Recessions, Slowdowns, Slumps – The US Role

What has happened as a result of unsustainable policies (simultaneous budget and current account deficits, and loose monetary and fiscal policies) in the US is that a huge liquidity bubble of $7-10 trillion has caused massive inflation in global prices for all asset classes: property, stocks, commodities, etc. – Percy S Mistry / New Delhi February 28, 2008 (bold letters mine).

How many Zeros In a Trillion?

I dont know. I was not prepared for this figure. It simply too huge.

To put it in perspective. The whole of India, produced last year, goods and services worth US$1 trillion. Did banks lend out 7-10 trillion US$ in doubtful loans (Why didnt I get any of this?)? Who will pay the price for this? How will this get financed? Can we continue running the world financial system like this?

Every Few Years

Every 10-25 years, the world seems to go from one financial crisis to another. Asian currency crisis, US housing slump, Northern Rock, Soc Gen derivatives scam, et al. Trucks full of economic analysis follow each crisis – and everyone agrees after each meltdown, that there will not be another catastrophe. What is behind this? Who is behind this? What can we do to avoid this?

What is the system behind this fraud? Why has ‘this’ system been such a failure? Simple!

The Bretton Woods Fraud

After WW2, the global financial system has been governed by the Bretton Woods Agreement. The Bretton Woods Agreement is a millstone around the developing world. As WW2 came to a close, British-American economists came together and devised this system. 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.

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. This was supposed to be done out of 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 plum postings at LSE (IG Patel) and BN Aadarkar (IMF)?

The French Perfidy

In the 1960s, most of the world was buying gold at an artificially low price US$35 – and the USA was bleeding gold. The French team of Charles de Gaulle and his economic advisor, Jacques Rueff did quick maths. It was clear this मेला would not last long. The USA was printing dollars and dumping it in world markets. Based on huge dollar ouflows, the French decided they will call the bluff. The French started redeeming gold for their dollar earnings – and for this ‘perfidy’ the US had not forgiven France.

The French redeemed their dollar holdings (1958 onwards), sent the French navy (in 1965) to take delivery of gold from USA and bring it to Banque de France. The French raised gold reserves and dumped dollars. Banque De France finally, by 1968, increased its gold reserve to 92% (as a percentage of total foreign currency /monetary reserves).

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 redemptions by France, and the new French President, Sarkozy believes it is now possible to renew US-French relations again.

The Nixon Chop

In 1971 (August 15th), 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 in these 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.

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 (and their client states like Japan, etc.) have more than 67% 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.

How Does This Work

Highly paid (mostly western) consultants are paid by aid recipients from debt funding – who recommend more debt and more imports which creates greater indebtedness and rising interest payments which need more aid for which more highly paid consultants are required. At the other end, some of this aid, finally ends up with corrupt bureaucrats and politicians – who tax the citizenry more to pay increasing debt.

US Trade Balance (Image source and courtesy - nytimes.com).

Asians Are Funding the US

Asia lost last year (my estimate) more than US$300 billion dollars due to the monetary policy of the USA. Deliberate, well thought out monetary policy by the USA Government.

The truth is that American lifestyle is being maintained due to Asian stupidity. The Chinese, Japanese, Indian, and other ASEAN countries have lent the USA – which is in the hock by over, US$2 trillion dollars. They will lose US$ 300 billion for the privilege of lending US$2 trillion to the USA. They designate trade in US dollars worth another few trillion dollars a year – which is zero-cost-to-US depreciating currency ‘float’ that the US benefits from.

The Big Mac index (based on two simple ideas of PPP and a standard industrial product) shows the dollar is overvalued against most currencies of the world. This over-valuation range is about 53% in case of India. What that means is that the US pays India only half the amount of what it should actually pay. And India pays double for whatever it buys from the USA.

Who Is Behind This

No one person is – but an excellent representative is Ben Bernanke – the US Federal Reserve Chairman. In his celebrated speech, he sneeringly informed the rest of the world that the USA can start printing dollars – and helicopter drop them.

If the world doesn’t take him seriously now, who can blame him. He has told the truth. The latest is economists are waiting for him to release his M3 (money circulation) figures. Of what use is that. He has already told the world that the US Mint presses are working overtime.

Dollar Reserves in Developing Economies

West Being Held To Ransom

While the West, especially the Anglo Saxon printing presses are working overtime, propagandists, (called neocons these days), blame the rest of the world for imaginary problems. One favorite whipping boy – Oil producers.

One such neo-con (emphasis on con) Brendan Simms starts with his “western capitalist democracies find themselves held to ransom.” rigmarole. All that OPEC wants is a market driven price. Any problems? Why does the West not explore and drill for oil along their huge off shore areas and kill their dependence on oil. If the Oil producers are wary of the dollar price due to depreciating dollar, who can you blame.

If the West wants ‘helicopter Ben’ wants to print more dollars, who will pay the price ? The rest of this gullible world? Does Simms think, that oil rich countries will ship out limited oil resources with the same speed that Bernanke prints money – or helicopter drop dollars?

Is Simms getting this feeling because of the price that the Middle East is charging a full price for oil.

Simms-bhai, I know the feeling, believe me! We, have been through that. It is the similar feeling that we in India, (and developing countries) used to get while negotiating for food purchases (called aid) after the Bengal Famine and while rebuilding collapsed agriculture economies in post colonial India.

Behind Bretton Woods – Gold

The world stamped their approval on Bretton Woods. Why? Why did the world believe that only the Anglo-Saxon Bloc could deliver. Why? 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.

The Cornering Of Gold Supplies

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.

Things are still the same

The Anglo-Saxon bloc of ABC countries is still the largest gold production bloc in the world. The Anglo-Saxon Bloc (countries, colonies and companies) still control more than 80% of world’s gold production – and significant natural resources, like oil. They administer 3 out of the 5 largest countries in the world. Hence, their currencies still have significant heft. Apart from military power.

Financial manipulation comes naturally to them. The USA is trillions of dollar in debt – and Ben Bernanke, the Fed Chief says we can always print more money – or drop it from a helicopter. For instance, the above diagram shows the increase in global dollar reserves – mostly held by Asians.

What happens to the Indians, Chinese, Russians – who stupidly even today believe in the American dollar? Well! Anglo Saxon law says, caveat emptor – buyer beware!! Their latest victims – good old India and China. India and China have significant dollar holdings. The value of dollar had depreciated by 75% in the last 10 years – from US$225 to US$900.

What Can Change

India has emerged as the largest (private) reserve of gold in the world. The countries of South Africa, Ghana, Peru, Indonesia, China, Russia, Papua New Guinea account for nearly 50% of the world’s gold production – though gold operations in these countries are controlled by largely Anglo Saxon Bloc.

A currency bloc, underpinned by India’s private gold reserves – and future expansion of the currency system guaranteed by 50% of the world’s gold production is a feasible start point.

This will make the world more equitable and reduce financial volatility. This will also wean the world away from the savagery of the Anglo Saxon bloc countries who have been involved in every major conflict for the last 400 years.

Related articles

• Gold Standard: Forty Years Gone – And Good Riddance (blogs.wsj.com)
• Central banks return as gold buyers (cnn.com)
• Policy pushing global economy to the brink: UN (business.financialpost.com)