All
governments lie and debase currency. Roman emperors secretly reduced the
amount of gold in their dinars and eventually started using lead instead
of silver. Mohammed Tughlak of the Tughlak dynasty sultanate in India
tried to use leather coins. The more recent invention of paper currency
initially required that the nation’s central bank have a certain amount
of gold reserves to back its paper money. Most Indians remember when
India’s dwindling gold reserves led to a mandatory confiscation of
public gold by its government at fixed prices and some years later when
India had to fly gold to the UK to get a loan.
The central
government of India has been running massive fiscal deficits and sooner
or later will have to pay the piper. The most irresponsible government
in the world is the one in the US. It’s current debt is nearly ten
trillion dollars and unfunded future liabilities are 65 trillion
dollars. Its annual GDP is 12 trillion dollars and its debt keeps
increasing at over a trillion dollars each year. Its interest payments
to service the debt will soon reach a trillion dollars a year.
Realistically speaking there is no possibility of America repaying its
debt by exporting more than importing. At present it runs over 800
billion dollars a year trade deficit. It just keeps printing more and
more dollars. Such a problem led to hyperinflation in the thirties in
Weimar Germany. A pack of cigarettes cost a billion marks, The result
was Hitler, the second world war and tens of millions of dead people.
All the world’s currencies have become fiat currencies, unbacked by gold
or tangible assets. This is why the price of gold is approaching 700
dollars, oil is at 77 dollars and the price of onions in India nearly 40
rupees a kilogram. Bush’s desperate gamble in Iraq is failing and there
is a serious chance that he will play double or quits by attacking Iran
to control oil which is the lifeblood of western industrial nations.
Remember what Yudhisthira did in the Mahabharata. The EU has its own
currency and will be better able to survive the dollar collapse. China
with 1.3 trillion dollars, Japan with a trillion dollars will take the
biggest haircut but will still be able to afford oil at over hundred
dollars.
Russia, India, Taiwan, Hong Kong and South Korea with two to three
hundred billion dollars will only have their hair trimmed because they
hold part of their reserves in other currencies. India nevertheless will
face a bigger problem as a lot of its outsourcing will be lost due to
price and increasing American domestic backlash. The escalating oil
price will become a double whammy increasing India’s import bill even as
its exports and remittances from the Gulf are diminishing. The
kleptocratic Arab regimes will lose value of their dollar reserves and
unrest in them will rise. Since their rule is illegitimate they will
stick with America under its military umbrella. The rising Islamic
militancy will further destabilize them as is happening even in
Pakistan.
The last straw which will break the American camel’s back has been
already loaded by its greedy capitalists. These capitalists hollowed out
US industry and transferred all production and many services to cheaper
locales like China and India, to increase their profits. The US now
makes mainly high tech arms and planes, grows heavily government
subsidized agriculture and indulges in financial speculation. This is
why it must make wars and sell arms to keep its economy and employment
going. The subsidized cotton leads to Indian farmer suicides. The
subsidized corn impoverishes Mexican farmers who migrate illegally to
the US to survive by menial jobs. The financial speculation is causing
US and world markets wild gyrations.
This last and most recent sins of greed by US financial institutions
needs to be understood. US Federal Reserve Chairman Greenspan was a
regulator like the fox guarding the chicken coop. He encouraged
irresponsible borrowing by individuals to buy houses they could not
afford. He did not discourage institutions which made loans of
adjustable rate mortgages, interest payment only mortgages and even
negative amortization mortgages where the principal debt keeps
increasing. The foolish home buyer took on such debt while buying a
house. House prices had been increasing because of open money spigots
and a debased dollar. Home prices in California and other states went up
to over 500,000 dollars for homes of less than 1000 square feet. Such
prices put homes beyond the capabilities of even professional persons
earning more than 100,000 dollars.
These home mortgage loans, which had been given to persons without
checking their incomes, assets or ability to pay and no down payment
were securitized and sold to pension funds, mutual and hedge funds,
insurance companies and foreigners. The greedy mortgage lenders who were
in cahoots with the rating agencies twisted their arms and finagled a
AAA (top grade) rating for these junk bonds. As home sales peaked and
fell and home prices decreased making the home worth less than the
underlying mortgage and the sub-prime borrowers lost their jobs, home
owners (investors or residents) walked away from the homes leading to
foreclosures.
The investors who bought the mortgage bond stopped getting interest
payments. The mortgage lenders were left holding homes priced less than
the outstanding loan and they could not find buyers for loans they had
securitized. No investors wanted to buy the worthless securities after
they had heard of defaults in the previously sold ones. This led to
bankruptcy of some hedge funds, some European banks and a lot of
American mortgage lenders.
The Federal Reserve and the European Central Bank once again opened up
the money spigots just as they had done during the LTCM hedge fund
debacle and Mexican, Russian and Argentinean default crisis. The problem
is that investors still refuse to buy commercial paper backed by unsafe
assets like mortgage, credit card or auto loan debt. This creates a
liquidity crisis that can’t be solved simply by throwing money at it.
What makes the crisis worse is that crooked scam artists had enticed
ignorant and unsophisticated home buyers and owners with attractively
low short term teaser adjustable rate mortgages with huge prepayment
penalties and a sharp jump in the rates after six months or a year.
These ARMs are due to reset much higher in six to twenty-four months and
falling home prices and the now stricter criteria for loans by the burnt
lenders, makes it impossible for the trapped home owners to refinance or
sell.
Thus the London interbank borrowing rate has risen sharply as have
interest rates on most mortgage loans even if they are prime. A year’s
worth of unsold housing inventory is overhanging the market and it will
be burdened by more coming defaults and foreclosures. There have been
large layoffs in construction and financial companies. This will hamper
job growth and the economy and may lead to a recession. Thus to divert
the public attention from the economic meltdown, Bush like any other
scoundrel, may use patriotism and go to war with Iran, even if it leads
to a worse mess. He can then put the blame on Iran and escape personal
responsibility.
The dollar is teetering on the edge of a precipice. A sharp jump in
world interest rates or a selective lowering of the US interest rates, a
worsening of the Middle East war or a sharp jump in the price of oil
will nudge the dollar over the edge. Other factors that could hurt are a
falling stock market and unwillingness of foreign investors or central
banks to fund the current account deficit. Once that happens the selling
momentum of dollar holders scrambling for the exits will accelerate the
fall.
All above are the catastrophes of an unregulated free market with
laissez faire capitalism. Capitalism is in tune with the selfish and
greedy psyche of human beings and can lead to general progress only if
it is strongly and honestly regulated for the common good. Unrestrained
free markets are manipulated by the wealthy and powerful to the
detriment of the public and the nation as is being done in the abject
surrender by Manmohan Singh to an atrocious and oppressive nuclear deal
and neo-liberalism in America. The media and haves who control it as
well as the ministers are lying to the people as they always do.
I am no enemy of capitalism and no friend of communism. The latter is
antithetic to human nature and is unworkable except amongst saints. The
example of many of India’s and the old Soviet government bureaucracies
will suffice as an example. The saying goes that in such bureaucracies,
everyone has a job but nobody works. In the old Soviet case it goes
further that everyone has money but there is nothing to buy. What India
needs is a judicious mixture of capitalistic socialism with strong and
honest regulators. Free trade that leads to export of onions and
starvation at home is the biggest enemy of democracy and ultimately the
nemesis of freedom and a civil society.
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