Bakhabar, July, ramadan special, 2013 - Bihar Anjuman

The US$ - America's WMDwhen Nixon broke the “gold window” and refused to convert theUS$s into gold, the system of floating exchange rates came intoexistence. Since no viable alternative existed after the US$ wentoff the gold standard, so most countries agreed to it. They had nochoice other than fixing or „pegging‟ their currency with the US$or leaving their currency on a floating exchange rate wherein itsvalue is determined by its demand and supply in the market. It isintriguing how Wikipedia introduces the „foreign exchangemarket‟. Rather than admitting that US broke the Bretton Woodagreement and as a direct consequence the foreign exchangemarket came into existence, and that the modern day market isnot a thoroughly planned and organized market, it states that themarket “we see today started evolving during the 1970s whenworld over countries gradually switched to floating exchange ratefrom their erstwhile exchange rate regime, which remained fixedas per the Bretton Woods system till 1971”. Readers areconveniently deceived by the use of words “evolving” and“gradually switched” leaving an impression that the system wasdeveloped periodically and systematically.After the Bretton Woods was abandoned, currencies were (andstill are) valued merely by their relative exchange rates in the so-called “free” market. Foreign exchange markets became giantcasinos, in which large US institutional investors (now dominatedby Hedge Funds) are betting on the relative positions of differentcurrencies. The daily estimated foreign exchange trades are overUS$ 4 trillion. Of this, over 45% are “swaps”; 35% “spottransactions”; and approximately 12% “outright forwards”.Similarly, an estimated US$370 trillion are now riding on complexhigh-risk bets known as derivatives. This is 28 times the US$13trillion annual output of the entire U.S. economy. But only smallercountries are vulnerable and left at the mercy of these investorswho can radically devalue national currencies just by selling themshort on the international market in large quantities. Thesecurrency manipulations could be devastating and bring countriesdown on their knees.The alternative to letting thecurrency float is for governments tokeep their currency tightly peggedto the US$. But governments thathave taken this course have facedother hazards. The currencybecomes vulnerable to the USmonetary policies; and if thecountry does not set its peg right, itcan still be the target of currencyraids. In the interests of “freetrade,” most governments agree tok e e p t h e i r c u r r e n c y f r e e l yconvertible into US$. This meansgovernments should be ready toabsorb any surpluses or replenishdeficits in the exchange market. Forthis, they must have enough US$reserves to buy back their owncurrency. Recent depreciation ofIndian and Turkish currencies isb e i n g a t t r i b u t e d t o t h e s ecountries‟ current account deficits(higher imports and lower exports).But this is not the only reason!If governments set the peg too high(so that their currencies do not buyas much as the equivalent indollars), there will be “capital flight”out of the local economy. Capitalflights then force governments to spend their US$ reserves to“defend” their currencies; and when the reserves are exhausted,the governments either default on their US$ obligations or lettheir currencies devalue to earn more US$s. When the value of acurrency drops, so does everything priced in it. Through enforcedprivatization programs, national assets are then snapped bycircling “foreign vulture capitalists” for pennies on the dollar. Butwhat goes around, comes around. The same sort of speculativedevaluation could happen to the US$ if international investorswere to abandon it as a global "reserve" currency, something theyare now threatening to do in retaliation for what they perceive tobe the US economic imperialism.THE BOTTOMLINE:There is no really safe course at present for most nations. Whethertheir currencies are left to float or are kept tightly pegged to thedollar, they can still be attacked by speculators or strong nations.Professor Henry C. K. Liu is a Harvard educated economist. Hechaired a department at UCLA before becoming an investmentadviser for developing countries. He calls the current monetaryscheme, upon which the economic infrastructure is built, a ‘cruelhoax’. “When we wake up to that fact”, he says, “our entireeconomic world view will need to be reordered, just as physics wassubject to reordering when man’s world view changed with therealization that the earth is not stationary nor is it the centre ofthe universe”. Till then, Uncle Sam will continue to rule the roost![The author was listed by GIF magazine, UK, as one of the world's20 most influential People in Islamic finance, among the toptwenty Islamic Bankers of the world.]Bakhabar19