Currency Wars

A Matrix of Concepts
Rashmin Chandulal Sanghvi
24th January, 2011
Summary of Contents

1. Identify the problem. Currency Wars. (I)

2. Analyse past and present.
Diagnose reasons for the problem. (II to X)
3. Estimate consequences. (XI & XII)
4. Offer solution. (XIII)

Detailed Contents

If you are busy, just read the paragraphs marked with * &
red colour. Then if interested, read the whole paper.

Paragra Paragraph Titles Page

ph Nos. No.
I Preface 1
* What is a Currency War 1
Illustration 1: Exploitation by Europe of its colonies. 3
Colonial Exploitation Compared with Economic 3
Exploitation
Conspiracy Theory 4
Notes 5
Matrix of Concepts. Some details & analysis of past 7
& present. From page 7 to page 60.
II Exchange Rate Determination 7
III* U.S. $ Issues 10
IV A Brief History of Money 11
* Nixon Shock 12
Currency Explosion 13
V U.S.S.R. Implosion 15
Star Wars 15
Contd…..
Contd…
Paragra Paragraph Titles Page
ph Nos. Nos.
Afghanistan 16
VI South East Asian Crisis 22
Yen Carry Trade 22
Indonesian President Suharto 24
Yen as International Currency. 25
Crash of 1997 25
Some Proverbs 27
VII* China and India as Suppliers & financiers to USA. 28
VIII.* Benefits to USA of $ being the global currency: 33
IX How U.S. tries to maintain $ Hegemony! 34
* Gold Carry Trade 34
List of U.S. Strategies 37
X Practical compulsion to adopt $ as the Currency for 39
international trade:
XI Some signs of the trend for U.S. Economy. 42
American Financial Crisis of 2008. 42
XII Probable Consequences of Currency Wars 43
XIII Probable Solutions 49
XIV Relevant Issues of Interest 51
Annexures
1 Concept Vs. Definition 56
2 Cause of Inflation in India 58

This is a summary on a vast subject. Several issues are

controversial and need considerable discussion.

Short Forms:
FI = Financial Institutions including banks.
Fx = Foreign Exchange

Next page: Preface

 Page No.: 1

Currency Wars.

I. Preface

I.1 Several currency wars have been fought during last

hundred and fifty years. No currency war was fought before 150
years in entire history of money. At present (January, 2011) the
currency war has already started. If it escalates, results can be
severe. Senior Economists of the world are worried about
currency wars. International Monetary Fund (IMF) and World Bank
are also worried. Let us see in details these issues in this paper.

Currency movement and currency exchange rate can be

abused to exploit another country. There are several ways of
abuse. Most ways are difficult to understand or realise. In this
article we have a look at the ways of abuse. We take
illustrations from history so that abstract concepts become
easier to understand.

It can be several decades and even hundreds of years

before a society or nation realises that it has been exploited. The
exploiter can confuse the exploited. Some people have
mastered the art of exploitation. Even when the exploited feels
exploitation, he cannot pinpoint real cause of his suffering.

2. What is Currency War?

Common Definition.

Some people have defined “Currency War” as competitive

devaluation of one’s own currency so that exports become more
competitive and imports become costly. As a result imports are
expected to reduce and exports are expected to go up. As a
further result, employment within the country goes up and
employment in the competing country may go down. The
country which devalues its currency may get net trade surplus
(exports more than imports) and its foreign exchange reserves
go up.

This policy is also referred to as “Beggar Thy

Neighbour”.

At present, U.S. Government’s allegation is: “China is

keeping the value of its currency artificially low. Hence it has a
huge trade surplus and large foreign exchange reserves. U.S. is
suffering unemployment and trade deficit because of Chinese
policy.”

U.S.A. tried to push China into revaluing Yuan. China told

Hillary Clinton: “Mind your own business. Instead of advising us,
 Page No.: 2

ensure the safety of your currency.” When individual pressure did

not work, U.S. tried international organisations and institutions to
pressurise China.

Ultimately, in the year 2010 U.S.A. started Quantitative

Easing worth $ 600 billions. This is expected to (i) devalue U.S. $
and (ii) force other countries to either buy $ or experience
appreciation of their own currencies.

China has refused to buckle down under U.S. pressures and

U.S. has started action. Common man does not see anything
happening but economists and finance ministers around the
world consider this as Currency War and are worried.

Another definition:

I submit that a Currency War can be conducted in several

manners. Devaluation is only one of the several ways possible.
A country can exploit others by keeping own Currency value
high also. And other countries can be reduced to ‘beggar’ level
by several economic means.

We will see these details in the present paper. We will also

consider the substance behind U.S. allegations.

3. I have discussed in the past – “What is a ‘Concept’! How a

‘Concept’ is different from a ‘definition!” A discussion on
“Concept Vs. Definition” is given in Annexures. Considering
concepts is more serious than just considering definitions. When
we consider a matrix of concepts, matters become even
more complex. And when we take concepts from different
disciplines, things become really difficult. I have attempted to
simplify.

4. In this paper, let us consider some concepts from history,

human psychology, Government psychology and
economics altogether. Considering all these, we try to analyse
the past. Based on this analysis we try to understand
the present. Based on our understanding, we try to
project future.

5. There are good chances that we make several errors and

our projection may prove wrong.

History repeats itself.

And yet no one can predict future.
This dichotomy makes life challenging and hence
interesting.
 Page No.: 3

Hence we make a series of projections. Be prepared for

adverse probabilities. Plan to make the future stronger.

6. Illustration 1:
Exploitation by Europe of its colonies.

Pope Alexander VI in the 15th century told Spain &

Portugal: “Go and win the countries of the world. Who ever wins,
keeps that country as her colony”. These two countries became
prosperous. Soon several others joined them.

The Europeans took their ships and armies all over the
world. They took over the control of several nations including
India by several means. And then they justified the controls by
saying: “We the white people are supreme race. We are meant
to rule over the rest of the world.” (Search on the internet –
“White Supremacy Theory. Compare it with the theory that
“Brahmins are superior to all other castes.” Consider how this
bogus theory has been perpetrated in India for many thousands
of years.)

Today’s generation will find it ridiculous. But many Indians

did believe that the white race is superior to the Indians. Many
accepted the exploitation by the white race as “normal”. But
many Indians did not accept “White Supremacy” or exploitation.
They fought back. The 1857 independence war was a war
against British Rule and against British Exploitation.

Britishers were ready with “Sham, Dam, Dand, Bhed”

“Fooling, Bribing, Fighting and Dividing”. “If the colonies simply
accepted to be exploited, great. If they did not, then fight. Bribe
the kings by several means and use their names to rule the
Indians and exploit them”.

Gandhiji was one of the many Indian leaders who saw

through this exploitation. He developed world’s unique method
to fight back and drive out the shrewd Britishers. Gandhiji used
“Resistance without War” (Satyagraha) to end the exploitation.
Then the Britishers used “Divide and Rule” method to prolong
their rule over India. Some other nations got their independence
by an open revolt.

When the era of colonisation was over, the Europeans and

Americans found out new and sophisticated ways of exploitation -
Economic Exploitation. In economic exploitation, there is little
resistance, your soldiers don’t get killed and your prosperity is
even better.
 Page No.: 4

7. Colonial Exploitation Compared with Economic

Exploitation:

Now use the illustration of ‘Colonisation’ to develop a few

phrases and use them in the field of global economics.

(i) As long as one person – society or country exploits another

without the other realising it, it is simply exploitation.
(ii) If the exploited realises and yet does not fight back, it is
“exploitation of the stupid.”

(iii) If the exploited person resists, it is “Resistance”.

(iv) If the exploited person fights back, it is “War”.

Who wins or loses the war is a separate issue.
In war, all sides are hurt irrespective of who wins.

(v) One nation exploits another and there is neither resistance,

nor war. This is Equilibrium.

(vi) In resistance or war, the Equilibrium is disturbed.

8. Conspiracy Theory
8.1 Theory:
“Commit crime. Most likely, you will not be caught. If
caught, deny all allegations and confuse the public by
disinformation. There are enough gullible people to believe in
your denial.”

Elaboration - Mr. P, a politician conspires to cause damage, or

to gain fraudulent advantage from his position. He succeeds in
his conspiracy/fraud. However, afterwards, he is exposed.

Mr. P is so powerful that no one can punish him. But he

needs to save his public image. What will he do?

He will flatly reject all allegations. And then he will allege

that his opponents have just cooked up the conspiracy theory
to malign him. And he will start a disinformation campaign.

People will never know the truth. They will be confused.

Some will believe in P & some will believe in the opponents. The
opponents’ allegations will be largely neutralised.

And human psychology is such that they see no fault in

the rich and powerful. While they see numerous faults in the
weak. Human naiveté crosses the limits when: The powerful
abuses the weak. And public criticises the victim instead of the
 Page No.: 5

aggressor. This is commonly seen when a powerful politician or

bureaucrat abuses a poor.

8.3 Illustration:
U.S. Government is exploiting others in some fields for
many decades. People have made allegations against U.S.
Government.

U.S. Government’s first response is:

“Just deny everything.

“Rely on the fact that very few will dare to criticise U.S.A.
“If some rare person still criticises; then do one or all of the
following:

(i) Make his Character Assassination.

(ii) Broadcast to the world that the critic is just creating
conspiracy theories to malign the noble U.S. Government.”

(iii) Spread massive disinformation.

Those interested in further research may study the theories

that CIA & KGB developed to spread disinformation, counter
information and confuse the opponents & the world.

U.S. Government is successful in brain washing its people

into believing that the U.S. Government and military are not
doing anything wrong in the world. And the public sees what it
believes. They believe what is beneficial to them.

9. Notes:
9.1 Several Perceptions:
History is very interesting. Same event will have infinite
different perceptions. I have noted here one perception. You
may have many different perceptions. All may be right. None
complete.

Here the focus is to explain the Currency Exploitation and

its variations. So let us all focus on the exploitation; and proceed
with this main issue.

9.2 Exploitation is Universal:

Our exploitation by the white people should not be a

surprise. Some Aryans have exploited non-Aryans for thousands
of years. Some “upper caste” people have exploited “lower
caste” people for thousands of years. Some men have exploited
women for longer periods.
 Page No.: 6

Exploitation really acquires several ways and means and is

almost universal.

Main need is to understand exploitation. Remove

exploitation. Where others are exploiting us, throw them out.
Where we have exploited others, stop exploiting.

9.3 Currency war is only one of the several tools available to

the exploiter. Larger field is Economic Exploitation. If you want
to see how India exploits its agriculturists, read articles by Mr.
Sharad Joshi (Shetkari Sanghatana, Pune).

9.4 I am giving a history of last few decades in one paper.

Some of it is from pure memory. There can be errors. Dates &
amounts may not be exact. The attempt is to show the
chronology of events. Most of the amounts are rounded up.

I. Preface Completed

Next:
Currency war is a concept.
To understand this concept we have to consider several other
concepts.
It is an interwoven multidimensional matrix.

First concept to consider:

How does one determine the foreign exchange rate!
 Page No.: 7

Matrix of Concepts: Pages 7 to the end of the paper.

To understand currency wars we may have to understand a

matrix of several concepts which will together build the final
concept of Currency War & Economic exploitation.

II.1 Exchange Rate Determination: “What is the right and fair

exchange rate for a currency” is an issue on which several
thesies have been written. At the same time every person who
has studied economics at college level has studied two methods
of determining exchange rate.

Should the rate of rupee be ` 45 per dollar or ` 18 per

dollar (as it was in the year 1991)!

II.2 Demand & Supply method.

If the demand for a currency is high, its exchange rate will

be high. On the other hand if the supply of the currency is more
than the demand for the currency, its rate will go down. For
example, at present U.S. dollar to Indian rupee rate is ` 45 per
dollar. Now if the U.S. Government increases the supply of the
dollar by “quantitative easing”, normally the value of dollar
should go down. Hence the new rate may be say, ` 40 per dollar
or even ` 35 per dollar.

The demand of a currency should normally depend upon

the exports made by that country and the foreign investment
into that country. Thus for example, if India imports more goods
than it exports, then the demand for rupee should be lower.
Hence the value of rupee should fall. If foreigners make more &
more investments into India, they would send more foreign
exchange into the country and hence value of foreign exchange
will go down whereas the value of rupee will go up.

Note: It should be understood that in real life economics

individual theories do not have complete playground. In theory,
in college one would explain an economic theory as if “all other
factors remained same” (Ceteris paribus). In real life several
factors work simultaneously. Some factors are at cross currents.

