more than 50% of the above-the-ground gold reserves. This gave them absolute liberty to print depreciating currency and flood the world pieces of paper(called dollars and pounds), manipulate the world financial system and keep other populations poor and backward.
Bretton Woods – Broken Promises
The promise of the Bretton Woods system was stability. USA promised the world that they will redeem the US dollar for gold – at a rate of US$35. Anyone could (except Indians and Americans) buy an ounce of gold from the USA for US$35 – managed by the the London Pool system. Within 20 years, the first promise was broken. Redemptions of dollar for gold to individuals was stopped in 1968 (March15th).
The Bretton Woods system worked for 20 years because Indians were not allowed to buy gold. India’s finance minster during that crucial period, Morarji Desai, (allegedly on CIA payroll during Lyndon Johnson’s Presidency 1963-1968), presented a record 10 budgets, between February 1958, up to 1967.
His break with Indira Gandhi began when the Finance portfolio was taken away from him. Morarji Desai’s ban on gold imports allowed the sham of Bretton Woods to continue for 20 years. His adamant attitude on gold cost the government popularity and electoral losses – and the Indian economy and Indians much more. Was it a co-incidence that many of the RBI functionaries later got (and even now) plum postings at LSE (IG Patel) and BN Aadarkar (IMF)?
The Bretton Woods Twins
Bretton Woods also gave rise to the the Bretton Woods twins (the IMF and the World Bank) which are run and managed by the Anglo Saxon countries. The ABC countries, their client states like Japan, OECD, etc. have 65% of the voting rights. With this huge voting majority, less than 5% of the world’s population (of the ABC countries) decide how 95% of the world lives.
The Bretton Woods twins (the IMF and the World Bank) been significant failures. Aid (spelt, ironically, very similarly to AIDS) projects are approved – which are tied to imports from these Anglo Saxon countries.
Bretton Woods Fraud
The Bretton Woods system was technically created by more than 700 delegates from the 44 allied nations. But the match was fixed.
It was designed by the Anglo-Saxon countries (America, Australia, Britain, Canada), for the benefit of the Anglo Saxon countries. Notice how much Britain resisted and finally did not join the European Currency Union. This system has swamped the world with accelerating inflow of dollars (American, Australian, Canadian) and British pounds. Producers and exporters are left with vast reserves of a depreciating currencies.
Nixon Chop And Bush Whack
From the Nixon Chop to the Bush Whack final months of Dubya’s Presidency, the Bush Family has been in the Presidency for 12 years of the 37 years. And in positions of lesser power for the entire period. George Bush Sr. was the US representative to the UN during the Nixon era – when Nixon made his infamous remarks to Kissinger about the ‘sanctimonious Indians’ who had pissed on us (the US) on the Vietnam War’. George Bush Sr. was also the US Vice President during the 8 years of Reagan Presidency.
During these 37 years – between the Nixon Chop (1971) and the Bush Whack (2008), the world has changed significantly.
On August 15th, 1971, President Nixon after a two day huddle with 15 advisers at Camp David, delivered the Nixon Chop to the world. The Nixon chop (my name for this event), one month after his China breakthrough, cut the convertibility peg of US$35 to gold as US gold reserves were severely depleted.
The French had been regularly redeeming gold for their dollar earnings – and for this ‘perfidy’ the US had not forgiven France. This was much like the pre-WW2 French methodology of devaluation, new peg, old debt for new gold routine which got the US hackles up. Many decades have passed since these redemption by France, and the new French President, Sarkozy believes it is now possible to renew US-French relations again.
On the opposite side of the world, a beleaguered Indian Prime Minister was celebrating 24 years of Independence with a “ship-to-mouth” economy, dependent on PL-480 grain. Private gold reserves in the Indian economy after nearly 25 years of post-colonial rule, were steadily rising. Over the next 10 years, the western world (and most of the rest) blamed OPEC for post-1971 inflation, gold scaled US$800 an ounce; the Hunt Brothers launched their bid to corner the silver market; stagflation made an entry and Soviet power grew. Nixon Chop , itself the result of many years of gold reserves erosion, was one in many steps that brought the US$ to its knees.
