The disaster to be created by ‘Currency War’
Anand VP Gurumoorthy
A currency war is a situation where several countries simultaneously devalue their currency by printing more money, with an ostensible motive of increasing their exports. We are now in the midst of a currency war. And it has not been good for India. The present day high inflation and the drastic depreciation of the rupee in 2013 can be partly attributed to the ongoing currency war.
According to Jim Rickards, a noted international finance expert and author of currency Wars: The Making of the Next Global Crisis, this is not the first time that the world has been engaged in a currency war. Actually, it is third time in the last 100 years. And every time the currency wars have ended badly. The 1930s currency war “led quickly to Japan’s invasions in Asia and Germany’s attacks in Europe”. The 1970s currency war “led quickly to the worst period of inflation in history”. The present day currency war which started in 2010 with the US quantitative easing (QE) programme promises to bring about the collapse of the international monetary system, according to Rickards. Indeed this is why Austrian School writer Patrick Barron calls the present day currency war a “currency suicide.
It is still too early to comment on how the denouement will turn out. The first currency war lasted 15 years from 1921 to 1936, and the second war lasted 20 years from 1967 to 1987. “If that pattern holds, the new currency war might last until 2020 or beyond,” writes Rickards in Currency Wars.
And what will be the trigger for the collapse of the international monetary system? One can only speculate. In a recent interview to InternationalMan.com, Rickards discussed the possibility of the collapse of the dollar through the collapse of the petrodollar system. “The term ‘petrodollar’ is shorthand for an understanding between Saudi Arabia and the United States that the US will guarantee the security of the House of Saud in return for the Saudis agreeing to price oil in dollars, to manage the dollar price of oil, and to redeposit those dollars in the banking system where they can be used to support international lending by major banks,” states Rickards in the interview. He goes on: “Now the petrodollar system is collapsing for two reasons. The US has abused its privileged reserve currency position by printing trillions of dollars in an effort to create inflation. More recently, US President Obama has taken steps to anoint Iran as the regional hegemon of the Middle-East, and to ease the way, in stages, toward Iran’s possession of nuclear weapons capability. This is viewed as a stab-in-the-back by the Saudis and the Israelis …. There is also a newly emerging alliance among Saudi Arabia, Israel, Egypt and Russia. The new alignment will have no particular use for the US dollars and no reason to support them. This turn of events marks the beginning of a significant diminution in the role of the dollar in the international monetary system.” This collapse of the US dollar could eventually lead to the collapse of the international monetary system.
These are hard words from Jim Rickards and it remains to be seen whether he is proved right. But it goes without saying that the next few years are going to be one of currency turmoil and as with all currency wars, the ending may be deplorable.
(The author is a PhD from IIT-Bombay and is currently working as an Associate Professor at VIT University, Vellore Campus. He can be contacted at [email protected])
Indian economy is slowing down rapidly. An economy that had managed to reach growth rate of 9 per cent has slowed down and is barely able to manage 5 per cent. Of course, it may suit some political forces to make hay while the sun shines and capitalise on present economic predicament. There is no guarantee that a change of Government will bring economy on track. Indeed, while the problem is evident to all – low growth rate, high inflation, huge current account deficit, mounting fiscal deficit, depleting foreign exchange reserve – there is nobody to offer solutions.
But here is a clue; it is not as if only Indian economy is in doldrums; China’s growth rate is plummeting from heady 12-14 per cent to respectable yet mellow 7 per cent. Economies around the world are muddling through and there is very little to cheer and indeed commodity prices all over the world are falling drastically.
‘Commodity prices,’ did you say? Does that mean gold, silver and that sort of thing? Well, yes. Does it include crude oil? Yes to that too. But, hey – crude prices aren’t falling are they? Nope.
That’s an anomaly. How come the global recession is not having expected effect on crude oil prices? Well, what if crude oil price were the cause of global recession?
Indeed that very well could be the case. Since 1960s, most recessions – at least of global nature, have been almost invariably been preceded by spike in crude oil prices. And that should not be surprising.