And all markets are manipulated by interested parties. A

simple illustration is the share market. A stock analyst may study
the balance sheet and may work out a value of the share as the
right value. However, when one goes into the share market, the
price at which the share would be traded may be quite different
from the fundamental value. In fact, it would be a rare event
when the real market price would be nearer the intrinsic value of
 Page No.: 8

shares. In the same manner the real value of a currency may be

widely different from its intrinsic value.
While several forces are acting simultaneously, some are
understandable, some are beyond the understanding of a
commercial man. In philosophy, one’s intentions (Bhavna) have
a great influence on the force of money and weapons. Hence
final results will depend upon the thinking and intentions. Some
aspects of this concept are known as “Will Power”, “Power of
Positive Thinking”. “Impact of Negative Thinking” and so on.

Intentions are unknown and keep changing. They affect

future. Hence prediction of future is not possible. We can only
project probabilities.

II.3 Purchasing Power Parity (PPP):

When the real value of Indian rupee in India is compared

with the real value of dollar in U.S.A., one can get the
fundamental exchange rate of the currency. To find the real
value of a currency in a country, a practical method is to find a
representative basket of goods & services which are common in
both countries. For example, if a basket of goods & services costs
` 50,000 in India and $ 5,000 in U.S.A., then the exchange rate
for the two currencies should be ` 10 per dollar.

A representative basket of goods & services may be

considered as the normal consumption by a family over a period
of one month. Consider a family of five persons living a middle
class standard of living in India. One would say that the family
can live with an income of ` 50,000 per month at a middle class
standard of living. At the same time, a family of five persons
living a similar standard of living in U.S.A. may need $ 5,000 per
month. Hence under the PPP method the value should be ` 10
equal to a dollar.

II.4 In reality, for determining correct exchange rate what is

more important is the goods & services which are being traded
in the international market. In other words, India exports iron
ore, cotton yarn, handicrafts & software services. India imports
machinery, chemicals & electronics. In all these considerations,
the family consumption does not figure in. Hence the PPP rate
does not really work in the international market.

The PPP rate is a guideline and not final determining

factor.

And yet, IMF World Bank and important international

institutions now prepare comparative statistics on PPP basis.
According to these comparisons, dollar is overvalued four times
 Page No.: 9

its intrinsic value; or rupee is undervalued to one fourth its

intrinsic value.

University of Pennsylvania has prepared World GDP tables

on PPP. A summary:

Country GDP at Market GDP at PPP

Rate rate
$ Trillions $ Trillions
China 5.7 14.8

USA 14.6 14.6

India 1.4 4.4

II.5 There are allegations that multinational corporations in

association with their governments try to suppress the prices
of commodities. Hence they get the commodities at a cheap
rate. They also try to sell their own products at high rates. This is
a simple exercise of exploiting the countries having poor
knowledge of economics by those people who are experts in
economics.

II.6 For last forty years U.S.A. has been having a trade
deficit. In other words, the value of goods & services imported
by U.S.A. are far greater than the value of goods & services
exported by U.S.A. As a simple logic, the value of dollar should be
depreciating. However, all over the world people invest in U.S.A.
Hence there is a huge inward flow of foreign exchange into U.S.A.
Hence the value of dollar has remained high.

Some beliefs have been perpetrated by certain authorities.

Especially the U.S. Government. “U.S. Dollar is a safe haven.”
“U.S. dollar is as valuable as gold but more convenient & efficient
than gold.” At some time (before 1972), these beliefs had
substance. Over period, substance has gone down and today
they are myths. But old beliefs die hard.

These and similar myths have made people believe that it

would be better to invest in U.S. dollar rather than their own
currency. Hence there has remained a continuous flow of money
into the U.S.A. We will see in this article, how these myths came
into being and how today economists realise their true substance
(or absence of substance).

II. Exchange Rate determination issues completed

 Page No.: 10

Next: A summary of issues on US $.

 Page No.: 11

III. U.S. $. Issues:

III.1. We will see how U.S. became Super Power No. 1 and how $
became a global currency. What advantages U.S. has enjoyed.
How U.S. has tried to maintain $ as the global currency. Some of
the wars & strategies that U.S. Government has executed to
maintain $ hegemony. Whichever nation tried to move away
from $ as international currency has been attacked.

Today what is the position! Can U.S. maintain that

hegemony? Are we in for a “tectonic shift” in the global
economy? What can happen if $ collapses like the Russian
Rouble? Will India benefit or suffer?
We cannot predict future. But based on our analysis we can
make a “Case Scenario”. We can make several different
projections. And be prepared for the same. Also, expect the
unexpected. Something may happen which we cannot even
project today.

III.2. Devaluation of Dollar. Following is a simple statement

driving home a point. Real implications are too many and
complex.
In the year 2006 the price of gold was $ 400 per ounce.
Today (January, 2011) the price of gold is $ 1400 per ounce. This
means that in four years time dollar has depreciated to 28% of
its value in the year 2006. In other words there has been a
devaluation of 72%.

In the year 2006 the parity between Indian rupee and U.S.
dollar was Rs. 45 equal to a dollar. Today also the parity is ` 45
equal to a dollar. Hence while we believe that in terms of dollar,
rupee has not been devalued, in reality against gold rupee has
depreciated by 72%.

See the gold price chart. Why it remained steady for long
period & why it has started steep climb up!
 Page No.: 12

III. List of Initial thoughts on U.S. $ completed.

 Page No.: 13

IV. A brief history of money.

Share market friends may say: “Just tell us how the index
will move in future. Why bother about the history!” It is said:
“One who does not study history is condemned to repeat
history”.

A brief history of money may be useful. Under barter

system lot of economic exploitations would not be possible. Even
under a gold standard it would not be possible. The fact that
Governments have a licence (given by them to them) to print
paper currency without any legal or practical limitation has
created several possibilities. We consider a few possibilities here.

IV.1 Initially there was barter system. Then came the coins.
Coins were made of metal and carried the intrinsic value of
the money. For example, Indian rupee was made of silver (rupa).
Hence a Government could create only so many coins as the
stock of silver available with the Government permitted.

When there was a physical restriction on supply of money,

there was no question of over supply. Hence there was no
question of inflation caused by Governments. There could be
price rise caused by droughts or similar other scarcities. But not
an inflation caused by deficit financing by the Government.

The Chinese people invented paper and paper currency.

Paper currency is more convenient in handling as well as
storage. Hence it was more popular.

Under the gold standard a Government would specify the

value of its currency in terms of weight of gold. The Government
would be required to maintain stock of gold. Actual money
created by the Government would be physically limited by the
quantity of gold with the Government.

In the early part of 20th century there were huge

fluctuations in international money markets. Governments
misbehaved. People lost trust in the paper currency issued by
Governments. Huge flights of capital ruined certain nations.
Then, to bring some form of stability, gold standard was imposed.

In early 20th century, U.S. & Europe were developed. Rest

of the world was mainly colony of some European country or
other. In the two world wars, Europe was economically destroyed.
U.S.A. was not affected. At the end of 2nd world war, U.S.A. &
U.S.S.R. emerged as the two Super Powers. In 1991 & 1992,
U.S.S.R. was destroyed economically & disintegrated politically.
That left U.S.A. as the Super Power No. 1.
 Page No.: 14

In the year 1934 U.S. Government declared that the value

of U.S. dollar would be: One ounce of gold equal to $ 35. In
other words, any Government or Central Bank having $ paper
currency was legally entitled to go to U.S. Government / Federal
Reserve and demand physical delivery of gold. This was the
solemn promice made by the Government of U.S.A.

At that time very few Governments had the capability to

make such a promice. U.S. was super power. And U.S. dollar was
backed 100% by gold. Hence it became the most popular
currency around the world.

Let us consider those times when banking systems were

not as developed and efficient as they are today. Computers &
internet were not yet developed. If some one had to make an
international transaction worth say, Rs. 100 crores, how would he
do it! If he paid in terms of rupees (paper currency), the
foreigners would not be interested. If he wanted to pay in terms
of gold or silver, he would require (at those prices) plane load of
gold. However, U.S. dollar was accepted all over the world. High
denomination notes of the dollar would work far more efficiently
than gold or any other currency. Hence dollar was accepted by
everybody.

British economy was on the down trend. Once upon a time

Britain ruled scores of countries. In an open, forceful & cruel
manner it exploited all its colonies and became rich. However,
after the Second World War more & more colonies started
becoming independent. The sources of exploitation reduced.
British economy started shrinking. Hence British pound lost its
importance. Simultaneously U.S. dollar gained importance.
Slowly the dollar became the world currency. This is when people
started saying that dollar was better than gold. It became the
global currency.

IV.2 Nixon Shock:

After the 2nd world war, U.S. & U.S.S.R were locked in
Cold War. Both nations tried to have military & naval presence
through out the world. They developed several bases in island
countries & had their nuclear armed sub-marines around the
world. U.S. started having balance of payment deficits. In 1968,
there was a Gold Run. People wanted to hold gold instead of $.
U.S. gold reserves started depleting.

In the year 1972 the French Government had

accumulated a few million dollars. The French were more inclined
towards Russia than towards U.S.A. The French Government
 Page No.: 15

asked U.S. Government to take back its dollar notes and give
equivalent gold.

President Nixon simply refused to pay the gold.

International Money markets had a big crisis. This refusal to
honour promice is known as the “Nixon Shock”. However,
nobody had the capability or authority to punish the U.S.
Government for breaking the promice. Bretton Woods system
collapsed. $ depreciated by 50% against gold. World started
floating rates for currencies. (This is a short summary. For
details, see internet on Bretton Woods Agreements & their
collapse.)

All countries abandoned relationship with gold. They

printed paper currency without strict restrictions.

IV.3 Currency Explosion.

Once the Governments accepted that they could print

currency notes irrespective of the size of gold reserves, they had
a free run. Today U.S. Government has 8,000 tonnes of gold. This
would be roughly worth $ 360 billions. And the money supply in
terms of dollars is: 9 trillions.

The foreign exchange reserves held by U.S.A. are

negligible. Total reserves held by U.S.A. (other than gold) are less
than $ 100 billions. If the earlier system of issuing money to the
extent of reserves held was continued, then the total money
supply (M0) in U.S.A. would have to be limited to $ 460 billions.
This would be impractical. However, assume that a country is
required to maintain a percentage of money supply as reserves.
Then also this money supply would be restricted. In U.S., there is
just no relationship between money supply and reserves.
American Federal Reserves Chairman has publicly stated: “U.S.
does not need any reserve.” This is currency explosion. Same
story is applicable to almost all countries. However, Germany and
under its leadership European Union have adopted some
prudential standards. Hence they cannot issue currency beyond
certain limits.

When a Government spends more than the total revenue

earned by it, it is resorting to deficit financing. The Central
Bank of the country simply issues currency notes without any
backing by reserves.

In a country like India if the Government issues money by

resorting to deficit financing, it causes inflation. If the inflation
is beyond acceptable limits (probably 15% per year) then the
 Page No.: 16

Government in power looses elections. Hence in a democracy

there is a limit beyond which the Government cannot print notes.

However, when U.S. Government prints notes, these are

lifted by Central Banks around the world (as their Fx reserves)
and even private individuals and corporations holding foreign
exchange savings. Consider the case of a rich man. If he has no
foreign exchange restrictions, he would like to spread his assets
into different currencies to reduce the risks inherent in single
currency. The first foreign currency which any individual or
corporation would hold will be U.S. dollar.

Thus even if U.S. Government resorts to deficit

financing, there is no inflation within U.S.A. For U.S.
Government it is simply like getting money out of thin air without
any consequences. This liberty made the U.S. Government resort
to deficit financing without any limits. With unrestricted money
supply the U.S. Government could conduct star wars and defeat
U.S.S.R. in an economic war.

U.S. external debt is $ 14 trillions. US need not repay this

loan. Noone asks for repayment. And in case, some one asks for
a repayment, U.S. can print more notes and hand over the notes.
The word has gifted $14 trillions to U.S.A.

This is a major benefit that the U.S. had for having $

as a global currency.

All Governments have abused paper currency systems to

the detriment of their citizens. U. S. Government has abused the
system & broken its commitments to the detriment of people
outside U.S.A.

IV. Brief History of Money completed.

Next:
How USSR was destroyed by using “Economics”.

