A New Currency Bloc – The Chinese Question

Estimated Chinese Holdings

Stumbling Block

In any new world financial reform proposal, the Chinese voice will be very important. After all they are the world’s largest creditor nation! They have US$2 trillion worth of IOUs with them. Of course, the composition of these US$2 trillion Chinese reserves is a state secret. And after the Chinese come the Japanese with US$1 trillion of reserves. Russia, India and Brazil total to another US$1 trillion.

Given the Chinese history in the last 100 years, the Chinese will not agree to any ‘hare-brained’ scheme by ‘tin-pot’ dictators, who are sitting on some raw materials – and think that the future belongs to them. The world has so many of this variety, that it does not require me to be specific.

Even a serious attempt by the EU, with the Euro, has not been able to significantly dent the dollar market share! Apart from the Euro, in the the last 10 years, there have been at least 3 half-baked – and unbaked attempts to break the dollar hegemony. So, there you have it – it is out in the open!

What can you do about the Chinese question?

The Way Out

China, in its own short term interest (importantly) and long term interest (definitely) needs to find a way out!

Buying gold in such large quantities is not possible – there will simply be no deliveries. Increasing import ‘trade volumes’ is also difficult – as what more can China import. It cannot send many more Chinese on holidays! They don’t have the single-mindedness of the Indians – when it comes to buying gold.

What it can do is buy Western firms! China has been always been a laggard in terms of growth in software! Maybe they can buy some software firms. The domestic Chinese entrepreneurial spirit has been damped in the last 100 years. What if the Chinese were to spend on some Venture Capital funds! What if China were to kick-start their fast-moving consumer goods industry by buying P&G!

The Chinese need to acquire some big ticket assets – for about US$1.5 trillion and bring down their reserves to US$0.5 trillion. This will reduce US outstanding debt, create demand for US stocks, lift the Dow Jones, and create value for the dollar. As I see it this is the only way that the Chinese can cash in their chips. The House will not let them take it away any other way.

And then the Chinese are free to join any currency bloc – or even initiate one!

Indo Pak Relations – What Will It Take

The Detritus

As Britain (and the West) was 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. 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 many issues in the West Asia and Africa are living testimony to the British gift to the modern world. The entire Arab-Israeli-Palestinian conflict is a creation of the Anglo-French-American axis.

Closer home is the Kashmir problem. After 60 years of negotiations, India-Pakistan relations have remained hostage to the Kashmir issue.

Jagmohan Dalmiya

A Precedent

Till the 1983, world cricket was run by the UK and Australia. These countries, of course, had veto power, had the funding, to control the game. In 1983, however, Britain and Australia hit a financial roadblock – the 1987 World Cup sponsorship. They did not have a sponsor in place for the 1987 World Cup. And then India stepped in. India roped in Dhirubhai Ambani for the sponsorship. India roped in Pakistan to put in a joint bid for the 1987 World Cup.

What was Special

This was, simply, without a precedent. For three reasons.

Imran Khan

First, this was a unique case, where rich and developed countries could not find a sponsor for a sporting event, which they dominated. And a poor country could.

India, in 1987, still had a waiting period for Bajaj Scooters. Maruti cars had just been introduced. Colour TV sets were rare and colour TV transmission had started a few years old – and a luxury. Competitive bidding for TV rights was not possible – and could be sold only to a public sector TV transmission monopoly. Computers in India were rare and far in between. Private sector as we knew it was non-existent. Licenses were required for everything. Foreign exchange situation was precarious. Hence, for a poor country to bid for a World Cup was unprecedented.

Sunil Gavaskar

The second major challenge was the organization. Indian bureaucracy was then (much more than now) a minefield. Myriad laws made any kind of complicated organization a nightmare. Private sector was seen with suspicion. Indian films still portrayed businessmen as villains. Indian software industry was nowhere in sight. India did not have even one (private sector) company in the Fortune 500 list. To say the least, it was audacious, at a time when India dominated by stereotypes (more then than now).

But the third element that has remained unrecognized was the working of the India Pakistan partnership. The World Cup bid was a joint bid (1985) by India and Pakistan. No one would have bet that India Pakistan could have worked together. But together they did. And successfully. This Indo-Pak relationship has now survived for more than 20 years.

What Changed

India and Pakistan, went ahead and moved cricketing headquarters from UK to Dubai. Unlike Bro.Manmohan Singh at the high table, BCCI and Pakistan just took away the veto powers of UK and Australia over cricketing matters. In spite of best efforts of ‘divide-and-rule’ by the ECB (UK’s cricketing authority) and Cricket Australia. UK, in a case of sour grapes, went ahead and stopped its players from participating in the Indian Premier League. Australia broke ranks, and participated. South Africa started with its first official post-apartheid series in India – the post-apartheid ‘coming out’ party.

In the UK and Australia, this loss of power rankles.

Shahriyar Khan

Use The Experts

This India Pakistan Cricketing relationship is very healthy – and has been managed by four people. Of course, there has been no case study, or a book or even a news report on this partnership. So some of this is my perception based on media interaction.

