The World Monetary System !! PART - 2 of 2

I think the inequality in the world monetary system is quiet apparent. The system clearly reflected the beginning of Capitalism at the world stage after the second world war. This further led to the cold war because the Russians did not want the American dollar to rule the world. As we all know, they lost. 

I am not against Capitalism or Communism. In this case I take the "Middle" view.   Capitalism is a good idea, excellent in fact, when put in an envelope called Democracy.  Democracy - that granted everyone equal rights and freedoms. There is no democracy at the world stage. Countries are democracies but the world is not, as the assigning of quotas shows. 

Countries had to to grant their citizens equal rights ....but with whatever quota they were given. 

So equal rights in US and Europe meant - Free Health care, Unemployment pay ( very capitalistic !!), Free Education,  Pension Plans , Big Mortgages, Social Security. They had, they borrowed, they had more.

  

And equality in Africa meant- Maybe someday everyone will have water and electricity and polio drops !! They had not, they borrowed not and they had not !!

But things are not as hopeless as they may seem. Many Asian countries including India and China were able to attain rapid growth, thanks to Education and Infrastructure development. 

The US consumers total consumption per year is $ 9 trillion. China's consumers spend $ 1 trillion and Indians about $ 600 billion a year. This is mainly because Chindians have a higher savings rate. ( Chindians is an accepted word in Economics nomenclature  .... I know !! ... makes me wish I was a nigger !! )

The US can print cash and they have to pay about 1 -1.5 % interest on their bonds and countries like India have to pay 4 -5 % . So the US had access to a lot of liquidity. Which in fact led to  the whole credit-crunch and sub prime mess.

 People were given loans, who should not have been given loans. The lending rates were so low ...that it was always assumed that the percentage rise in price of the property would be much higher, hence the loan was always safe. The real estate brokers sold homes to people with absolutely no documents. These loans were called NINJA loans (No Income, No Job , Asset ). The brokers made these loans because they dint care if the loan would be paid back or not, they only had to hold the risk of the loan for a few days, till it was "securitized". Then these securities would rest with banks in their balance sheets. These derivatives were so complex...I'm sure they were some highly complex y= f(x) equation that Middle came up with when he was interning at Lehman. Then they were "sliced" and "diced", assigned arbitrary ratings by rating agencies and sold left and right . When the prices fell and the shit hit the fan, the ones who had created this crap were left holding most of it themselves . A dozen or so HUGE corporations collapsed or became "financial Institutions" that were deemed too big to fall, for the sake of Mankind. This is a whole different topic of debate and there have been many good articles on the subject. 

I don't know if the current credit crisis signals an opportunity for India and China and other Emerging countries to play a larger economic or political role in the world. But there certainly are signals from many countries that they want to negotiate a new world monetary system. The world monetary system is always changing...the introduction of Euro for example has given the governments of the world an alternative to dollar reserves. I think the current crisis certainly means that the role of the US will be diminished in the long term but I don't know how effectively and quickly India can increase its importance in the world stage. 

I hope Manmohan Singh is PM when/if the monetary system is "renegotiated". 

Anyway in conclusion, I think the Entire concept of money is flawed. There is no point on putting a cap on the wealth of the world and then dividing it disproportionately. Yes, there is a cap on the total money because even though the money supply is always increasing, inflation ensures that the value of money is always eroding at a certain rate which keeps wealth constant and people senselessly  going about the Rat race. In fact a big part of the slowdown in the US can be attributed to the higher number of educated adults in Asia who are a cheap source of labour, both in the Services and the Manufacturing Sector , as a consequence, the virtual collapse of the US Auto Industry (both due to credit crunch and losing to low cost Asian rivals ) .

 Almost all manufacturing jobs ( Factory Jobs) could be lost to technology and automation ( Robots ) in 30-40 years, the technology will exist . Thanks to excessive automation, Mankind has lost many jobs to computer programs. A company's point of contact today is the Internet website and everything can be done online.The only thing that motivates corporations is profit. The term "Corporate Responsibility" is clearly a paradox.  Excess food is destroyed by producers to drive up food prices and hence profit. How can this be allowed in a world where people die of hunger.

So my point is ... The current monetary system will lead to a situation where many human beings will lose their sources of Income and their lives,  as there will be less and less jobs because of Man vs Technology. Right now we are in the phase of Man vs Man, because it is one country over another trying to divide wealth. 

In this scenario, it is the duty of the world leaders to define a minimum level of equality for the whole world, for every person. In my opinion at least food, clean water, electricity, primary education and basic health care must be provided to everyone in the world. It is possible. But does Mankind have the will and the Integrity to provide basic equality to everyone in the world ?? Judging from 2000 years of human history, I think Not . 

http://in.youtube.com/watch?v=NT-2fenmLnc

Zeitgeist ...awesome documentary

The World Monetary System !! PART - 1 of 2

I have spent countless nights researching Money and the origins of wealth. Most people take the world monetary system for granted. They think of Money as something that has always existed and something that will always exist. Here are some facts that make you think......

1) World's richest 1% own 40% of all wealth

2) Poorest 50% of world's adults own just 1% of the wealth

3) Richest 10 % account for 90 % of the world's wealth

4) Only 3% of all money in the world exists as cash.....97% of it exists as 1s and 0s in computers across banks. 