See how history, economics, politics, psychology etc. are

interwoven.
 Page No.: 17

V. U.S.S.R. Implosion

V.1 Let us understand what happened in Russia in 1990 when

the exchange parity between Rouble and dollar stood at 4
Roubles to 1 US dollar. Rouble was considered strong, whilst
USD was considered speculative. When Gorbachev introduced
democracy in parts, there was revolt and counter revolt. Then
Yeltsin came to power. But he had no clue of market economics.
In communist Russia, prices of all commodities were determined
by the Government. There was no inflation for decades. In short,
there was no market economy in Russia.

V.2 Now consider a short history from 2nd world war to 1990.
After Second World War U.S.A & U.S.S.R emerged as the two
super powers in the world. Europe was seriously damaged.
Britain which claimed earlier to be super power No. 1 had
economically collapsed and was on a further downward slide.

U.S.A. & U.S.S.R. were competing to become or to remain

No. 1. For several reasons their competition also involved hatred
and a desire to kill or damage. Both nations had different kinds of
races. Sending rockets in the sky, sending the first man on moon,
developing the latest weapons, establishing strong influence in
Asia, Africa & Latin America as well as Europe … etc. were the
races between the two.

V.3 Star Wars:Reagan became President of U.S.A. In the year 1983

he started the “Star Wars”. Let us understand what is “Star
Wars”.

Both the nations had developed guided missiles with

nuclear war heads. These were the missiles which could fly a
few thousand kilometres without a pilot & strike the target. They
use Global Positioning System (GPS), radars, satellite
communication systems and computers. They could be exploded
by remote controls. These missiles were costly weapons.

U.S.A. could send missiles to destroy several cities in

U.S.S.R. In the same manner U.S.S.R. could send missiles to
destroy several cities in U.S.A. The theme was to cause
maximum damage to the enemy without harming a single soldier
from own military. The missiles were based at several locations
within both countries. Now an enemy would first target the
missile bases. Hence both nations kept missiles on moving
bases like nuclear submarines. This gave them strategic
advantages.

Then they developed missiles to destroy incoming

missiles from enemy nations. This is a difficult exercise. To
 Page No.: 18

target a stationary city like Moscow or Washington is easier. But

to target a flying object is more difficult. Hence both the nations
were spending billions of dollars in development, production and
deployment of missiles and counter missiles.

The third stage of missiles was as under: Say U.S.A. would

send a missile to attack Moscow. Moscow would send a counter
missile to destroy the American missile in sky. The U.S. missile
would send small missiles to destroy the Russian counter
missiles. Imagine the amount of technology required for all these
unmanned vehicles of death. It was all a hugely costly exercise.

Observation so far: Both super powers were in a

weapons race burning billions of dollars with no end of
race in sight.

V.4 Afghanistan:

The Afghan people are the most indomitable people in the

world. Nobody can rule over them. Some 200 years back
England was ruling over India – which included current Pakistan
& Bangladesh. Afghanistan was a neighbouring country. England
wanted to conquer Afghanistan. When it sent its army to
Afghanistan, the whole of the army was killed by the Afghans.
England suffered such huge losses that since then it has never
tried to conquer Afghanistan.

Geographically, U.S.S.R. is locked in the North by frozen

sea of the North Pole. It has no access to the Indian Ocean in the
South. U.S.S.R. had a dream to win over Afghanistan and then
parts of Iran or Pakistan. This way it could establish a direct
access to the Indian ocean and could have ocean transport all
over the year.

U.S.S.R. did not learn from the lessons of British defeat in

Afghanistan. In size, wealth & military power, Afghanistan is so
small as compared to USSR. USSR attacked Afghanistan and its
military quickly took over Afghanistan. The real war started
thereafter. Afghans fought a guerrilla war. The guerrillas
caused maximum damage to the U.S.S.R. military.

Please see map in the next paragraph. This is an old map

of U.S.S.R. as it existed before 1991. We can see that U.S.S.R.
was really a large country locked in from most sides.
 Page No.: 19

V.5 U.S.A. saw a golden opportunity of causing damage to

U.S.S.R. U.S.A. would also love to frustrate U.S.S.R. strategy of
accessing Indian ocean through Afghanistan & Pakistan. Through
Pakistan U.S.A. financed the Afghan guerrillas. Taliban was
created by U.S.A. For ten years U.S.S.R. was bleeding men,
material & money in its Afghanistan war. This was happening on
top of huge military expenses in the Star Wars. Ultimately, in the
year 1990 U.S.S.R. was nearing insolvency. Of course, U.S.S.R.
was never required to publish its Government Balance Sheet. So
nobody knew that U.S.S.R. Government was insolvent. However,
the U.S. Government anticipated U.S.S.R. insolvency. In fact, that
 Page No.: 20

was the target. This is the time when Mikhail Gorbachev became
the President of U.S.S.R.

V.6 Gorbachev realised that his Government was insolvent

and he would never be able to rule Afghanistan. Hence he
voluntarily started withdrawing military from Afghanistan. The
Taliban took over the rule over Afghanistan. (The facts are not as
simple as this sentence. There are several tribes & groups in
Afghanistan. Each tribe wanted its own rule. There was severe
infighting. The rest is a different history.)

Gorbachev also knew that his Government was not rich

enough to fight Star Wars. He voluntarily announced restrictions
on creation of further missiles. He requested that U.S. should
follow but never insisted on it.

He started glasnost & perestroika. In other words, in the

year 1990 U.S.S.R. started liberalising its politics as well as
economics in a significant manner. The KGB afraid of losing its
power arrested Gorbachev. In a counter revolution, in August
1991 Yeltsin took the power back from the KGB and became
President. This was a historic period for U.S.S.R. (1991-92.)

Yeltsin was a hero for re-establishing freedom from KGB.

However, his knowledge of economics was poor. His Government
was insolvent. With the upset at Central Government level,
several things were jolted.

V.7 U.S.A. knew that behind withdrawal of military from

Afghanistan and voluntary restriction on star wars, the real
reason was the insolvency of U.S.S.R. Iron was hot. U.S.A. wanted
to strike.

Geographically U.S.S.R. is in the North of the Northern

Hemisphere. Vast parts of its land remain frozen for half a year or
more. Moscow needs to import its daily supply of milk,
vegetables & fish from Europe. So far these imports were paid by
exporting gold, platinum, diamond & crude oil. Even today Russia
is extremely rich in natural mineral resources.

Poor Yeltsin suffering from financial shortage asked for a

large loan from G4 Nations. U.S.A., U.K., France & Germany (G4)
together offered a loan of $ 30 billions (at that time it was a
huge loan). However, the loan was conditional on U.S.S.R.
removing several economic regulations. Yeltsin trusted the G4.
He scrapped by simple Presidential decrees several laws. At one
stroke U.S.S.R. ceased to be a communist country and
became more capitalist than U.S.A.
 Page No.: 21

V.8 Now remember the fact that U.S.S.R. was communist since
1917. Under the communist regime commodity prices had no
freedom to move with economic forces. For example, if price of
bread was one Rouble in the year 1917, it was one Rouble even
in the year 1990. This is an illustration to say that entire
economy was regulated.

Suddenly the whole country was shocked to find that all

regulations disappeared. Nobody knew what should be the price
for its products. Government had no idea of how to fix the prices
or how to ensure supplies. At this time G4 decided that they do
not want to import anything from U.S.S.R. Not even oil or gold.
And they insisted on cash payment for milk, vegetables & fish.
And the assured loan of $ 30 billions was simply not given.

The result was as expected by U.S.A. U.S.S.R. collapsed.

Government had no money. Therefore Russia was forced to

withdraw army from Afghanistan and Eastern Europe. Thousands
of soldiers were retrenched. They became mafia who knew
nothing else than to run guns. Through all these events started
massive depreciation of Rouble. From four Roubles to a
dollar - to eight Roubles to a dollar, from eight to twenty
and from twenty to hundred Roubles to a dollar. Nobody
knew what was happening. Yet no one outside Russia was
concerned because the world did not use Russian Rouble for
international trade and western countries wanted Russia to fall.
The exchange parity deteriorated so much that today it is almost
31,500 Roubles to one US dollar. Russia has simply deleted
three zeros from its currency. So 1,000 erstwhile Roubles are
now called one Rouble. Current parity is 31.5 Roubles to a
dollar.

No economic theory can explain this, be it purchasing

power parity, chart, fundamentals, technicals - nothing could
justify depreciation of four Roubles to a dollar to 31,500 Roubles
to a dollar. Russian economy was totally in shambles. (I have
written a separate paper explaining that Economy is dominated
by sentiment. Sentiment and logic have no relationship. The
paper is on my website.)

Eight East European countries dominated by U.S.S.R.

became free. Most dramatic was the fall of Berlin Wall. Fourteen
other nations merged by U.S.S.R. into itself also became free.
U.S.S.R. was divided into several countries. The major portion
that remained separate is now known as Russia.

V.9 Now consider this entire history again. U.S.A. used pure
economic forces to destroy super power No.2. In the process
 Page No.: 22

U.S.A. did not suffer a single soldier. USA spent huge amount of
money on helping Taliban and Pakistan. However, this was
financed by issuing $ notes which the world took away happily.
See paragraph IV.3 above. Today U.S.S.R. does not exist.
U.S.S.R. has been destroyed. You can call this as economic
murder or currency murder.

Whereas U.S.S.R. wanted to expand & access Indian Ocean

by annexing Afghanistan, it got broken up & Russia got further
away from Indian Ocean. See the next map. Such a great victory
for USA!

Notes:

1. It may be noted that the collapse of USSR was also a

collapse of controlled economy. Main reason for collapse was
internal chaos. USA planned & used the opportunity to destroy
USSR & remove competition to its status as super power No. 1.

2. By now, this article could have disturbed some readers.

Purpose of this article is to expose exploitation. It is no surprise
that even today some people believe that they are superior to
others because of – Colour of Skin, Caste, Religion, Gender; or
simply without any reason. And they are convinced that they
have right to exploit others. Some exploiters don’t even know
that they are exploiting others. Let us call them Illusioned
Exploiters.
 Page No.: 23

Some persons may be exploiter in one aspect of life and

exploited in another aspect.

Ways of nature (Maya) are infinite.

3. Many times the exploiter turns exploited. Tables get

turned. A man may be exploiting his wife. He may not even
realise when the wife starts exploiting him. He may not realise
the exploitation for the whole of his life. Same goes for societies
& nations. If this article can reduce exploitation any where, the
efforts will be worth while.

4. Some authors write articles on pure economics. Here we

are considering economics together with history, psychology and
philosophy.

Life is not lived in compartments.

V. USSR Implosion completed.

See how USA played strategic game to defeat USSR by

using Economic exploitation as well as by supporting the Taliban.

Afghanistan became the instrument for making

USSR insolvent. Now, with the same instrument, USA has
become insolvent. The Afghan war expenditure is bleeding US
budget. US rule does not prevail even in Kabul.

Next:
How a cartel created South East Asian Crisis.
Bankers made a killing in Fx derivatives.
G4 achieved their political objectives.
IMF & UN helped.
 Page No.: 24

VI. South East Asian Crisis. 1997.

VI.1 Countries mainly affected by the South East Asian (SEA)

Crisis:

Indonesia, Malaysia, Thailand, South Korea and

Philippines.

In nature, several streams of events simultaneously

develop. Eventually, the combined result of these streams is
some thing too radical to guess. Let us see some such streams of
events.

VI.2 Yen Carry Trade.

Japan is a net exporter. As a country it has surplus money.

It does not know what to do with the money. (Problems of the
rich are different from the problems of the poor.)
 Page No.: 25

Japan cannot have as much growth in the economy as it

wants. Since 1986 to 2000 it was stagnating. After 2000 had
some growth only to go down with 2008 American crisis.

Within Japan interest rate on Yen loans is almost zero. It

has been so for more than two decades.

Around late eighties, some smart bankers developed an

idea. An Indonesian (for example) can borrow in Yen @ 1%
interest and invest in Indonesian rupee and earn 20% return.
Same potential for Malaysia, South Korea and Thailand.

Even Indians could earn a huge net profit by adopting Yen

Carry Trade. But under FERA, RBI would not permit an ECB
for speculation.

These five South East Asian (SEA) nations were growing

rapidly. They were praised as South East Asian Tigers. Their
Finance Ministers were being awarded “Best Finance Minister of
the year” awards.

In these growing markets, Western Financial Institutions

including banks (FIs) started investing. Hence share markets
went up. That lifted property prices also. “Smart” bankers told
natives to carry out Yen Carry Trade.

