2ndlook

The Third Currency Option – Junk the Dollar and the Euro

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 President-elect 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.

Europe would obviously like to break the dollar hegemony – and muscle into the racket. They know the Third World-Russia-China are not prepared.

And what do Europeans want – some seats at the global regulatory table, to force US moneybags (for now) and others to seek approvals, which will come at a cost … or is it that the approvals will come at a price …

Which will solve no one’s problems … back to square one …

The US Gameplan

US analysts, led by Paul Krugman, have been calling for Barack Obama 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 financial stimulus plan hasn’t even a snow flakes chance in hell – as there are no targets left who can be funded. Industrial corporations are lip deep in debt. The housing sector is knackered. The tech sector has over capacity. No go, no show.

What Has Been India upto? Either … or …

India seems to completely lack direction on how to move independently in times like these. After, all why should India even look at IMF and World Bank – which are fig leaf organizations of the West, as transfer mechanisms of wealth from the Third World to the rich.

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. While the US has been resisting calls for action, busy doing post-mortem, Asia and Europe have been moving.

India is unlikely to get seriously affected by the current crisis – which is possibly creating complacency in India about what needs to be done.Or India is working on a different plan, of which we know nothing. After all, India does believe in moving steadily (even, if slowly).

Are we reading too much into this? At times, India has seemed clueless.

Russia and China – The DragoBear Dance

The big issue is of course, China and Russia. China has 2 trillion of US dollars – and what does China do with this? This crisis seems to have made the Chinese Premier shaky. 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.

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. Russia and China as significant military powers as well as a part of P5, will want their pound of flesh. They will, of course, be afraid of being left out!

Among the P5, US and EU have their own reserve currencies – leaving Russia and China out in the open. Russia and China (as full P5 powers) will want a ‘lion’s share’ of influence in any new architecture. Which any Third World grouping will not give.

The US will not have them and the EU does not want them!

Stalemate.

Russia and China play blame-the-US game

The US has been evading transparency by not revealing M3 figures (on dubious grounds), printing money 24×7×365 and creating toxic assets. Now when the muck has hit the fan, they are acting coy. And this made the Chinese very angry.

China has alleged that the US has plundered the world – and is is now looking after its own. China alleges that the US is not bothered about the problems the US has created for other countries.

Late In the day, Mr.Hu … This is something that the world has been talking about for a long time. China has been a major supporter (and victim) of this scam – by allowing US companies unlimited access and support. Chinese citizens have been duped with low paying jobs at these enterprises.

Is China forgetting history … Mr.Hu – Today it is the US – but yesterday, it was Europe, Mr.Hu. Europe was blockaded by the US for the last 100 years – and hence, European loot is possibly forgotten in China. European loot was accompanied by a lot of bloodshed and killing also, Mr.Hu.

Has the Leopard Changed its spots Possibly, you dont know, Mr.Hu, because China has very little wildlife left. Leopards dont change their spots. Europe behaves today, because it has no options.

China is making common cause with EU over the dollar crisis. While Chinese disappointment is understandable, their actions are beyond comprehension. Just why will Europeans be bothered about Chinese welfare? Just look at their history!!

For that matter why in the world would anyone be interested in Chinese welfare – except the Chinese, of course. The Chinese Government is looking at all options – except Chinese welfare, unfortunately.

The answers A new currency floated by the five major economies who are most affected today – China, Russia, India, Brazil, South Africa. Maybe Japan will also join in. But, the answer, Mr.Hu is with these 5 – and not Europe.

OK … join the gang

Sometime back, Medvedev joined China in blaming the US. Now that the blame game is over, is it finished. Over. Satisfied with blaming the US, Mr.Medvedev.

Now what

Mr.Medvedev, now that you have blamed the US, are you better off. Apart from some (dubious) satisfaction, what else have you got.

Russia has a lot to feel bad about, I agree. US$400 billion is a lot of money – and to see it being printed out of existence, cannot be good. Sometime back China started the blame game – and now Russia has joined in. However, I am yet to see any constructive action. Especially from China and Russia.

Russia, China should join up with with Brazil, South Africa and India to present an alternative to the world community. With this grouping and backing, at least a 100 countries will sign up within 30 days.