On August 15th, 1971, the world got the Nixon Chop - where even Governments could not redeem dollar holdings. The dollar was put on float. In little time, dollar value depreciated from US$35 per ounce of gold to US$800 in 1980. Over the next 20 years, through various clandestine methods (check out the Edmond Safra and the Yamashita stories links), gold prices were managed and brought down to US$225 per ounce – but still 80% reduction in value of dollar value. Foreign reserves of poor countries got eroded. It was a gigantic fraud on the world – especially the poor, developing countries. And the fraud continues.
Every Few Years
Every 10-25 years, the world seems to go from one financial crisis to another. Trucks full of economic analysis follow each crisis – and everyone agrees after each meltdown, that there will not be another catastrophe. What the poor (and not so poor) economists don’t see is that the Anglo Saxon bloc with 80% of the world’s gold production in a choke-hold does what it wants.
On December 31st, 1974, nearly forty years after Roosevelt nationalized private American gold stocks, Americans were allowed to invest in gold again. Again Indian liberalization (1991) of gold imports happened a good 17 years after the US laws (1974) were liberalized. I wonder, how that was tied.
And that is what has happened for the last 60 years. Of course, all good (for the Anglo-Saxon Bloc) things come to an end. And so has Bretton Woods – I & II.
The India China Relationship
To most in India, China is possibly the biggest defence threat and is a ‘feared’ competitor.
However, the 2ndlook blog has discounted the ‘threat of the Chinese dragon’ based on an active engagement with China – and not benign neglect.
No less than Arun Shourie has weighed in on the ‘Chinese threat’ side of perception. This puts the 2ndlook blog in a minority. In the 2ndlook blog dated May 31st 2008, there was a significant analysis of the China-India face off. More on that later.
Two Books – Opposite Themes
In the meantime, Arun Shourie’s book has evoked scant interest – excerpted below.
… important parallels, as Shourie points out, between the situation pre-1962 and the situation now. Border talks are regressing, Chinese claims on Indian territories are becoming publicly assertive, Chinese cross-border incursions are rising, and India’s China policy is becoming feckless … India has always been on the defensive against a country that first moved its frontiers hundreds of miles south by annexing Tibet, then furtively nibbled at Indian territories before waging open war, and now lays claims to additional Indian territories. By contrast, on neuralgic subjects like Tibet, Beijing’s public language still matches the crudeness and callousness with which it sought in 1962, in Premier Zhou Enlai’s words, to “teach India a lesson”. (Stagecraft and Statecraft: Lessons for today’s India from the 1962 Chinese invasion).
The lack of coverage in Indian media for an important book like this is a matter of concern. At the same time, another book on a similar subject, from an American perspective is vastly different – and closer to the views of the 2ndlook blog.
This one, … (by) Ms Shirk (former deputy assistant secretary of state who dealt with China) … should become a must read for every Indian who cowers and cringes at the very mention of China. For, as Shirk shows, there is no reason to do so. The core of her message is that only one thing has changed over the last two decades: instead of being a paper tiger, China has become a cardboard tiger.
… recall how China responded to the Tibetan uprising just before the Olympics to get a sense of its vulnerabilities and the resultant paranoia. The Chinese embassy in New Delhi was surrounded by three rings of defence against attacks by Tibetan women. You don’t become a super power merely because you have some money and some guns.
the Chinese leadership no longer has to fear the foreign devil who speaks English; it has to fear the average Chinaman who does so. She also shows how there is no shortage in the variety of unrests in China: you name a type of discontent, and it is there. But unlike India, China has not had the sense to develop political outlets for the head of steam that is building up. The only way it knows of dealing with mass discontent is repression.