Only problem was: International money markets will not

convert Yen directly into Indonesian rupee, Thai Bhat,
Malaysian Ringgit or Korean Won. Hence the “smart” borrowers
adopted the following route. Borrow in Yen. Convert the Yen into
U.S. $. Convert U.S. $ into domestic currency. Invest in the share
market or property market.

This longer route meant additional cost of conversions of

currencies. Since there was a wide margin between cost of
borrowing and the return on investment, the borrowers took the
cost in their stride.

These countries did not have “Reserve Bank of India” to

regulate their markets. Their Central Banks did not insist on strict
margin restriction. American Bankers / financial institutions
insisted that they are self regulated institutions. The domestic
central banks should not try to regulate them. People borrowed
without any restrictions. Compare a person with margin
restriction and another person without margin restriction.
Illustration:

Mr. I in India has ` 1,00,000. If he borrows anything, he has

to provide atleast 25% margin. This means, he cannot borrow
 Page No.: 26

more than
` 3,00,000. Total funds available with him will be ` 4,00,000.

Mr. M in Malaysia has no borrowing restrictions. While the

Malaysian Government or Central Bank did not impose any
margins, the lending bank may, at its own discretion impose
margins. Let us say a margin of 5% was required. This means,
the borrower could borrow nineteen times his funds. The
Malaysian borrower M had, say, `1,00,000. He could borrow even
` 19,00,000 and play on ` 20,00,000.

The margin restrictions reduce the chances of profits as

well as losses. When there was no margin restriction, the “tigers”
had almost no restriction on their profits.

This cycle of growing prices building asset bubble went

on for a few years. All the five South East Asian Tigers had fully
liberalised their economies. They had no foreign exchange
controls. Share markets and banking systems were fully
digitalised. Shares worth millions of dollars could be sold in less
than one hour, proceeds could be realised and remitted out of
the country in a day.

(See internet on a “Cartel of Bankers” speculating on

international currencies.)

VI.3 President Suharto. This is another stream of developments.

Indonesia became independent and Sukarno became

President. After many years, Suharto became President. (This is
another long story.) (History is nothing but Hi Story.) Communists
were very strong in Sukarno’s Indonesia. They were causing
“Trouble” for industries. Government threw open the military on
the communists. Over half a million communists were simply
killed. Indonesia became a capitalist country. Indonesia had full
support from the G7 (U.S.A., U.K., Germany, France, Canada, Italy
& Japan). They supported Indonesia and the country started
growing. “Aid Indonesia Consortium” was providing all kinds of
help to Indonesia. At one time, annual aid to Indonesia was
around U.S. $ 5 billions.

President Suharto liberalised Indonesian economy. Hence

substantial foreign investments started flowing into the country.
Within a few years foreign investments were far more than $ 5
billions.

Indonesia consists of more than 17,000 islands. Pre

independence, during the colonial days, while most of the islands
were ruled by Netherlands, some were ruled by Portugal. One
 Page No.: 27

far away island of Timor was ruled by two countries. On

independence this island was divided into two parts – East
Timor & West Timor. West Timor became part of Indonesia while
East Timor continued under Portugal. In 1975, it was merged with
Indonesia by throwing out Portugal. (Some thing like Goa in
India.) This was supported by USA. Then the equations changed.
US wanted East Timor to be independent. To compare, it was like
the island of Div claiming independence from India. President
Suharto would not allow such absurdity.

However, G7 is known for “Divide & Rule”. They wanted

an independent foot hold in the Pacific ocean. They asked
President Suharto to “liberate” East Timor. Suharto refused. Aid
Indonesia Consortium threatened Suharto with action if he would
not comply with their request. Substantial foreign investments
had given an independence from the Aid Indonesia Consortium to
Suharto. He refused to buckle down.

Nothing happened. For a few years the investments into

Indonesia grew continuously. Suharto was praised in the western
media as a progressive, pragmatic expert leader of the country.

Nature plays several series of events simultaneously. For

example: Mahabharat is not one story. There are several stories
simultaneously building up. Ultimately all the stories climaxed
into the Kurukshetra war. See the next series of developments.

VI.4 Yen as International Currency.

Japan had emerged as a major exporter to U.S.A. U.S.

dollar had already become the global currency. After the 1972
fall in the value of U.S. $, U.S.A. forced Japan to revalue its
currency. Hence the cost of production in Japan went up. To
maintain its competitive age, Japan outsourced its production to
South East Asian Countries – South Korea, Indonesia, Malaysia &
Thailand. All these five countries turned into major exporters.
However, their exports were to Japan and not to U.S.A. If
Malaysia exported components to Japan, it was invoicing
in U.S. $. Any fluctuation in dollar would affect the profitability
of the Malaysian exporter. It made sense to invoice in either
Malaysian ringgits or in Japanese Yen.

Prime Minister Mahathir Mohammad was a radical

independent politician. He decided that it was better for Malaysia
to adopt Japanese Yen as the currency for international trade. He
also convinced some of the South East Asian Tigers to change to
Yen as the trade currency.
 Page No.: 28

Moving from $ to Yen for international trade would mean

erosion in demand for $. It was enough for U.S.A. to attack the
SEA tigers.

VI.5 Crash of 1997.

In the year 1997, Yen appreciated slightly as compared to

U.S. $. The Japanese banks which had given Yen loan, demanded
additional funds for margins.

Since the Malaysian borrowers had fully invested borrowed

money in the domestic markets, they had no liquid money.
Hence they had to sell some of the shares. However, before the
domestic borrowers could even think, the cartel of the bankers
at one stroke sold all their shares and investments in the five SEA
countries. Hence the share prices dropped. The domestic
investors following FIIs were late. There were two kinds of
problems. (i) They needed money for margins. (ii) Share prices
had dropped. Hence they had to sell more shares than they had
anticipated. So everyone wanted to sell. There was a mad rush.
The asset bubble burst. Within a few weeks the share markets
crashed. Property markets followed. The FIIs took all their money
out of SEA. Hence their currencies dropped. Within six months
all the five tigers were insolvent.

In Indonesia the Rupiyah depreciated from 2600 per

dollar to 16,000 per dollar. There was massive inflation. All the
individuals & companies who had borrowed in Fx, went insolvent.
Economy collapsed. People lost their jobs. Inflation &
unemployment together caused massive unrest in the country.
There was a revolt. Some historians say that this revolution was
instigated by CIA. Suddenly several charges of corruption came
up against Suharto and his family members. Ultimately Suharto
had to resign from his post. With the change in power G7 nations
jumped up with their demand for independent East Timor.
United Nations swiftly sent its army to East Timor and
“liberated” it.

After two years IMF President Michel Camdessus

retired. In his retirement speech he said: “I am happy that during
my presidency our target of removing President Suharto was
achieved.”

I read this speech on IMF website during those years. After

some time I wanted to copy and save the speech and hence went
to IMF website. This speech was removed.

VI.6 Notes:
 Page No.: 29

The 1997 crisis was known as South East Asian or SEA

Crisis. Initially this crisis affected South Korea, Thailand,
Indonesia, Philippines and Malaysia. All these five countries were
economically ruined. Essentially they were attacked by G7
Governments through the cartel of financial institutions
which speculate in foreign exchange. Having succeeded in
making huge gains by selling short the currencies of these five
countries, the cartel then attacked Mexico, Argentina &
Russia. These attacks were again successful and the currencies
of these countries depreciated drastically. Then there were
attacks on China & India. However, because of substantial
foreign exchange regulations in these two countries, the
speculators did not succeed. They did not dare attack U.S.
currency.

One can say that many countries around the world were
attacked. Still the name of the crisis remained South East Asian
Crisis.

Current crisis started in September, 2008 with U.S. banks &

financial institutions. It quickly spread into Europe. Rest of the
world is affected to a much lower extent. In fact some countries
are prospering irrespective of this crisis. Correct name of the
crisis of the years 2008 to 2010 should be “American Financial
Crisis” or “Western Financial Crisis”. In this article we will
refer to the current crisis as the American Crisis.

VI. South East Asian Crisis completed.

US Government used its clout with the financial institutions

to make SEA nations insolvent. It then used U.N. & other friendly
nations to dethrone President Suharto & “liberate” East Timor.
Achieving political goals through economics. U.S. also
sent a message to the world that who ever tries to avoid
$ as the International currency, will meet the fate of the
SEA nations.

Some Proverbs:

African Proverb:
When Elephants fight, grass gets crushed and trees get
hurt.

Greek Proverb:
When a demon becomes so huge that no one can defeat
him; God plants seeds of destruction within the demon himself.
 Page No.: 30

Indian Beliefs.
Law of Karma – What ever you cause to others will come
back to you.

History repeats itself. And yet no one can project future.

Next: Third world as the lender of money & supplier of

goods to USA.
 Page No.: 31

VII. China and India as Suppliers & Financiers to USA.

VII.1 U.S.A. has developed a strategy to supply imported goods

to its residents at low price. As a strategy, U.S. decided to stick to
export of services, weapons & high value technology products. It
was a deliberate policy to shift commodities production to
the third world. This would reduce the cost of production. Since
third world had low over heads, low cost of labour, nil or
negligible pollution control laws, & insignificant damages
liabilities, their cost of production was lower than the cost of
production in U.S.A.

VII.2 U.S. MNCs set up subsidiaries in the third world.

Outsourced production & reserved marketing rights within
U.S.A. to themselves. The trend was so set up that the
marketing & distribution margins were far more than the
production margins. Then they claimed that there was great
technology innovation in U.S.A. & hence they were making good
profits. Even Economist Magazine published articles claiming that
U.S. economy has great “Factor Productivity Growth”, it will
have permanent growth & there will be no recession in U.S.A.
McKinsey & Company published a report in the year 2001 &
world media carried the reports that U.S.A. had achieved
permanent increase in the rate of growth in productivity. Hence
U.S. companies will make super profits. Will continue to make
super profits. They were not interested in commodities
production. It was for the third world to produce at low cost &
supply to U.S.A. See the report on this web link.

http://www.mckinsey.com/mgi/reports/pdfs/productivity/usprod.p
df

Several well known economists have written articles on this

subject.

In my submission, innovation was not the chief contributor.

Real contribution was by: (i) Exploitation of the third world
through the currency manipulation. (ii) Forcing low prices on
commodity suppliers & pushing high prices on U.S. products &
services. All lobbies worked with the active collaboration of the
U.S.A. Government. After all, “the business of U.S. is Business”.

Consider an illustration. Indian ready made garment

manufacturers were supplying garments at a cost of $ 4 to $ 5
to the U.S. chain stores. They in turn sold within U.S.A. at $ 20. It
was evident that Indian manufacturer (as well as the farmer
growing cotton) would earn a small margin & the U.S. distribution
system would earn super profits.
 Page No.: 32

VII.3 This was not enough. They still wanted lower costs. Hence
U.S. experts together with IMF & World Bank experts advised
commodity supplier countries to depreciate their currencies.
Benefit for the third world were supposed to be: within the
country all suppliers of goods & services including labour still get
their prices. And yet outside the country, they could achieve
competitive strength.

VII.4 Even Indian Government went on a long cycle of

devaluation of rupee. Remember, in the year 1981, rupee rate
was: $ 1 = ` 8. Now it is
` 45. Indian Government & RBI understanding was: with every
depreciation of Rupee: (i) Imports become costly. Exports
become cheap. Hence Indian trade balance improves. Fx reserve
position improves. (ii) Customs duty – which gave more than
direct tax revenue, would increase. (iii) There will be more
employment in India.

Little did Indian Government & RBI realise that (i)

Continuous depreciation of rupee was increasing cost of
production in India. Imported products & especially crude oil
increased cost of production. (ii) With high cost of imported
machinery, Indian factories were becoming less competitive. (iii)
It was a strong incentive for Indian rich to transfer their wealth to
Swiss & other foreign accounts. (iv) It was a strong disincentive
for any one to invest in India.

And when all commodity suppliers devalued their

currencies, only countries that benefited were the developed
importers of commodity goods. Especially U.S.A. (This
paragraph VII.4 is a small summary. It deserves entire paper.)

Who is more guilty of this misleading depreciation of

rupee! U.S. or Indian Government! To be ignorant is a crime
in this world. Punishment of the crime is that you will be
exploited.

What were all the Indian experts doing! Were they only
repeating what the U.S. experts told them!

Ultimately, India became near – insolvent in the year 1991.

With massive liberalisation of the economy, entire picture has
changed. That is a separate interesting story.