Wakey, wakey, Mr.Medvedev. Let us get to work. Blaming the US gets us no where.

Japan + ASEAN

China-leaning Lee Kuan Yew with an Islamic Malaysia may not be very hot about ‘giving so much influence’ to a ‘new member’ like India for an ASEAN initiative. Any action which hurts the US, their largest market and patron, will be something that will make Japan and ASEAN hesitate. The very economic model of ASEAN + Japan is undervalued currency + exports to the USA. Hence, they will be wary of any initiative that affects the USA – and the West.

Status Quo …

And that is why South Africa and Brazil are essential for India. China and Russia must join in. The benefits are too obvious – and the fallout is non-existent!

The New 5 – Three Horsemen Of Apocalypse

The real action will be 5 countries – Russia and China on one hand – and India, South Africa and Brazil on the other.

The G3 (i.e. India, South Africa and Brazil) have functioning democracies, decent regulatory systems (which can be ramped up), the technology platforms, the trading systems, a vibrant entrepreneurial class – all of which is powering their economies forward. What they don’t have is P5 status – which is useful, though not essential.

This Washington meeting – Contours Of The Deal

During the con-fab, ‘committees will be set up’ which will create mechanisms for this management. The EU-USA-Asia may agree (for the time being) on a broad a global regulatory and oversight body to monitor and maintain oversight over a Dollar-Euro currency regime. Some of Asia may want to cling to this Dollar-Euro skirt.

But what the BRICS must work on is a Third reserve currency for the Third World.

The new currency may an Asian-Developing world currency. The big issue for the developing world will be obtaining assurances against predatory raids by the dollar bloc and the Euro-zone to dismantle any new system – like the alleged plot of 1997 Asian crisis.The lesser issues will also be inter-bank settlements, anchoring currencies (the role of gold or bullion).

Following is a 2ndlook at the how the Third currency option will work.

The Organization for the 3rd currency option

Q: Who will handle this currency?

A: The BRIX Reserve Organization will be a the global body which will manage the operations of the BRIX currency. This organization will have initially shareholding by the BRICS countries – equally.

Q: What will happen when new shareholders come in?

A: The promoter shareholders will (later) offer shareholding to other countries to the extent of minimum 1% of total capital and not exceeding 5%. The promoter countries will gradually reduce their shareholding proportionately and equally by inducting other shareholders or selling existing shareholding to new shareholders.

Q: What will be the capital contribution by member countries?

Member countries will contribute to capital equal to 4000 tons of gold (but not gold). Capital will be increased by addition of new members and/or existing members. In case of exchange rate fluctuations, exchange rate will be based on 90 days average. In case of any significant decline in exchange value, concerned member country to make good the shortfall in capital contribution or face shift in member status.

Q: What will be the role of gold in BRIX-BRO system?

A: All citizens of member countries will be allowed to own and trade in gold – within and outside the country during peacetime. In cases of national emergencies, countries may impose export restrictions for a limited defined period.

Governments will not be required to maintain any gold balances at all.

Q: What will be the role of BRO?

A: Firstly to provide and maintain Realtime Settlement System (RSS) – a on line, real time, trading platform – for all the national currencies of member banks and countries. Additionally, there can be ‘permitted’ currencies’ – like the Dollar and the Euro, for trading in non-member currencies.

The RSS will enable participating members will be allowed to nett off transactions.Th BRO will also approve ‘standard packages’ for over-the-counter (OTC) trading of derivative products.

Q: How will BRO make money?

A: The RSS will earn fees through transaction fees and earnings from float – which currently is used by the US and ECB. Individual countries based on trade and production patterns can expand or contract currency supply. Based on supply and demand for individual currency, the RSS will aid the price discovery and setting. National Central Banks will be able to borrow or lend BRIX through the BRO.

Q: Who will man the BRO?

A: Banking specialists will be deputed from (initially, founder) member countries in equal proportion at each level in the organization. Over a period of time, the BRO will build it own cadre of banking specialists – starting with entry level candidates.

The Currency

Q: What will the currency be called?

A: Initially, the start up name of the currency unit can be BRIX.

