Tuesday, 4 May 2010

Loaded Dice

I was reading an Economist article yesterday about the Greek economic debacle. After looking at the declining investor confidence in Greek bonds and the likely repercussions of the IMF rescue package, the article went on to talk about the generally dismal state of Euro-zone economies and the impending crisis that may strike Spain and Portugal. There was an interesting statistic at the end of that article – the average Euro-zone public debt is 68% of GDP. That of the US of A is 70%. Still it is only Europe that is in crisis and not America. 

In its conclusion, the article also gives a brief answer to the reason for this discrimination between Europe and America – the world’s reserve currency is the US dollar. In effect, what this means is that the rest of the world cannot allow America to be in crisis for very long. It is in the interest of the global economy to ensure that America is always bailed out on soft terms, at least for now.

At the time of the 2008 Crisis, there was a lot of debate on the larger, global implications of the kind of global financial system that has been created over the years. One of the arguments, that has existed for a while, and came to the fore in the immediate aftermath of the 2008 crisis runs thus (and here I am paraphrasing from several sources): One of the primary reasons that we are a skewed global economy is that we do not have an objective international currency that penalises excess debt and credit both. We have created a system whereby, one side (in this case America) is always rewarded, regardless of debt or credit and the other side is always punished simply because, the international currency is the American Dollar. All economies hold their surpluses in dollar terms thus, making it in everyone’s self interest to ensure at the well being of the dollar by hook or by crook.  This has led to the creation of a financial system that is benchmarked on nothing, whose value is based on biased speculation and not the fundamental value of the resource.

Yesterday’s Economist article brought this to the fore again, albeit in a very subtle manner. And to me it is unjust indeed that some countries should suffer and others not simply because the dice has been loaded since the beginning. I wonder if any generation, in the near or far future, will have the courage to dismantle this unequal system and create a level playing field. 

4 comments:

Aarti said...

i totally agree! the dollar can replace gold as a safe haven!!!

Nithya Ravi said...

Maybe the dollar should remain the reserve currency and the US should change its currency to the credit card no? ;)

Always A Rocker said...

What you say makes definite sense, but then Euro zones also don't seem to suffer much. While bailing Greece out is not the job of the IMF but of the European bandwagon, the IMF still is still gonna pump in funds meant for poor and developing nations, and that too at a lesser interest rate than the Europeans, obviously because fellow-Europeans dominate the IMF. So it is mainly the III world countries that suffer more than anyone... So whether the dollar or the Euro is the international currency, the losers are the dependants...

Nithya Ravi said...

@Always A Rocker: the solution is not to have another country's currency as the international currency. Because then you land up in the same situation as the present with a different set of specifics. The solution would, I think, be something along the lines of what Keynes suggested at the time of the Bretton Woods Conference - to have an objective international currency (he called it the Bancor) benchmarked against a basket of internationally traded commodities. With an objective international currency, countries with excess credit and excess debit would both face problems without affecting countries with a balanced BoP (Balance of payments account). Check Keynes and his Bancor proposal out for more details. Will post a link if I can trace a decent article on the same.

 

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