CURRENCY WARS

By

HARSHIT MALVIYA 2016039

5 Year Integrated B.A., LL.B. (Hons.) Course

ITL

DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY

NYAYAPRASTHA “, SABBAVARAM, VISAKHAPATNAM-531035
ANDHRA PRADESH, INDIA
 ACKNOWLEDGEMENT
I have made my project titled Currency Wars under the supervision of Varshita Mam, Faculty
Lecturer, Damodaram Sanjivayya National Law University. I find no words to express my sense
of gratitude towards her for providing the necessary guidance at every step during the completion
of this project. I am also grateful to the office, librarian and library staff of DSNLU,
Visakhapatnam for allowing me to use their library whenever I needed to. Further I am grateful
to my learned teachers for their academic patronage and persistent encouragement extended to
me. I am once again highly indebted to the office and Library Staff of DSNLU for the support
and cooperation extended by them from time to time. I cannot conclude with recording my
thanks to my friends for the assistance received from them in the preparation of this project.
 Contents
ACKNOWLEDGEMENT...............................................................................................................2

INTRODUCTION...........................................................................................................................4

A brief history of money..................................................................................................................5

Nixon Shock....................................................................................................................................7

U.S.S.R. Implosion..........................................................................................................................8

Star Wars.........................................................................................................................................9

South East Asian Crisis. 1997.......................................................................................................12

Probable Solutions :.......................................................................................................................16

Cause of Current Inflation in India!...............................................................................................17

Conclusion.....................................................................................................................................19

Bibliography..................................................................................................................................20

INTRODUCTION
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 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.
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.
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.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, ensure the safety of your
currency.” When individual pressure did not work, U.S. tried international
organizations and institutions to pressurize 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.
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.

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.  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. 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 promise. 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.

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 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. All countries abandoned
relationship with gold. They printed paper currency without strict restrictions.
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 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.

U.S.S.R. Implosion
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.Now consider a short
history from 2 nd  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.

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 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.
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.  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 was the target. This is the time when
Mikhail Gorbachev became the President of U.S.S.R.  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. 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. 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. 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.
 South East Asian Crisis. 1997.
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.)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 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.
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 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.
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.
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.
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.”
.

Probable Solutions :
1. IMF / 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.
 2. Alternative 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 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.

Cause of Current Inflation in India!

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. Fact is, India is also in
the grip of inflation, a victim of Currency War unleashed by USA.
Each one is an excellent, short article. Their conclusion is: USA is exporting its
inflation to the rest of the world.
 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.

Bibliography

1. www.scribd.com
2. www.UN.com