Q: How will the BRIX currency look like?

A: The BRIX currency will only exist in bank accounts. It will not be printed, circulated physically or stored in vaults.

Q: What will happen to current US$-Euro reserves?

A: Initially all dollar reserves will be used to facilitate trade between member and non-member countries. The BRO will maintain Dollar /Euro reserves equal to 3 months requirements for member countries. Excess dollar reserves of member countries will drawn down gradually over 12-36 months based on market developments.

Q: How will monetary expansion of the BRIX be handled?

A: All monetary expansion of the BRO will happen through trade volumes and capital infusions. The BRO cannot print, monetize, expand money supply.

The Mechanics and Operations

Q: How will exchange rates be determined?

A: Demand and supply for currencies will determine exchange rates. Output of products, services, will create supply and demand for various currencies.

Q: Who will be allowed to trade on the RSS?

A: National currencies will be traded on electronic platforms with accredited traders, backed by institutional settlement system, trade guarantee – based on demand and supply for various national currencies.

Member Benefits

Q: What changes will countries need to make?

A: Very few. All transactions must be linked to the index currency – the BRIX. No country will be required to change from their current currency system. As trades happen, a BRIX amount will be created. As the payout happens, that many BRIX will be extinguished.

Q: What reserve requirements will be imposed on member countries?

A: All countries will be required to maintain a reserve of 1 month’s BRIX usage with the BRO. This amount will earn interest rate at market determined rates.

Q: What happens when countries go through emergencies, catastrophes or calamities?

A: In case of extreme volatility in any currency due to currency /economic /natural disaster, the BRO Board of Governors may approve loans – which will be guaranteed by the donor central banks. Loans by BRO will at all times will be covered by guarantees.

The benefit of this that any country can raise loans from BRO by finding sponsors. Thus hegemony by a few powerful country will not be possible. Thus a small economy (like say) Iceland can raise a loan by finding a consortium of guarantor (say African) countries.

National central banks may guarantee ‘interest’ payments or ‘interest+principal’ amounts. In case of normal commercial loans, the principal and interest repayments can be a commercial credit decision by the BRO.

Q: How will countries maintain their foreign currency reserves?

A: Countries will need to maintain minimal BRIX reserves. BRIX will be fully convertible into other currencies. However, since all national currencies will be convertible, the need will be minimal.

Q: What will be the disclosures and information requirements?

A: BRO will collate, circulate and publish information given by all member Governments regarding M3, currency, etc.

Safety, Checks & Balances

Q: What will happen when a ‘rogue’ Government prints too much money?

A: Whenever, exchange rate volatility exceeds the prescribed bands, BRO will impose trade restrictions after due inquiry.

Q: What about predatory currency traders?

A: Since, BRIX cannot be bought except by creating business trade, there cannot be large holdings of BRIX which can be used for predatory activities. National currencies of member countries can be at risk if excessive monetization happens. But, since, trading in all currencies will happen continuously, excessive monetization will first come to light in terms of excess supply and deterioration in exchange rates.

Q: What about fake currency?

A: The BRO will have its own mint and currency printing units which will print currencies for member countries. This will ensure that mala fide, fake currency by foreign agencies, criminal elements will be eliminated. The BRO may also insist that weak economies print their currency at the BRO mint to ensure that there is transparency in money supply.

Q: What about trade in Government debt and securities?

A: All member countries will be required to intimate and route transactions of Government debt, securities through the RSS. This will ensure that there will be complete transparency in debt, M3, etc.

End game

With a BRICS grouping behind an initiative outlined above, a 100 countries will join this system within 30 days. Japan will defect – as will some poorer European countries. OPEC countries will dither – and then join. Singapore and Malaysia may also dither for some time – but will finally join. Most of Africa, South America and Asia will sign up.

With US$6 trillion amongst the BRICS, Japan, ASEAN and Africa, the Third currency Bloc can give a huge financial stimulus to the global economy. Poorer countries can jump start industrialization – and massive orders for high tech equipment can be placed with Japan, EU and USA to jump start their economies.