VII.5 Loan to US:

When a person holds any currency note, in effect, he has

given loan to the Government issuing that Currency. If you hold `
100 with you, you have given a loan of ` 100 to the Indian
 Page No.: 33

Government. The paper note has no intrinsic value. It is just a

piece of paper. It is true that when you give that note to the shop
keeper, he will give goods worth ` 100 to you. Today, we all need
money to transact our business. And in India, rupee is the legal
tender. Fact remains that when the Government issues paper
currency it is getting value for nothing. Any one who takes
money, is giving a loan to Government.

When an Indian black money holder holds $ in Swiss bank,

he has given loan to the US Government. He could hold gold or
any other real asset. But he chose to hold an IOU by the US
Government. When the RBI holds say, $ 200 billion in Fx reserve,
RBI has given loan to the US Government. In reality, central
banks hold a combination of treasury bonds & currency account.
Bonds are of course plain simple loans. But we do not consider
them as loan given to USA. We consider it as our reserve. What is
the value of that reserve!

In the year 1991 Indian Fx reserve was less than $ 5

billions. Since then, the Fx reserves have increased to
approximately $ 300 billions. Out of this amount, let us say, the
dollar component is worth $ 200 billions. (Actual mix of reserve is
a secret maintained by RBI.) Thus in last 20 years, India has lent
approximately $ 195 billions to the US Government.

China has lent, say, $ 1.5 to $ 2 trillions to US Government.

(Total Chinese reserves are more than $ 2.6 trillions.)

Japan has lent say, $ 700 billions to the US Government.

(Total Japanese reserves are more than $ 1 trillion.)

Whole world together has lent $ 14 trillions to the US

Government. Almost no one realises that he/she has given loan
to the Government. But that is the underlying fact.

VII.6 Forced Loan to US:

China, Japan & India have decided that they will not allow
their currencies to appreciate against US dollar. Any appreciation
of their currency & their exports will be hurt.

Now US either deliberately or helplessly depreciates $.

These three nations have no option but to buy dollars & sell their
own currencies in the market. In this way, they will make a
competitive depreciation of their own currencies. But qua the $,
their currencies will maintain value.

If you want to maintain the value of your currency against

$, you have to keep buying $ continuously.
 Page No.: 34

By quantitative easing of $ 600 billions, US Government

has/will depreciate $. In a competitive effort, all three nations will
buy $ and will not allow their currencies to rise. Whether they like
it or not, they have to keep lending to US.

This is the Currency War. In this war US fires at every

body & the victims still support US. The day we stop trusting
dollar, our exploitation will stop. China, Germany, Brazil & several
countries are trying to find a way out. So far, there is little
success. So far.

VII.7 We are familiar with the India story. Similar was the case
with China. It was encouraged & praised as a miracle economy
when it supplied toys & shoes at low cost to U.S.A. China
developed special economic zones simply to export goods.
Chinese outside the SEZs remained poor. They were starved &
are being starved (comparatively) so that Chinese SEZs could
export goods at low cost to U.S.A. China developed huge export
surpluses. Where do you invest the surplus! In U.S. currency &
treasury bonds only!

See the story in perspective. China would supply goods to

U.S.A. U.S. Government will simply issue IOUs to China. All
treasury bonds & even currency notes are simply IOUs.
Their value is equal to the capacity & intentions of the
issuer. China was lending to USA & supplying goods to USA by
keeping her own people poor. US residents enjoyed wasteful
consumption at a low cost.

VII.8 With this policy, U.S.A. was very happy that Chinese &
Japanese currencies had low values. When the Japanese auto &
electronics industries grew so well that their competition started
hurting U.S. production & ego, they forced Japan to revalue
Japanese yen – year 1986. China is far behind Japan in terms
of technology input in exports. Hence U.S.A. never asked China
to revalue its currency. Until the 21st Century.. when U.S.
economy had started facing difficulties & unemployment started
soaring. It is unwritten law that all countries around the world
should so arrange their currencies & economies that U.S.A.
should benefit. China became the first country to oppose U.S.
instructions. Hence the beginning of current Currency War.

VII.9 Now who is causing the currency war: China or

U.S.A.!

VII.10 When you keep issuing IOUs & no one ever asks for
repayment, in essence you are not paying any one any thing.
 Page No.: 35

U.S.A. owes to the world 14 trillion dollars and U.S. is

incapable of repaying the loans. It has got a continuous trade
deficit for many decades. Supposing the world becomes wiser &
asks for repayment. What will U.S. do! Well it will refuse to pay.
That is what it did in 1972. The Nixon Shock has showed us what
lies in future.

Conclusion: U.S.A. has developed a strategy: (i) to supply

imported goods to its residents at low price. (ii) To get a high
price for its own services & products.(iii) To transfer the global
resources to U.S. & to enjoy the same at the cost of rest of the
world. (iv) If any thing goes wrong, blame the world.

Further notes:

1. Exporters of India are giving out Indian resources at low

or Nil cost to U.S.A. while half the Indian population is poor. And
the export lobby claims that they are the saviours of Indian
economy & they deserve incentive in the form of continuous
depreciation of Rupee. And even RBI buys the argument!

Similarly, Japan has supplied goods & services to USA.

Keeping large masses of Japanese population at lower middle
class so that the U.S. residents enjoy luxuries of life at little cost.
This is another long story. Interested readers may search on
internet. If you want news which are not biased by western
interests, find Japanese authors in Japan who write in English.

History keeps repeating itself with all the countries.

2. During last 500 years, the Chinese did not allow any
European nation to rule them. They are not allowing the white to
exploit them even now.

3. It may be interesting to note that the Britishers minted

money by buying opium from Afghanistan & India and selling it to
China. British authorities were smugglers and drug peddlers.
Chinese prevented the British traders from selling opium in
China. This caused the famous “Opium Wars” in the years
1839 to 1842. It is an interesting reading to see how the
Britishers & the Chinese report different versions of the same
wars in their own history.

VII. China and India as Suppliers & financiers to USA.

Completed.

This is a long story told in 5 pages. On internet you may

find books or essays written on each paragraph.
 Page No.: 36

Next:

See how US has reaped enormous benefits by making $ as

International trading currency.
 Page No.: 37

VIII. Benefits to USA of $ being the global currency:

In paragraph IV.3, “Currency Explosion”, on pages 13 & 14,

we have seen the benefit that U.S. has enjoyed for having $ as
global currency. Now let us consider an illustration.

Let us assume that U.S. owes $ 2 trillions to China. Current

(January 2011) rate is 7 Yuans equal to $ 1. (7 Yuans = $ 1).
Now US is pushing China to revalue Yuan. Assume that Yuan is
revalued so that new rate is 6 Yuans = $ 1.

As far as US Government & Central Bank (Federal Reserve)

are concerned, they have made no loss or profit. Their borrowing
is expressed in their own currency. It remains same.

As far as Chinese Government & Chinese Central Bank are

concerned, they have lost 2 trillions Yuans. Earlier their balance
sheet showed Fx reserve of (2 x 7) 14 trillions Yuans. Now with
revalued Yuan, they will have Fx reserve of 12 trillion Yuans.

Logic: This is one of the several reasons why China is

resisting revaluation of Yuan & U.S. is pushing.

US keeps pushing currencies around the world to adjust

their values such that US benefits. Since all transactions are
mentioned in $, generally, US is not affected by rate fluctuations.
Other countries may lose or gain. Generally, lose.

The benefit of your currency being accepted outside your

country is that you keep issuing IOUs & the world believes that it
has received its payment. You never have to repay. If one
individual asks for repayment, there are ten more to accept your
IOUs. In effect, the world is gifting you trillions of dollars. So you
enjoy the luxuries of life. Why save! The world is saving for your
benefit.

There are more benefits. Let us keep them for some future
discussion.

VIII Benefits of $ being Global Currency completed.

Next:
How US maintains its hegemony over world trade!
 Page No.: 38

IX. How U.S. tries to maintain $ Hegemony!

There are several ways that U.S. employs to ensure that

the $ remains global currency. U.S. will not give up the
tremendous advantages that it has got used to. We will see some
of these ways in brief.

When some one considers value of rupee, he would say 45

rupees are equal to $1. However, if he wants to value $, how
would he state the value? $ is valued in terms of gold. If gold
price rises, it means $ value has depreciated. It is in the interest
of U.S. Government that gold price remains steady or goes down.
U.S. would want people to invest in $ rather than in gold.

How do you control the value of gold?

IX.1 Gold Carry Trade

U.S. Government and a small, select cartel of FIs played
this game. It is explained in some hypothetical steps.

1.1 U.S. Government would lease gold to Union Bank of

Switzerland (UBS), Goldman Sachs, Lehman Brothers, Citibank,
etc. Let us say, 100 tonnes of gold is leased.

Gold may or may not move out physically. “In these days of
digitalisation, who wants the real thing! Virtual is better than the
real.” The custodian will issue receipts to the FIIs that it is holding
gold on behalf of the FIIs. Receipts will be in smaller quantities.
Some people do insist on physical delivery. Women would rather
wear jewellery than hold digital receipt of gold. “One Asset in
hand is better than two digital assets.”
Where required, gold will be delivered.

1.2 FIs will pay a small lease rent to the Government.

1.3 FIs will sell gold in the ‘spot’ market. They will get cash
which will be used in the banking business to earn income.
Net of lease rent, FIs will earn profits.

1.4 FIs will buy gold in ‘futures’. As far as FIs are concerned,
they have sold gold and bought gold. Hence technically, the gold
taken on lease is still with them. It is possible that for all the
transactions – lease – sale on spot – buy in futures – only
custodian’s receipts have changed hands.

1.5 It is also possible that some gold is actually delivered in the

market. In fact it is planned to continue deliveries in the market
so that gold prices continuously go on reducing or at least remain
stable. In last ten years, several Central Banks around the
 Page No.: 39

world and U.S. Government have sold hundreds of tonnes

of gold. And gold prices remained range bound for almost
twenty five years after the Nixon shock was over. (Barring a few
disturbances for specific reasons.)

This way, they make no losses on “sale and buy”

operations. The cartel was happy & confident in Gold Carry
Trade. Bankers who made profits out of air, were taking huge
bonuses and congratulating them selves for being so intelligent.
U.S. Government was happy that $ to gold price was stable. This
process could continue with some disturbances till the year 2006.

1.6 Banks could legally say that they have fulfilled all banking
reserve ratios and the balance sheet is great. They are earning
profits and every thing is rosy.

1.7 U.S. Government can legally claim that it is still

owning 8000 MTs of gold. A part of this gold may have
physically moved out, got converted into jewellery or may be
lying in some one’s lockers as his/ her investment. Even if some
gold is lying in Fort Knox as custodian, it has been sold out
virtually by the banks.

1.9 After the dot com bust and Enron plus Arthur Andersen
collapses in 2001, world had started losing confidence in U.S. By
2006 the trend became intense. More and more people were
buying gold instead of hoarding $. By 2008 gold buying rush
became gold buying avalanche. Today, prices have risen from $
400 per ounce to $ 1400 per ounce.

1.10 All the banks which had conducted Gold Carry Trade had to
stop selling gold and start buying gold. But if all the banks
need to buy say, 2000 tonnes of gold, it is simply not available in
the market. (This explains steep rise in gold prices between 2006
& 2010.) All these banks could have incurred huge losses.

American Government does not make losses – as long as

banks are able to keep their promice. However, many banks
have gone insolvent. U.S. Government has bailed out the banks.
Consider how much leased gold is recovered and how much – not
recovered. This will remain a top secret until some one leaks out
the facts.

Conclusion: The Gold Carry Trade cartel has failed. So have the
banks. Bail Out doles kept some banks running & some went
insolvent. And no one has blamed the Gold Carry Trade. US
Government keeps bailing out others. Who will bail out US
Government!
 Page No.: 40

IX.2 If Any one refuses to accept $ as currency, attack &

destroy.

2.1 The South East Asian crisis was created because of

several reasons. One was: they dared to move to Yen instead of
$ as global currency.

2.2 Whole world knows that:

(i) Saddam Hussein of Iraq was not involved in the World Trade
Centre attack.
(ii) There were no weapons of mass destruction in Iraq.

Iraq was attacked only because Saddam dared to sell oil in

Euros. Saddam was humiliated & killed.

2.3 Iran became dominant in Asia. When a compliant Shah

was the ruler, U.S. armed Iran. However Ayatollah Khomeini took
over the control of Iran & disturbed U.S. plans. Iran was attacked
by Iraq in the year 1980. It is rumoured that Iraq (Saddam
Hussein) was instigated by U.S. to attack Iran. U.S., U.S.S.R. &
Spain supplied weapons to both sides - Iraq & Iran. They made
money. Iraq & Iran were seriously damaged.