Shirk also deals with the aspect that the Chinese leadership is most anxious to hide: a split not in the ranks of the party, but in the highest echelons of the leadership. And the second- and third-level Chinese leadership knows this. The drive against corruption, for example, when mayors are hanged, is seen as just a tea leaf, a straw in the wind that the big boys are pulling in opposite directions.
contrary to popular belief, especially in India, China can’t get along with anyone. Japan, Taiwan, Korea, India all have difficulties with a neighbour whose word can’t be trusted and who tends to rely more on strong-arm tactics than diplomacy. This, too, seems to be a part of the Communist party repertoire, merely their way.
As we see in this book, when push comes to shove, China always backs down. Its leaders simply don’t have the stomach for a confrontation because they don’t know how it will turn out for them personally. That’s the key thing: the personal interests of the Chinese communist leaders. It now always comes before the country’s interests, or is at least seen as being coterminous with it. (Book Review of FRAGILE SUPERPOWER by Susan L Shirk).
The Chinese Paper Dragon
The Chinese success is similar story. Much like USSR’s break-up, the Chinese monolith is more fragile than apparent. Apart from the usual suspects of democracy, economic disparities, social upheavals, etc, there are 3 factors, which most Chinese analysts miss.
One, the Tibetan’s are held together by force – and no one imagines that this holding them together by force, can be in perpetuity. The Muslim provinces of Xinjiang (another one-third of China) is usually ignored. These issues are usually minimized by the current strength with which China holds these provinces together.
But possibly, the biggest issue is the share of revenues of the Chinese central governments.
Secondly, the Chinese Central Government commands less than 25% of the total tax revenues - and the 75% goes to provinces. This, possibly is why the Chinese Government cannot reduce cigarette usage in China. Most expenditures on health, education, pension, unemployment, housing etc. are borne by the local government – and hence there is patchwork of systems which run across China. Most of executions and imprisonments of bureaucrats (including the Mao’s Cultural Revolution) is to demonstrate central authority. The PLA is the only factor that keeps China together. A Chinese Lech Walesa or a Nelson Mandela could unwind China very quickly.
Significantly, and thirdly, the Chinese diaspora and Western MNCs are biggest investors in China – and also the main beneficiaries. This currently keeps resentments of the local Chinese under control – as the neighbour is not getting much richer. But at one stage the domestic Chinese will want to greater say and control over the Chinese economy. He may not be happy with just a well paying job and abundant, low quality goods.
India vs China
On these three counts India scores significantly better than China. India’s problems with Kashmir are a British legacy, an external creation – as is the North East problem, to a degree. India’s significant issue (probably temporary) is the Naxalite problem. India’s central Government has greater control and share over total revenues – than the Chinese. India’s recent economic and political successes are entirely home bred – with the exception of remittances from the expat workers in the Middle East.
2ndlook blog proposes a different way out of this India-China stalemate.
As various colonial powers were forced out of various colonies, left behind was the garbage of colonialism. This post-colonial debris has become the ballast, that is dragging down many newly de-colonized countries. And it is the stereotypes and images of each other that seem to be determining the relationships between the two countries.
Vietnam suffered from a prolonged war (1956-1976) – and finally peace had a chance after 20 years of war. Korea remains divided. The Cyprus problem between Turkey, Greece and the Cypriots has been simmering for nearly 100 years. The role of the Anglo Saxon Bloc, in Indonesia, the overthrow of Sukarno, installation of Suharto and finally the secession of East Timor is another excellent example. The Israeli-Palestinian conflict (1935 onwards) will soon enter its 75th year. The entire Arab-Israeli-Palestinian conflict is a creation of the Anglo-French-American axis. The many other issues in the West Asia and Africa are living testimony of the Western gift to the modern world.
Closer home is the Kashmir problem. After 60 years of negotiations, India-Pakistan relations have remained hostage to the Kashmir issue. Similarly, between China and India, the border issues remain 60 years after the eviction of Britain from India.
We Hereby Resolve
Let us (India and China) decide that for the next 60 years, these legacy border issues will remain in cold storage! There are far more pressing issues that need our attention. Let us focus on those issues. We have a lot of catching up to do.