Gold policy in modern India

Posted in Business, Current Affairs, European History, Gold Reserves, History, Media by Anuraag Sanghi on December 2, 2007
Terrorism comes to town.

Terrorism comes to town. ( Policemen inspect the Bombay Stock Exchange building after the blast in 1993. Thirteen serial bomb blasts tore the city in which at least 250 people were killed. - Photo - AP).

Who is responsible for Mumbai Bomb blasts?

Dawood Ibrahim? Wrong!

Tiger Memon? Wrong?

The answer is Late Morarjee Desai – India’s ex-Prime Minister and Finance Minister.

And a whole lot of RBI and GOI officials who were behind 40 years of legislation which has created India’s underworld, corrupted 4 generations of India Government officials and reduced the value of Indian savings by Rs.1,20,000 crores. (4000 tons of gold purchased by Indian consumers at a 30% premium at today’s value – do your numbers).

Blind Imports

The Indian development idiom is an imported idea. For instance, the Five Year Plans, from Russia. Indian monetary authorities have been led by western discourse and strategy.

No enabling mechanism, (an output of differential thinking) like the Japanese business led by MITI, American business supported by Marshall Plan, NATO, CENTO, SEATO, IMF, World Bank, US Exim Bank, ADB et al. It is these mechanisms that enabled these economies retain their dominant and exploitative positions.

India’s Gold Policy was also a case of warped thinking. To be fair, domestic thinking had to contend a tectonic shift – from a colonial-feudal system to a nationalist, democratic economy. Not discounting, Western pressures tied to aid. For instance, India’s infamous population control policy.

The other big disadvantage – English language.

TN Ninan on Indian poverty

TN Ninan on Indian poverty

The French Lesson

India’s red herring of English language stopped it following French strategy, an empire under eclipse before WW2. Today, 60 years later, France has come ahead of its arch rival and competitor – Britain. Of course, the French strategy is simple – nationalize the economy, with token private sector presence.

In the 1960s, most of the world was buying gold at an artificially low price of 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.

The French redeemed their dollar holdings, sent the French navy 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 increased its gold reserve to 92% (as a percentage of total foreign currency /monetary reserves).

The Bretton Woods system.

The world after WW2, has been governed by a financial system that has been a failure. The Bretton Woods Agreement, 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. Did anyone notice how much Britain resisted, joined and finally exited the European Currency Union. Thie Bretton Woods 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 depreciating currencies.

The dollars cracking

The dollars cracking

It also gave rise to 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.

Indian Government supported the Bretton Woods sham

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 Johnsonn’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 IMF (BN Aadarkar-IMF)?

The burden of the dollar

The burden of the dollar

March 15th, 1968. Finally, US support for gold prices stopped at consumer level. USA continued to promise redemption to Governments at US$35 per ounce. And on August 15th, 1971, the world got the Nixon Chop. By that time, USA gold reserves had dropped from 20,000 tons to 8500 tons – from 21,828 tons (701.8m troy ounces) in 1949 to 8130 tons (261.4-264.6m troy ounces) in the 1980s.

What did India do.

From practically, 1939, (the start of WW2) gold imports into India were controlled or banned. This British legacy (aimed at colonial exploitative ends) was continued by Indian Government and RBI. Many Gold control laws were enacted which stopped all legal gold imports into India.

Our finance minister at that time – Late Morarjee Desai.

Seymour Hersh, an American investigator implied that Morarjee Desai was in CIA pay. Morarjee Desai filed a court case – and subsequently died. Henry Kissinger, made a bald defence of Morarjee Desai.

The other thing that happened was that gold imports went underground.

Morarji Desai may get his place on Mount Rushmore

Morarji Desai may get his place on Mount Rushmore

Gold (illegal) imports (called smuggling) spawned biggest criminals that India has seen. Karim Lala, Haji Mastan, Varadarajan Mudaliar, Yusuf Patel, Tiger Memmon, Chota Rajan, and of course, Dawood Ibrahim – a biological son of a police constable Sheikh Ibrahim Kaskar, was spawned by Morarjee Desai’s laws.

These laws corrupted four generations of Indians Government and politicians. It made gold in India very expensive – and the Indian buyer remained in poverty longer.

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