2.4 U.S.S.R. was destroyed because it was competing with

U.S.A.

2.5 Euro was attacked. And even now, at every opportunity,

American experts would denounce Euro. But Euro has survived
US attacks. With Euro, a large market for US $ has vanished.

IX.3 China:
I feel US may have developed a strategy to break and
destroy Chinese economy. U.S. cannot tolerate any one
challenging its Super Power Status. It may take them 20 years or
30 years or 2 years to achieve their goal. And the strategy may
have started before ten years. After China is finished – some
people may realise the strategy. Most will never realise.

One Possibility: US owes approximately $ 2 trillions to

China. One day, US can declare that it will not honour its debt.

There will be a global crisis. China will lose $ 2 trillions. US

$ will be devalued. Who will win and who will lose?

In 1972 Nixon told France that it will not honour

commitment at $ 35 per ounce of gold.

In the year 1979 Ayatollah Khomeini became the ruler of

Iran. USA seized all Iranian assets in USA and refused to honour
its debt to Iran.
 Page No.: 41

It can do the same to China.

IX.4 List of U.S. Strategies

This is a summarised list of a few of the U.S. strategies.

Some are already discussed at length in this paper.

4.1 Promising full convertibility into gold, becoming a

prominent currency and then breaking the promice. Nixon Shock.

4.2 Series of wars to maintain dollar hegemony. While U.S.

Government is against Diamond Trading Corporation (DTC),
global diamond trade is in dollar. Crude oil and gold are traded
in $ - though U.S.A. exports neither.

4.3 Series of strategies to maintain high value of dollar like

Gold Carry Trade. Asking other countries to devalue or revalue
their currencies. Japanese Yen fluctuations. Indian Rupee
devaluations & depreciations.

4.4 Suppressing the prices of commodities supplied by others.

Crude oil price strategy. Chinese commodity supplies at low
prices.

4.5 Maintaining double standards. KYOTO agreement. Nuclear

NPT, WTO. Attacking Swiss and other tax havens. Permitting
Delaware as tax haven within U.S.A.

4.6 Subverting international institutions to own advantage:

U.N., IMF, World Bank. Attempting to subvert even OECD and
other regional international bodies.

4.7 Siphoning off whole world’s savings & consuming the

same: Euro dollar, Petro dollar, Japanese & Chinese dollar.

4.8 Scuttling the IMF SDR & replacing it by U.S. $ as the

international currency.

4.9 Pentagon. Continuously having some war some where in

non-white countries. Outside North America & Europe. Selling
weapons to both sides of warring nations.

4.10 Lobbies in U.S.A. Pentagon, Insurance, Pharmaceutical

industry, Banking & Financial Institutions. Permitting all these
lobbies to grow in wealth & power at the cost of the consumer.
Then subsidising consumer by exchange rate policy & $
hegemony.

4.11 Installing dictatorial Governments that suit U.S. policies –

Pakistan, Panama, Peru, Iraq, Afghanistan, Nicaragua & so on.
 Page No.: 42

Conclusion: U.S. has adopted several means to maintain $

hegemony. These have become apparent. World is losing
confidence in U.S. That is the beginning of end for U.S.
hegemony. Paragraph 4 covers a broader issue: How U.S.
maintains its status as Super Power No. 1. Awareness &
acceptance of the root cause of the problem is the first step
towards solution.

IX. “How U.S. tries to maintain $ Hegemony”. Completed.

Next:
It has become practically impossible for any one to trade
internationally in any other currency.
 Page No.: 43

X. Practical Compulsion to adopt $ as a Global Currency:

Once $ became global currency it became a necessity to

trade in $. Small entities just cannot survive if they do
international trade in any other currency. U.S. does not even
have to lift a finger to cause losses to small entities.

X.1 Illustration:

Shipping Corporation of India (SCI) has to quote its freight

in U.S.$. Even if it lifts cargo from Mumbai to supply to Africa,
the freight will be quoted in $. Actual payment may be made in
rupee – but converted into rupee at the rate prevailing on the
day of payment.

SCI tried to quote freight rate in different currencies. For

example, for freight from U.K. to Finland – in Euro, for Asian
trade, in rupee etc. In six months time SCI had to return to U.S.
$.

Why?
Almost All the shipping costs are quoted in $. Crude oil is
traded in $. Expatriates’ salaries are quoted in $. Several port
services are quoted in $. Together, more than 70% of its costs
are quoted in $. Even ship purchase cost would be in terms of $ -
even if it is built by South Korea. ECB (loan) on ship would be in
$.

Now consider an illustration – (all figures are assumed.)

SCI quoted freight in rupees – say ` 45,000. SCI’s Profit &

loss account - currency wise Break-up is as under:

$ `
Revenue 100% 1000 45,000
Cost in $ 70% 700 31,500
Cost in INR 20% 200 9,000
Profit in INR 10% 100 4,500

Its costs are 90% or say, `. 40,500. On the date the freight
is quoted, the $ - Rupee rate was say, ` 45 equal to a $.

Now its revenue is fixed in terms of rupee. It will get only

` 45,000 irrespective of the conversion rate when SCI pays its
costs. Supposing, at the time of payment of costs, the rate
changes into Rs. 50 equal to a $. The costs are fixed in $. So SCI
will have a cost as under:
($ 700 x 50 = ` 35,000 + ` 9,000) ` 44,000. Large part of its
profit is wiped out.
 Page No.: 44

Consider, the rate had changed into say ` 40 = 1 $.

SCI’s profit would jump to ` 9,000.

SCI Profit & Loss A/c

@ ` 50 = $ 1. @ ` 40 = $ 1

Revenue 45,000 45,000

Cost 9,000 + 35,000 (700 x 50) = 44,000 9,000 + 28,000 =

34,000

Profit 1,000 9,000

In other words, the variation is in $ cost. $ 700 x ` 5 = `

3,500. With INR going down to ` 50, SCI’s profit is reduced by Rs.
3,500 & with INR going up to ` 40, SCI’s profit is increased by `
3,500.

Such a huge fluctuation in profits just because of exchange

rate fluctuation is something beyond the control of SCI. In
reality, SCI had to revert to quoting the freight in terms of $. It
can manage shipping business, not exchange rate fluctuations.

The issue is, if SCI had quoted freight also in $ then its
picture would be as under:

$ @ 50 `
Revenue 1000 50,000
Cost in $ 700 35,000
Cost in INR 9,000
Profit in INR 6,000

With depreciation in Indian rupee, SCI’s profit would still be

protected.

Indian companies’ experience in the year 2009 has proved

that $ keeps moving unexpectedly. Hence even forward booking
of $ can be disastrous. Companies have incurred huge losses in
hedging.

X.2 Some implications of $ being global currency

Gold is traded in $. Let us say, an Indian importer imports

gold in different ways:

(i) Directly from South African Mines;

 Page No.: 45

(ii) From Traders in London or Dubai.

At all places gold will be quoted in $ though USA does not

supply gold. Even South African mines will quote gold in $ and
not in Rand.

Hence whenever Rupee - $ parity changes – gold price in

India changes – though whole of the gold comes from Non-U.S.
sources. Fluctuation in Rand does not affect us.

When $ gold price went up from $ 400 per ounce to $ 1400

per ounce, it was actually a massive devaluation of $. If South
African mines were quoting gold in Rand, Indian gold prices
would have remained
` 9,000 per 10 gm. & not shot up to 20,000 per 10 gm. (One
American Ounce = 31.1 Grammes.)

X. Compulsion to adopt $ as a Global Currency completed.

Next:
While US is trying desperately to maintain its hegemony,
is it likely to succeed for long!
 Page No.: 46

XI Some signs of the trend for U.S. Economy.

XI.1 Its crude oil price strategy is slipping out of its hands.

XI.2 Gold price strategy has already slipped out of the Cartel’s
hands.

XI.3 Articulately developed myths have started breaking down:

(i) “U.S. is invincible.” World Trade Centre Attack and U.S.

failure to catch Bin Laden.
(ii) “Americans are honest.” Enron, Arthur Andersen &
scores of other scandals in U.S.
(iii) “U.S. Economy is strong.” Dot com bust,

(iv) American Financial Crisis of 2008 to 2010. This is a

subject by itself. It is not covered in this paper. In brief, whole
crisis was caused because of the Bankers’ greed. American
financial crisis also pulled down all those who had invested in
U.S. economy, or simply in $ lying any where in the world. People
dependent on exports to U.S. are also affected. In near future,
they may be in for a rude shock.

XI.4 SEA countries, Iraq, Iran, Venezuela and China – all have tried to
do international trade in currencies other than $. There will be
more attempts.

XI.5 Creation of Euro has eroded demand for $.

XI.6 Saudi Arabia, China and some other Governments have started
buying gold and selling $.

Despite all these facts, one may observe that the common
man still thinks: “U. S. is a great economy”. Sage Tulsidas had
said: “Samarth Ko Nahi Dos Gosain”. (Ordinary people do not find
faults with the wealthy & the powerful.) Our sages were great
experts in human & society psychology. (Individual thinking &
collective thinking.)

Many people in & outside U.S. believe that U.S. is a

dynamic country. It has always come out a winner from any
crisis. It will again come out a winner after the current Currency
Wars. Let us watch how events develop.

XI. Observations on economic trends completed.

Next:
If & when US economy collapses, $ loses its hegemony,
what will happen!
 Page No.: 47

XII. Probable Consequences of Currency Wars.

When USSR collapsed, not many were bothered. World

trade was not affected. However, when US (the largest buyer in
the world) collapses, what can happen! Let us see a few
probabilities.

XII.1 One Possible Scene: US economic demise.

World is losing confidence in US.

Arabians may stop investing in $ & instead invest

elsewhere. They stop selling crude oil in $ and accept all other
major currencies of the world.

Russia, India and China trade in ACU or Yuan.

All countries ask for cash payments in currencies other
than $. Then US will have to live within its means. American will
have to give up luxuries of life and live as rest of the world lives.
This will mean a drop in U.S. GDP – recession.

$ will devalue to say, Rs. 10 equal to a $. All goods

imported into U.S. will be 4 times costlier. Hence there will be
huge inflation in USA.

Recession coupled with inflation means stagflation.

XII.2 U.S. & China War

US and China may have an open traditional war. It will be

real third world war. It will also be a disaster for almost the whole
world.

Both – USA and China are powerful and stubborn.

One is declining super power and the other is rising super
power.
Like Jungle animals, they may decide – who is right – by
fighting.

Lehman Brothers and AIG believed: “We are too big to

fail.” They failed. World believes that a war between two
nuclear powers is unthinkable because of its harsh
consequences. We hope, the unthinkable does not materialise.

XII.3 U.S. learns to live within its means.

US people and Government learn to live within their

means. They generate trade surplus and start paying off loans to
the world.
 Page No.: 48

World maintains patience till US repays the loans.

US stops fighting Afghan and Iraq wars, evacuates its entire

military and machinery from the two countries. US reduces its
military presence all over the world and accepts to be one of the
first five countries rather than Super Power No. 1.

Only in such a situation (by reducing its war expenditure)

can US hope to reduce its budgetary deficits.

Do we see signs of a wiser, tamer USA stopping its lordship

over other countries!

When Obama came to power, world was hopeful of a wiser

U.S. Government. Obama promised the electorate to close Iraq &
Afghan wars. That was in 2008. In 2010 Obama has increased
war machinery in Afghanistan.

XII.4 Material Wealth Vs. Spirituality:

In the 20th century after 1960’s (it took 20 years to recover

from world wars) and in the 21st century we have seen
tremendous growth in trade, science, technology and new
instruments like computers, internet, wireless communications
and so on. All these have made us richer in terms of wealth and
military power.

The spiritual evolution has not kept pace. There has been
some growth but no way as much as the growth in wealth and
power.

Wealth without wisdom is dangerous.

Power without wisdom is dangerous.
Wealth and Power together without spiritual evolution are
disastrous.

U.S. Government has proved in last 75 years that it has no

wisdom. It is a rogue Government attacking and killing people all
over the world.

Sometimes purely for ego – Hiroshima and Nagasaki.

Sometimes to spread capitalism and prevent socialism.
Mainly to maintain its Super Power Status.

It supported Pakistan against India and equipped Pakistan

to keep fighting with India.
 Page No.: 49

Most of the times it has fought wars to keep growing its

trade and continue exploitation of natural resources of other
nations.