Consider for instance if the crude oil price rises from $ 30 a barrel to say $ 100 a barrel, the world would spend $ 3 trillion a year on crude, instead of $ 1 trillion on crude. That can significantly impact a global economy of around $ 70 trillion.
Hmm……sounds logical. But what is the cure.
Well just on a trial and error basis, here is a possible remedy to the malady.
Crude oil price like any commodity price is determined by supply and demand conditions. No, surprises there! But what is interesting in crude oil context is that the supply is significantly regulated by a cartel – OPEC – Organisation of Petroleum Exporting Countries.
OPEC regulates crude oil price by reducing supply, so that the reduced supply causes price to escalate. Interesting, isn’t it!
What is more interesting is that OPEC reduces supply by a very small amount 3-5 per cent and that escalates the price by over 100-300 per cent. This is getting even more interesting.
Now clearly supply is just one of the factors that determines price. The other factor that determines price is demand. What if it is also possible to reduce demand by global effort? How would you do that?
You would do that by reducing demand by creating an oil importer’s cartel – let us call it OPIC – Organisation of Petroleum Importing Countries.
Now there is an urgent need to create an OPIC that balances the power of OPEC. OPIC could include almost 150-175 nations.
OPIC can reduce oil demand by encouraging their citizens to switch to public transportation, by car pooling and by telecommuting.
Yes, this sounds a very desperate step. But consider the times. They are dire. If growth rate of China has plummeted from 14 per cent to 7 per cent and of India from 9 per cent to 4.5 per cent, clearly things are extremely bad.
We do not have the luxury of taking it lying down; there is need for proactive action. Oil prices impact global economy; there is little room for discussion on that. 9 out of 10 economists would entirely agree that high oil prices cause global recession.
Now what can be discussed and debated till the proverbial cows come home, is the solution to such a crisis. There is no guarantee that the oil importer’s cartel will work. Indeed one can be rest assured that there are going to be huge hurdles at every step – right from creating the cartel, to certainly attempting to make it effective.
But do we have a choice?
Inflation : The biggest failure of UPA –II
Common man is hit, very hard by the skyrocketing prices of essential commodities. Food items are the most important need of every family. Poorer families have had to stop eating various foods in order to manage crumbling family budget. Between 2004 and 2013 food prices rose by a whopping 157 per cent. The worst affected lot is the middle class, especially working class, which has to maintain a reasonable standard of living in a fixed income.
The price of various vegetables is at an all time high. Not only that, the price of other key food items like milk, egg, spices, cooking oil, sugar and other condiments have increased. Even the common salt, an indispensable and essential ingredient of most of the cooked food has not been spared; it has increased by 85 per cent in the past decade. Prices of the two staple cereals of India, rice and wheat have increased by 137 per cent and 117 per cent respectively. Even fruit prices have increased by 95 per cent despite bumper crops of many popular fruits like bananas, mangoes, oranges and papaya, which has placed them beyond the reach of the common man.
Chronic shortages coupled with serial hoarding has led to the shooting up of vegetable prices and made the people suffer. The prices have been rising relentlessly for the past several years despite repeated promises by the Prime Minister Dr. Manmohan Singh to bring them down.
Inflation has hit, not only buyers, but the sellers too. Sellers stock the commodities in good quantity, but the consumers purchase them in small quantities to control expenditure which result in lots of edibles get stale on the shop-shelf. Now-a-days, people purchase things in grams instead of kilograms.
Most of the trading is in the hands of commission agents and traders. Along with hoarding they fix different rates to different markets all over India. Lack of trading expertise, market knowledge and risk barring capacity has prevented most of the farmers to make any dent in onion trading. Further, commission agents are having close understanding with wholesalers and make speculative trading and future trading. The Government should intervene and facilitate farmers to have direct access to the market. Promoting farmers for direct sales of their produce to wholesalers and more particularly linking small farmers to retail chains will reduce the cost of products.
The long term measures will help the Government to withdraw the huge amount of money pumped into circulation during the previous year. There are market manipulators, fixers. The market can be manipulated within hours according to their own wish. It is nothing to do with production, distribution, monsoon and other factors. They create the artificial shortage and price rise. The farmers cannot sell their agricultural produce directly due to different reasons.