The four people in this complex relationship have been Jagmohan Dalmiya and Shahriyar Khan at the administration level. Between these two, they have managed a consensus between the Asian cricketing countries and South Africa. Jagmohan Dalmiya has a business background – and a career in cricket administration. Shahriyar Khan is a career diplomat and also a cricket administrator.

The other two are Sunil Gavaskar and Imran Khan – two well known and respected players in each of the countries. Between, these four, they have managed this complex cricketing relationship. Some of it is visible – but mostly, below the line. Especially, significant is the management of agreements. Recently, Asif Ali Zardari dismissed written agreements with his coalition partners, PML (N) headed by Nawaz Sharf, claiming agreements were not “holy like the holy Koran.”

The Learning

Now, if these four can overcome the complex political situation and the minefield of history, is there a learning for others? Especially, for those who manage the India-Pakistan political relationship.

Hidden in this cricketing relationship, is the solution to the sub-continental peace.

Post Script

This lesson seems to be dawning. Seven months after this post, a leading Indian newspaper carried an article on how Asian cricket needs to continue on the India Pakistan axis, which has been so successful in the last two decades. It points out how when cricket Indian administrators like

“I S Bindra … suggested that India is capable of hosting the 2011 World Cup on its own … (they) have sacrificed the much-used paradigm of subcontinental unity, which has seen India and its neighbours dominate international cricket politics for almost a decade.” It furthers links how ” it is inevitable that the West, rocked by the Stanford disaster recently, will try and regain composure and mount a counter-attack. Statements like English players may not be released for the IPL by the English Cricket Board and Tim May’s urging that a thorough security assessment is necessary to convince international cricketers to consider playing in IPL are evidence that such an offensive has already begun.”(ellipsis and bold text mine).

It is time that the Indian Foreign Service establishment took this learning – and start running.

Come June 2009, Shahriyar Khan (mentioned and pictured above) alongwith Shashi Tharoor came out with a book on Sub-continental cricket. Indian media, since it was not led by the nose, have this book cursory coverage.

Shashi Tharoor and Shahryar Khan in Shadows Across the Playing Field tries to provide answers by analysing 60 years of this intense cricketing rivalry, one, which has, on occasions superseded the intensity of the Ashes. (via something to hope for, and look forward to).

Indian Software Success – How Come?

A 35 year old Indian advertising executive (after a short London based assignment, at Car Phone Warehouse) had an interesting observation.

There is a transfer effect! We Indians, get respect in some parts of the world today, because we are Indians. Earlier perception of Indians was based on the individual. Indians were not respected for their nationality. Now, Indians gets some respect because they are Indian.

How Did This Happen

And the Indian image makeover was due to the work done by the software guys on the Y2K problem – this advertising executive claimed. The Y2K was predicted to be a major disaster – waiting to happen! The world waited with bated breath – for planes to crash; banks feared billion dollar frauds; Generals were afraid that defence systems would go on a blink. Indian software companies got the Y2K contract by the truckloads. The whole world piled on to Indian software companies – as there were few credible alternatives.

Come Y2k, nothing happened. The world over!

It just another day. It was the biggest triumph for the Indian software community. Done at a cost of a few billion dollars. The Y2K meteor did not crash onto mother earth – it was detonated at the time of entry into the earth’s atmosphere by Indian software programmers. As usual Indians do not celebrate their major successes. (Instead they make a big deal of the 20:20 world cup)

India’s software success has many claimants – and all of them have had a role to play. And in this crush, one small thing escaped everybody’s notice.

Why Did Software Become Such A Big Thing

Why is it that software became such a big thing in India? How come Indian engineers with such low levels of prior exposure to computers could ramp up so quickly and tackle such a complex problem? How could a country with the lowest computer penetration become the largest expeorter of software in less than 10 years.

The answer goes back to 5000 years ago.

When Sanskrit language was invented. Yes. Invented.

What!! What Has Sanskrit Got To Do With This

Sanskrit is an artificial, synthetic, revolutionary language – unlike all other languages in the world; which are Prakrit (natural and evolutionary). The next set of artificial languages came into this world after 5000 years later.

About 50-75 years ago, the next set of artificial languages were invented. These are the computer languages. Between the invention of Sanskrit and the computer languages , there was no other culture which created an artificial language system.

What is special about Sanskrit?

Sanskrit is nothing but a database system with millions of database tables and a system of linking concatenated data records. Every word is a table (I studied Sanskrit 30 years ago, and if I remember correctly, it is a 3 column x 8 row table). And all words then combine with each other as per these table rules.

And all Indian languages are derived from Sanskrit.

While most of us do not know Sanskrit or understand it’s structure consciously, we all use Sanskritic structures everyday. It is easy for us to learn another “Sanskritic” language! Hence, for all those brilliant engineers, their base in Sanskritic languages gave them a head start.

And the rest, as they say, is history!