Now its power is waning.

It knows, it is living a luxurious life on borrowed money.
But it cannot give up luxuries of life.

At the same time China has emerged as a powerful nation.

China is biggest lender to USA.

Both are powerful nations.

US has tried to sub-due and exploit China.
Failed in Subduing China. Succeeded in exploiting China.

But now China may not permit further exploitation (To the
extent it understands exploitation.)

Both US and Chinese Governments are insolvent in

spirituality. (Generally all Governments are insolvent in
spirituality. But at least some of them are cautious.) These two
Governments – are they wise enough to avoid an open war?

We will know in ten years.

Is Indian Government wise enough to stay away from two

elephants fighting?

XII.5 Psychological Reactions:

Consider psychology. A rich man or a man in authority is

accustomed to Power. When he starts losing power, he has fear
of losing further power. Fear makes him angry. Anger makes
him attack the cause of fear – where he is losing power.

When a rich man becomes poor, he gets into depression.

He may even commit suicide. When a Government bureaucrat
retires, he loses power. If he has not trained himself to a life
without power, he may get into depression.

Human individual psychology applies to Governments and

nations also. Attacks by US are due to their fear of losing power
and losing $ hegemony.

XII.6 What will happen when U.S. $ collapses?

All those people who own $ assets will lose their assets.
India may hold $ 150 billions as Fx reserves. This will
evaporate. India will suffer a loss of upto $ 150 billions.
 Page No.: 50

China will suffer a loss of upto $ 2 trillions.

Whole world together will suffer a loss of $ 14 trillions.

U.S present generation has over spent money by $

50 trillions. (This includes internal & external debt &
unaccounted provision for social security & medical benefits.) It
owes this to future generations. The future generations will lose
$ 50 trillions. In other words, US future generations will start with
a huge negative balance. They will have to work much harder
just to survive – because their present generation is living
beyond its means.

Countries like Japan, China etc. which live on exports to

US will see recessions. China has already started taking steps
to prevent this situation. It is developing domestic demand and
trying to reduce its reliance an exports to US. China is also
focussing on other world markets for its exports.

Companies like Indian software exporters are unique.

They have grown even in the dot com bust of 2000 and the
American Financial crisis of 2008 to 2010. However, if $ /
American economy actually collapses, can they grow! Probably
they may find US markets being reduced drastically. Their share
prices may crash. When the shareholders suffer losses, Mumbai
property markets can slide down.

Within USA unemployment can rise to 20% or more.

There can be food riots. Unemployed Americans will attack
foreigners and especially the coloured people. NRIs and NR
Chinese will return to their home land – only to find that the skills
in which they specialise are no longer required. Or they can get
only one-fifth of the salaries they were enjoying in US before
2006. Their savings left in USA might evaporate.

XII.7 $ Slide to Crash.

We have seen in the paragraph V on USSR implosion that

the rouble crashed from 4 to 31,500 roubles per $. There was no
reason for it to crash below 8 roubles per $.

Value of a currency is a matter of confidence in a

Government. Confidence is human sentiment. Sentiment is not
reasonable.

When people lose faith in $, it may not stop at ` 10 per $. It

can crash to $100 per rupee.
 Page No.: 51

One can argue that USSR had no economists, no think tank

on exchange rate parity. They did not save rouble from the crash.
But USA has great wizards in economics & a fantastic “Think
Tank”. It will save $ from a disaster.

Well, recent past has shown that US has made several

blunders. The think tank could not avoid the dot com bust or the
American crisis of
2008-2010.
Only time will tell whether US $ crashes or survives.

XII.8 Commodity Suppliers will benefit.

At present, suppliers to US are supplying the goods at low

prices, by sacrificing the needs of their domestic population.
When one third of Indian have insufficient clothes to wear, we are
exporting ready made garments & cotton yarn. When US
economy collapses, this cotton will be available for our own
people.

Similarly, a lot of goods which are being exported will

remain within India. There will be a reduction in prices.

U.S. will have to stop its excessive & wasteful consumption.

The resources saved will be available for the rest of the world.

Let us say, $ is reduced to ` 10. Crude oil is quoted in $.

Assuming it continues to be quoted in $, the cost of crude oil will
go down by 75%. Imagine petrol being available for ` 15 per litre.
Entire cost of transport can go down. This can reduce cost of
production in India. There can be a further reduction in prices.
We can achieve GDP growth with a fall in prices.

Indians who have stored their black money abroad &

especially in $, will have to remit the funds into India. We will
have more capital available for our own capital programmes.

Caution: (i) Nothing will work on its own. India will have to
work hard & strategically to gain its rightful benefits. If it does
not work, some one else will take away the benefits.

(ii) These are thoughts on probabilities. Noone may

consider these as prediction of what will happen.

XII.9 Mafia: Now U.S. strengths have turned into a problem. An

albatross around its neck.

U.S. trade deficit is $ 600 Bn. per year.

U.S. budget deficit is $ 700 Bn. per year.
 Page No.: 52

Every day it needs to borrow $ 2 billion. If U.S. does not

get more foreign money every day, its financial wheels will stop.
U.S. Government will not be able to pay salaries to its staff and to
its military.

If China and Japan stop subscribing to U.S. Treasury bonds

for one month, U.S. wheels will stop. Alternatively, U.S. has to
continue printing notes and issuing within U.S.A. This will cause
inflation. Americans are not used to severe inflation for many
years.

U.S. will not be able to maintain its nuclear installations

at hundreds of places in different countries and in different sub
marines around the world. U.S. army, air force and navy will
have to be called back from the whole world.

Remember: When USSR Government called back its

military from Afghanistan and Eastern Europe, USSR Government
was insolvent. Government retrenched the personnel called back
from front. These people only knew using guns. They had no
other skill. So they formed mafia gangs – total number going
upto 4000. In Russia, no businessman is safe without protection
from some mafia.

When U.S. Government will call back its Marines from the
world and release them on innocent U.S. residents – there will be
more mafia gangs. Guantanamo Bay and several other incidents
around the world have proved that these gangs will be more
cruel than Russian gangs. And U.S. may have many mafia gangs
already working in U.S. Will U.S. be safe haven for anyone! Even
proper American natives may start thinking of migrating
elsewhere.

It is said: What you cause to others comes back to

you. Timing and form is uncertain. But coming back is
certain.

XII.10 Inflation:
Current inflation in India and government’s helplessness in
controlling inflation is a direct result of Currency Wars. It is
discussed in Annexure 2.

XII. Consequences of Currency Wars completed.

We have seen several probabilities which may result if the

Currency wars escalate. Let us hope that US becomes wiser, less
aggressive & lives within its means.
Next:
 Page No.: 53

Is it possible to remove $ hegemony & stop the exploitation

of the rest of the world! What are the alternatives!
 Page No.: 54

XIII. Probable Solutions:

XIII.1IMF / SDR:

Original idea was that International Monetary Fund (IMF)

would create Special Drawing Rights (SDR). These SDRs would
work as the International Currency. All the members of IMF
would have quotas fixed based on some formula.

If SDRs had actually been used as international currency,

then all the member nations would have benefited. As and
when the need for additional money was required, IMF would
issue additional SDRs. This would be a simple gift to each nation.

Today world has almost gifted $ 14 trillions to USA. This

gift would have gone to all the nation members of IMF instead of
exclusively to USA.
A gift of $ 14 trillions is worth much more. To appreciate
this issue consider an illustration:

Two young CAs pass exams, obtain certificate of practice

and start practice. Both are equally competent. However, one
CA has no capital. He starts practice from home. Another CA
gets a gift of Rs. 5 crores. He buys good office and installs
necessary infrastructure. He will get a good head start. The CA
without capital can eventually cover up the distance. But initially
the rich CA gets a benefit.

Plain gift of massive fund has its own tremendous value for
USA and tremendous loss for rest of the IMF members.

Remember, IMF has worked as an institution “Of the US,

For the US, By the US”. It will not allow any great solution if that
solution does not serve US interests. World will have to replace
IMF by a truly independent global institution. And then issue an
independent global currency. Sounds very difficult. Nothing
worthwhile has ever been easy.

XIII.2Alternative to Global Currency

US $ will lose its status as Global Currency.

World will have to find other ways of doing global business.

Can we do away with US $?

World will have to do away with $ and stop gifting trillions
to US.

Assume that India starts trading with all its international

markets in their own currencies. Indian imports are annually
 Page No.: 55

worth $ 300 Billions. India may insist on even US companies to

invoice in Indian rupees. For business with Europe, all invoicing
may be in € or Re. For business with China, all invoicing may be
in Yuan or Re. And so on.

China has already made an offer to India: For bilateral

trade China is ready to avoid $ and deal in Rupee or Yuan. If
India accepts this proposal, to that extent need for $ will be
reduced.

With a proper exchange clearing house, it is possible to

reduce the invoicing in $ to minimum. Each country may have its
own clearing house for scores of currencies. Simultaneously
reduce the holding of US $ as Fx reserve to minimum.

Sounds simple. This is what Saddam Hussein of Iraq

wanted to do. This is what SEA nations wanted to do. US will
certainly attack India if India adopted this course of action.

It has to be done collectively and strategically.

XIII. Probable solutions to do away with $ hegemony

completed.

Next:

Main paper is completed here. There are some relevant issues.

In the next paragraph we discuss some economics & some
philosophy.
 Page No.: 56

XIV. Relevant Issues of Interest

XIV.1 Money Creation:

How does a country create money?

Central bank passes a journal entry in its books.

It debits Government (loan to Government) and credits a

reserve account in its own books. Then for the amount
concerned, it prints notes and gives to Government / or credits
Government account. Government can then use the credit
balance for its payments.

In the past, when cheques used to take 1 to 4 weeks for

clearance, businessmen also created money. They would issue
more cheques then their credit balance with bank. Now with
immediate clearance on computer, this avenue is limited.

XIV.2 Gold weight & rate.

Normal metric ounce is = 28.35 grammes.

However, US uses troy ounce for gold. It is = 31.10 grammes.
Hence one tonne of 1,000 Kg is = 32,154 troy ounces.

When the price is $ 1,400 per ounce, it is $ 45,015,000 per Mt.

(32,154* 1,400). ($ 45 millions per tonne.)
Hence $ one billion will get 22.21 tonnes of gold.
8,000 Mts. of gold = $ 360 billions.

XIV.3 Expansionist policy.

Expansion of the Kingdom by attacking neighbours is a

tradition followed for last few thousand years. Why did Kings
expand their Kingdoms! To get more resources, more wealth,
more revenues – which otherwise did not belong to them.

USA has held Saudi Arabia; and through it oil exporting

nations as its virtual colonies. For several decades U.S. could
control the price of crude oil. We, the Indians may not see the
truth. But those who are exploited, do see it. They have a
seething anger at USA. Hence Bin Laden’s attack on U.S. World
Trade Centre in September, 2001.

Even after the tradition of Kingdoms is replaced by

capitalism/ socialism/ communism – the expansionary habits of
Governments have not reduced.
 Page No.: 57

We (human beings) are still an underdeveloped form of life

practising jungle law more than logic and fairness. We are driven
by greed and fear. Not by love and truth.

History has shown us that:

Whenever a man, a society or a nation becomes more

powerful, it wants to grow-
Man in wealth,
Society in wealth and culture,
Nation in wealth and geography.

More powerful person is less tolerant of others’ opinions

and ideology.

One nation wants to acquire the land of its neighbour as

long as it considers the two separate. When the Kingdoms of
Pune and Surat were separate, Shivaji Raja considered it
legitimate to attack Surat and to rob it – repeatedly.

Pre-British within India there were 700 Kingdoms and all

wanted to expand. More powerful would usurp the land of its
neighbour. Neighbour either surrendered or fought back. There
was always a war somewhere or the other.

Today, with one country – India – all the wars within India
have reduced to some border skirmishes between states (similar
to Maharashtra and Karnataka border disputes). Whole country
considers parties to the dispute as stupid politicians.

In the 20th Century, Europe considered itself to be most

advanced continent. It could be true in material terms. But
there was no spiritual evolution. Hence Europe fought two wars.
Both the wars were caused by Colonial Exploitation available to
U.K., France, Spain, Portugal, etc. and not available to Germany.
Germany started wars to extend its boundaries to Atlantic Ocean
and to make own colonies.

Separatists keep fighting.

Unitists see no reason to fight.
When man will evolve and become human; U.S., U.S.S.R.,
U.K., China and all expansionists will be considered stupid.

