It has been going on since the world became colonised and currency was introduced in economy. In olden times people would trade in equal valued services and products. For e.g. rice produced by farmer is of less value to him than to a cobbler who makes shoes and cares less for shoes. Farmer thus has an economical need to trade his belonging in equal value with cobbler. Cobbler rates a pair of shoes to 10 lbs of rice. farmer equally values it and hence the trade happens. This is fair trade. However in current world scenario we dont do this. We trade paper which has denominated value. Also this paper has various denominated values against another paper. And some people trade in just paper. Creating a "False Value". I strongly suggest that we have single trading unit. No currencies. Central trade organisation like WTO based on current assets, services, GDP creates something like Global Trade Unit (GTU). The main problem arises is how do we treat PPP (Purchasing Power Parity). For e.g. INR is very strong in PPP as compared to many currencies however GDP of India is low. If we arrive at a central currency we will see inflation sky rocketing in some parts of the world with now excellent PPP but low GDP. Per capita incomes will be distorted as well. The concept is as wild as saying 1 Dollar = 1 Rupee. No not really. This is not how a Global Trade Unit (GTU) will work. GTU is index linked to assets. We can have it region based, country based, intercountry based, intra country based. Depending on the current market value the GTU reserves would be deposited with the country. Countries have to manage GTU. There is no way of having "False Value" (FV) or Notional Value (NV). Trade is thus asset linked more and less paper oriented.
Now many countries have Dollar Reserves. International trade is dollar based. If US wants services or imports its more than willing to print a few more dollars and sell it to any willing economy lacking them. How legal is this? You got True Value in return of False Value. Earlier currencies were linked to gold reserves internatinally. But with the concept of "Global Village" emerging it could no longer be sustained and the this mandate was revoked. Now countries can print their currencies as they please based on their own economic agenda. Zimbabwe is best example or crisis in argentina when the Argentinian dollar pegged to USD was released. The country went into an economic tumble. The countries that control media and have a global image will always remain strong as they are able to project higher value for their currency than other countries.
Yes the balances will tilt only when all countries have sufficient dollars and they realise that they are sitting on paper piles all this while. Where do we take all this trillions of paper bills floating around burn them? or fill our graves?
4 comments:
Great post. I was going to post a similar article regarding asset inflation and depreciating currencies.
I liked the “false value" concept. But I don’t see “one currency” being used in the near future. Euro itself was hard to introduce. Reintroduction of gold standard could be the best thing to do.
Actually I don’t blame the Americans for global imbalances. The real culprits are Asian countries like India, China and Korea who have artificially diminished their currency values in order to entice the American consumer. Dollar is weak - thats an unquestionable fact! But as these economies (having potential) don’t let their currencies appreciate, money has no other choice but to flow into assets. And that’s the reason why assets have inflated substantially since 2003.
I agree. Neither do i see the one currency concept happening ever. Regions have their own prejudices and besides that mistrust amongst the global trade players. You are right I am not saying America is at fault. If you read the last para youll notice the blame is on the other Dollar Hungry economies.
PPP(Purchasing Price Parity) ... I was under the impression that its Purchasing Power Parity. Whatever, this makes a good read
You are right in your analysis, however in economics there is no free lunch. You can only postpone a crisis so long as others (read global economies) hold you (read US) in awe. Let us assume everyone was to settle his trade with gold. At the end of the transaction no one owes anyone anything. Paper money is merely an IOU a promise to pay value for the paper held. Hence at some point in time US will have to pay in real terms of goods and services for all the dollars held by other countries. Fortunately in practice this does not happen and the trade goes on with most countries (after the asian crisis of 1997-98) collecting more and more dollar bills as reserves to be used freely for trading purposes. A drop in dollar value is equally bad for such countries and hence as Rohan points out the Asian countries are not allowing the dollar to depreciate against their currencies. They also fear that fall in dollar would lead to loss of exports for them. But the reality is that Dollar has to lose value which in real terms it already has through appreciation of all asset classes across the globe. Sooner than later inflation will catch up in most countries leading to a slow down\recession. We are very near there.
Post a Comment