PS – Most malware, denial of service attacks, co-ordinated system attacks seems to be coming out of Eastern Europe, Russia and now China also. India – nix. In spite of being a software super power, our negative contibutions seem negligible. There is something to this …

Gold policy in modern India

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

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

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

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

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.

Chidambaram Says … “End 5000 years Of Poverty”

This was Chidamabaram’s statement in the parliament and at least a couple of magazines – including India Today.

Nations Wealth

A nation’s wealth can be a number of things – intellectual wealth, economic wealth, social and political institutions and structures leading to wealth. But primarily, most look at wealth as a measure of economic wealth. And that is what Chidambaram was referring to and most of us accept. Therefore in this write up we will limit ourselves to the economic debate.

A few things.

Obviously, paper money cannot be a measure of wealth. Probably, the de la Rue family would have been the world’s richest family, if paper money was of value. The Bretton Woods mechanism under which the US dollar was the world’s reserve currency lasted as long as it was the only currency on the gold standard. The US Government broke the Bretton Woods mechanism by printing too many dollars. De Gaulle’s French Government started trading in US dollars for gold. In 1971 President Nixon abandoned the Gold standard. Thereafter the world got the first Oil shock and 10 years of stagflation. This French ‘perfidy’ strained US-French relations for the next 30 years. President Sarkozy is today trying to change that – and he can. The casus belli – the US dollar is no longer an issue. Today the US is the world’s largest debtor nation.

Measure Of A Nation’s Wealth?

How does one measure a nation’s wealth? A reliable method is, of course, gold reserves.

India’s private and governmental reserves of gold are by far the largest in the world. Estimates of total Indian gold reserves vary between 25,000 to 30,000 tons. The next highest is the United States with 14,000 tons of gold – with the US Govt accounting for 8000 tons. For at least the last 50 years, India has been world’s largest consumer of gold. (Pliny lamented 1800 years ago as to how imports from India were draining Rome of gold. In 1960’s, James Bond was sent after an arch villian, Auric Goldfinger, to close down illegal gold export from Britain to India in Goldfinger – the book.)

Secret of Japan’s rise

Year 1542. The Sado gold mines were discovered. In 16th-17th century, Japan became the second largest producer of gold in the world. Rapid rise of Japan after that and the rest of story is known to the world. Korea claims that Japan plundered Korea of hundreds of tons of gold from 1937-1944. Philipines, Indonesia have all raised claims against Japan for war time gold loot. Regardless, one American writer had definitely hit a jackpot – Gold Warriors: America’s Secret Recovery of Yamashita’s Gold (By Sterling Seagrave, Peggy Seagrave). Ian Fleming is supposed to have based his story on the Yamashita chapter of WW2.

Sounds like a 5000 years of poverty?

The intellectual father of India’s freedom movement was a British MP of Indian origin – Dadabhai Naoroji. His seminal work on the British colonial loot of India cut away the legs of the Raj – and thereafter, the Raj could not stand. Statistical analyses by Angus Maddisson, Groningen University showed India with a world trade share of 25% for much of the 500 years during 1400-1900.

India loss of wealth is a recent phenomenon. This trend of increasing poverty was halted only with Indian independence and subsequent growth of the Indian economy.
India’s rapid economic decline in the first half of the 20th century is what Chidambaram refers to as the 5000 years of poverty.

Lees Mody Pact

October 28th 1933. Much of India’s Hindu rate of growth can be traced back to this date. On that day, the Bombay Mill Owners Association signed the Lees-Mody Pact. This earned all Indian industrialists Nehru’s distrust. The British had succeeded once again in divide-and-rule.

Japan had become the largest buyer of Indian cotton – in spite of imperial preferences. Lancashire was hurting. Duty on Japanese textiles was raised from 31.5% to 75%. Japan stopped buying Indian cotton in retaliation. Cotton prices crashed. Montagu Norman was already wreaking havoc with his economic policies. demand had collapsed. Britain agreed to “help”. Customs duty was lowered for British goods only to 20%. Britain agreed to buy Indian stock piled cotton at lower prices. Indian mills and the Indian farmer paid the price. GD Birla said “They have lost their nerve …”. Churchill made life difficult in Britain as this pact did not deliver.

While the whole country was following a boycott of foreign goods (specially Lancashire goods), 21 businessmen led by Homi Mody (father of Russi Mody, Piloo Mody) agreed to the system of ‘imperial preference’ – which was behind India’s impoverishment. Earlier, Homi Mody had warned Gandhiji against the renewing the swaraj movement. The “money famine” had collapsed demand in India.

Mody had his own political ambitions. After Independence, Nehru did try and make up with Homi Mody later. Homi Mody was included in to India’s Constituent Assembly – even though he had served the British well.

Chidambaram Should Look At …

What Chidambaram should focus on is a monetary mechanism to leverage India’s 25,000 tons of gold to make India a capital rich country. From there India can start on its way to becoming the richest economy of the world – again.

Significantly, Chidambaram needs to answer if the Indian defence system is adequately funded for its task of protecting the world’s largest gold reserves!