XIV.4 Advait..

Every one will have different opinions, beliefs and

ideologies.
And yet, at the root, we are all one.
We are like leaves of the same tree.
 Page No.: 58

If we consider ourselves as separate:

Our different opinions will hurt egos and cause clashes.
When we evolve spiritually, we realise the unity in all and
futility of fights over differences.

An evolved person does not want to rule over anyone and

does not permit any one to rule him.

XIV.5Law of Karma

Theory:
In India, all the three religions – Hindu, Jain and Buddha
have fully developed literature on the “Law of Karma”. It says,
“Everyone will experience the consequences of what she/ he
does”. “What you cause to others, shall be caused to you by
nature”. “However the timing and form of your experience
cannot be predicted.”

I personally submit: “The law of Karma applies to a society

and even a nation.”

Indian philosophy says, “A person will face the

consequences of
(i) what he himself does, (ii) what he abets and (iii) what he
confirms / accepts.”

If the Government commits a fraud and people enjoy the

fruits of the fraud without protesting or asking the Government to
stop the frauds; then the Government and the people – both will
face the consequences.

The butcher kills the goat. One who eats the mutton has
not killed the goat. Still he is also a partner in the act of “himsa”
and he has to face the consequences. Butcher has killed the
goat for his customer. The cause of killing is the customer.
Customer has to face the consequences.

Even the Christians say “you shall reap as you sow”. This
means, the law of Karma is understood almost universally – in
several different ways.
Now add the “Law of Karma” to entire discussion on
economics.

One section of the law of Karma says – if you remain a

silent spectator of a fraud; and you do not protest against the
fraud; you are “Guilty of Silence” where you should speak up.
 Page No.: 59

The law of Karma and the theory of Punarjanma

(Reincarnation) constitute one complimentary set of theories.
You will never know the time when you face the consequences.
Hence to a person unaware of this set of theories, this ”Samsar”
(world) appears to be unjust and unfair.

A person commits Karma by action, speech and thought.

Ordinary base level people commit sins in action. An evolved
person will not commit a sin even in thought.

Law of Karma - Illustration:

U.S. Government is at a base level. It kills lakhs of people

just to maintain crude oil at a low price and to maintain dollar
hegemony.

It will be a long & arduous journey before it evolves into a

civilised person – and stops committing heinous atrocities. In
fact, mankind on earth needs substantial evolution.

Application of Theory:

U.S. caused the SEA crisis by first creating asset bubbles

and then pricking the bubbles. Between 1990 and 2010 U.S. has
experienced asset bubbles and in September, 2008, nature
pricked the US asset bubbles.

U.S. destroyed U.S.S.R. by (i) Dragging U.S.S.R. in massive

costly star wars (ii) bleeding U.S.S.R. in Afghan wars and
ultimately making U.S.S.R. insolvent.

Now U.S. itself has become insolvent because of excessive

consumptions and continuous wars.

XIV.6Maya:
All this is simply a drama of Greed and Fear. All
individuals and all entities are in the grip of Maya. Some “smart”
people have perfected the play of Greed. The societies that
permit unbridled greed are bound to collapse.

The percentage of greedy people in USA, China and in India

(any society for that matter) may be same. Indian politicians and
industrialists have proved this. Indian regulatory system has
worked better than the U.S. regulatory system. Indian culture
denounces greed whereas U.S. culture praised greed.

Hence the difference in the two countries.

So far.
 Page No.: 60

Even in India, greed is gaining respect in several fields.

Beware.

If we study international economics in depth, we

understand the Indian concept of Maya. What appears does not
exist. What exists, does not appear. And knowingly, we are
tempted by what is apparent.

XIV.7Un Ekant Vad:

On each issue covered in this paper, considerable
information is available on the internet. Most authors give facts
in a “Politically Correct” manner. Hence the real issues are left
for the reader to discern. In this paper I am submitting my frank
views. I am open to discuss & learn more on the subject.

On each issue, there can be several different views. That is

Un Ekant Vad at its peak. We cannot try to get unanimity on such
subjects.

Conclusion:

U.S. has exploited rest of the world for last sixty years. It
has used cunning strategies & even wars to obtain & maintain $
hegemony. Free availability of large funds flows has made U.S.
egotist & intolerant of democracy in global matters. It has
pushed itself into the quagmire of wars in Iraq & Afghanistan.

Now US has lost grip on all the cartels it created. The

probability is more in favour of a terrible crash in US $ & US
economy. Low chances for US behaving wisely & conservatively. I
personally see very little chances of US retaining its super power
status for long.

Whether US becomes wiser; or a crash forces it to be wiser,

rest of the world can benefit tremendously by stopping the free
gifts to US & using the scarce resources for domestic needs.

American Financial Crisis of 2008-2010 can be

summarised as under: It was caused by the greed of American
bankers and financial institutions. This entire paper has given an
analysis and summary of the past – 2nd World War to 2006. The
past has lead to American Financial Crisis.
What will be the future?

I am placing an analysis. Every one may make his own

informed opinion. Finally no one knows what will happen. But be
prepared
 Page No.: 61

Many Thanks
Rashmin Sanghvi
 Page No.: 62

An illustration of Concept Vs. Definition

Ahimsa

Ahimsa (non-violence) is a “word” also & a “concept”. As a word,

it simply means non-violence. However, consider it a concept & a
whole world of thinking opens up behind it. Jain & Baudhh religions are
almost entirely built around the concept of Ahimsa. Consider some
illustrations of Ahimsak (non-violent) thinking & we know what is a
concept.

Display of one’s wealth, power, degree etc. is a himsa (violence).

Talking aggressively is also a himsa.
Driving car in a way that causes inconvenience to others is
himsa.
Aggressive tax planning which is far removed from truth &
substance is also a himsa. Tax evasion is not even to be discussed by a
true Ahimsak (follower of non-violence).

If a person keeps fighting with all & sundry over petty matters;
you cannot even discuss Ahimsa with him. However, consider a Jain
who would not even eat green vegetables in monsoon. He is a wealthy
person being proud of his wealth & eager to display his wealth. He is
unfit for finer discussion on Ahimsa. You will be able to discuss the finer
aspects of the concept with a non-vegetarian person who is sensitive to
the feelings of others. Eating habits do not determine the level of
thinking & sensitiveness of a person.

Now we know the difference between a ‘word’ & a ‘concept’.

‘Concept’ has a lot of thinking gone into it. And if one does not know a
concept, we cannot discuss the subject with him. Intellectual discussion
with a person not appreciating a concept would be futile.

Now consider Unekantvad (Un-Ekant-Vad).

(i) When both Jain & Baudhh religions talk of Ahimsa, why do we
need two different religions!

Consider Upanishads. One would conclude that under Hindu

religion also, himsa is impossible. Any himsak (violent) person is not a
follower of true Hindu, Christian or Muslim religion.

And yet every Ahimsak person also has a different way of

thinking & living.

(ii) A tax consultant may not believe that Ahimsa & tax evasion
have any relationship. But a tax commissioner may agree more readily.
But on this issue, we will have strong views from many CAs.
 Page No.: 63

It is the law of nature that every one will think & act differently –
even on one and the same concept. This is called Unekantvad.

We have considered here two concepts:

“Concept”; and “Unekantvad”.
For understanding these two concepts, we have considered the
illustration of the concept of “Ahimsa”.
 Page No.: 64

Cause of Current Inflation in India!

Why there is so much inflation in India?

Why Petrol prices are increasing?
For earlier six years Government could contain inflation
below 8%.
Why Government of India is finding itself helpless?

Let us try to find answers to these issues.

1. There is a Currency War going on in the world.

According to USA, Chinese Yuan is undervalued. It causes
increased Chinese exports to U.S. and forces unemployment
within USA. U.S. tried to push China into appreciating Yuan but
failed.

Hence USA has started depreciating $ by Quantitative

Easing II. Amount involved is $ 600 bn. of money supply. This
money goes into the whole world as hot money.

China and India do not want their currencies to appreciate

against $. For retaining the parity of their currencies, Central
banks of these two countries buy $ and sell their own currencies.
Since the supply of Yuan & Rupee increases against $, these
currencies get depreciated and the parity is maintained with a
depreciating $. With continuous buying of $, their foreign
exchange reserves continuously go up. This has nothing to do
with exports by the country.

Brazil, Germany are also vocal critics of USA. Almost the

whole world is affected. However, developing countries are
affected more than the developed / rich countries.

When US Fed issues money supply, rest of the world takes

up $. But when China issues Yuan or India issues rupee, no one
outside the countries buys these currencies. Hence the domestic
money supply goes up. Too much money supply chases
available stock of goods. According to the Economics Law of
Demand and Supply, prices of goods have to go up. There is
bound to be inflation. Prices of shares and property also go up.
An asset bubble starts building up.

Government of India is helpless in preventing this

inflation.

China openly criticises USA. Hence the world perceives it

as a Currency War between USA and China. India, as a
matter of political strategy does not criticise USA. Hence
common man does not perceive a war between USA and India.
 Page No.: 65

Fact is, India is also in the grip of inflation, a victim of Currency

War unleashed by USA.
In case you would like to see global expert economists’ views,
see the following web links:

(i) Wall Street Journal:

http://online.wsj.com/article/SB1000142405274870440570457606425278242
1930.html

(ii) Financial Sense:

http://www.financialsensearchive.com/fsu/editorials/schiff/2008/0222.html

(iii) Octaviourzua:
http://octaviourzua.com/investing-strategies/how-does-the-us-export-inflation/

Each one is an excellent, short article. Their conclusion is:

USA is exporting its inflation to the rest of the world.

2. Consider economics in another way.

Globally crude oil is quoted & traded in $. OPEC (Oil

Exporting Countries) realise that when $ depreciates, if they keep
the oil price steady in $ terms, they are the losers. They get less
in real terms. Hence every time $ depreciates, they will try their
best to raise oil price. Hence the current increase in oil price
from $ 70 to $ 100 per barrel.

For India the oil price in terms of $ goes up by 40%. If India

could buy crude oil by paying in rupee or Euro or gold – without
involving $; then the crude oil price for India would have
remained steady. But that is not possible. Hence India is forced
to raise petrol prices.

Within India, as a matter of policy, diesel prices are

generally not increased. Hence the increase in cost is passed on
to petrol. (There is a complex equation. To the extent, India
produces its own oil, India is not affected by the increase in the
cost of imported oil.)

Conclusion: Because oil is quoted and traded in $,

movements in $ value affect oil importers & exporters.

3. An international cartel conducted Gold Carry Trade.

Hence gold prices remained generally steady between the years
1980 to 2000.The cartel started losing its grip around 2000 -
2001. Around the year 2006 the cartel failed. And gold prices
shot up from $ 400 per ounce to $ 1400 per ounce.
 Page No.: 66

So if your family members are getting married and you

have to shell out more money to buy gold, you know the cause.
When you buy petrol and pay more, you know the cause.

4. Look at it in yet another way.

Within India, the issuer of money supply (Rupee) is

Government of India. Whenever Indian Government increases
money supply, there is inflation in India. General public cannot
fight back.

Similarly, $ is the global currency. Supply of $ is

exclusively in the hands of US Government. Rest of the world is
a helpless victim when USA increases money supply and forces
inflation on the world.

5. In the year 2010, monsoon was extended by more than

one month. This has spoiled the monsoon crop as well as winter
crop. Hence food and vegetable supply has gone down. Prices
have to go up. This is another factor beyond the control of Indian
Government.

In real life, there are several forces and counter forces

acting on the economy. Inflation is the result of these forces.

6. Is there a way out of US imposed inflation?

Well European Union has developed Euro and significantly

reduced the importance of $ within Europe. South East Asia, Iraq
and Iran have tried to do international business in currencies
other than $. They have all been attacked by USA. Venezuela,
Zambia and China are trading at least partly in currencies other
than $. These issues need more detailed study.

India, USSR and a few Asian countries developed Asian

Currency Union (ACU). It was damaged when USSR collapsed in
1992. Last strokes to ACU are being given by Indian Government
and RBI by refusing to trade with Iran in ACU. There are reports
that this action is taken under the pressures from USA.

7. If you can see on the web all the links given on page 59 ,
consider the following: When the information on India’s biggest
current economic problem (inflation) is so easily available on the
web for free, how is it that almost the whole of the media is
ignorant about it? Why no one in India is discussing the real
cause of inflation?
 Page No.: 67

Thanks.

Rashmin Sanghvi