 

You don't have to be a very intelligent man to understand that there is something deeply wrong with the system. I have always believed that to understand something you need to go back to the basics. Question the underlying concept. 

We know that at some point in time we moved from the barter system to hard currency, coins and then notes. In order to understand the present monetary system, we need to go back to July 1944. I assume this to be the point when the modern monetary policy was put into effect. This is not some arbitrary date, but the time when the world money system, as we know it today, was put in place. 

The Bretton Woods system of monetary management established the rules for commercial and financial relations among the world's major industrial states. The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.

Preparing to rebuild the international economic system as World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944.  

Setting up a system of rules, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Bank for Reconstruction and Development (IBRD) (now one of five institutions in the World Bank Group) and the International Monetary Fund (IMF). These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.

The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing strain, the system collapsed in 1971, following the United States' suspension of convertibility from dollars to gold. This created the unique situation whereby the United States dollar became the "reserve currency" for the nation-states which had signed the agreement.

I copied the 2 paragraphs above from WIKI :) 

You can read the whole history if you are interested in Economics. Its extremely interesting, I can tell u that. 

In 1945, the world was very different from what it is today. The economy of Europe was destroyed because of the first world war, the great depression and the second world war. Most Asian and African countries were still colonies fighting for freedom. They had nothing....Nothing! No money, no rights and no power to negotiate. The only country that emerged relatively unscathed was the USA. 

Before the agreement, the currencies of the world were valued or pegged against gold. Each country had its own gold reserves, their currency was guaranteed by gold and gold was the major unit of trade between countries in case they had a major trade deficit. 

As a consequence of the bretton woods agreement all the governments of the world transferred their gold reserves to the US. It still resides there today . About 70% of all gold ever mined in the world is in the US. Only the US dollar was now backed by gold  !!! And the world currencies pounds, francs, rupees etc etc were now backed by US dollars, making the US dollar the reserve currency of the world !!!! Later after this system failed in 1971, even the US dollar was not backed by gold. Essentially it is backed by nothing. If the US fails, so does the world. 

If you think this is not fraud enough....you haven't heard the worst of it !!

THE IMF 

The IMF was to be the world organization that would assist, finance (  lend at an interest ) to countries who had big trade deficits. 

The big question at the Bretton Woods conference with respect to the institution that would emerge as the IMF was the issue of future access to international liquidity and whether that source should be akin to a world central bank able to create new reserves at will or a more limited borrowing mechanism.

What emerged largely reflected U.S. preferences: a system of subscriptions and quotas embedded in the IMF, which itself was to be no more than a fixed pool of national currencies and gold subscribed by each country as opposed to a world central bank capable of creating money. The Fund was charged with managing various nations' trade deficits so that they would not produce currency devaluations.  

When joining the IMF, members were assigned "quotas" reflecting their relative economic power, and, as a sort of credit deposit, were obliged to pay a "subscription" of an amount commensurate to the quota. The subscription was to be paid 25% in gold or currency convertible into gold (effectively the dollar, which was the only currency then still directly gold convertible for central banks) and 75% in the member's own currency.

In the event of a deficit in the current account, Fund members, when short of reserves, would be able to borrow foreign currency in amounts determined by the size of its quota. In other words, the higher the country's contribution was, the higher the sum of money it could borrow from the IMF.The countries issued bonds and they got cash.

Now if the inequality of this system is not immediately apparent to you , you are not intelligent enough to view this blog...please stop reading !!

Now lets talk about the Quotas :)  If you think quotas for SC/ST etc are wrong. This is a completely different type of quota. It is like giving quotas to the upper class which is even dumber.....

Lets talk numbers :)

USA - 17% 

UK -  5 %

France - 5 %

Japan - 6.13 %

Germany - 6 %

Italy - 3.25 % 

China -  3.72 %

Saudi Arabia - 3.21 %

Canada - 3 %

Russia - 2.74 %

Pot Smoking Netherlands - 2.38 %

Belgium- 2.12 %

India - 1.91 %

Switzerland - 1.6 %

Australia - 1.5 % 

Mexico- 1.45 %

Spain - 1.4 %

Brazil - 1.4 %

Argentina - 1 %

Pakistan - 0.5%

Keep in mind that these quotas are the latest and have been arrived upon by successive iterations every 5 -10 years. The Initial quotas of 1945, gave about 60% voting rights to G8 at that time. 

About 21 countries are indebted to the IMF since it was started. Those in debt include Brazil, Argentina, Chile, Pakistan, South Africa and most of Africa. 

I think the men who put the Monetary system of the world in place probably did it with the best of intentions, or maybe they were just plain evil. But the fact remains that this is the system we live in. They could never have fathomed the kind of world we live in today, the kind of technology that would exists. Think about it. We produce enough food every year to feed the whole world for a year and a half, yet people die of hunger. 

I think I have given you enough to think about and shed some light on the shady monetary system of the world. 

Will continue this post later :) 

I am posting references so u can make intelligent comments instead of some gen chutiyaps ....

http://www.guardian.co.uk/money/2006/dec/06/business.internationalnews

http://en.wikipedia.org/wiki/International_Monetary_Fund

http://www.imf.org/external/np/sec/memdir/members.htm

 http://en.wikipedia.org/wiki/Bretton_Woods_system