Executive Summary of the Paper Currency Wars Rashmin Chandulal Sanghvi 24th January, 2011 When a country manipulates

exchange rate of a currency or other economic measures to achieve its own economic or political objective, it is called an Economic War (Popular name Currency War). In this paper Colonial exploitation of the past is compared with present economic exploitation. As accepted by the IMF and World Bank, Indian rupee is under valued to almost 33% of its Purchasing Power Parity value. Or $ is over valued. Despite continuous trade deficit for 40 years US has succeeded in maintaining high value of $ since it is The Global Currency. In the year 2006 Gold price was $ 400 per ounce. Today it is $ 1400 per ounce. It means, $ has depreciated by 72% in four years. Yet, in terms of Yuan & Rupee, $ has not depreciated. Under the Gold Standard deficit financing and currency manipulation was not possible. Under the paper currency there has been a currency explosion. U.S. had maintained $ at a value of $ 35 = 1 ounce of gold and promised free convertibility of $ into gold. In the year 1972 President Nixon broke that promice, there was considerable turmoil in international economy and the Bretton Woods agreement collapsed. U.S. and U.S.S.R. were two super powers in the world. U.S.S.R. became insolvent by spending huge amounts in star wars and in its war in Afghanistan. Ultimately in the year it became insolvent and collapsed into several countries. USA remained super power No. 1. This paper explains how U.S. Government and its colleagues played their hand in bringing about the collapse. The paper explains Yen Carry Trade carried out by the financial institutions. How the FIIs caused flights of capital and the South East Asian Crisis. How G4 nations achieved their political purpose of liberating East Timor. How UN & IMF helped. When any nation holds in its foreign exchange reserves the currency of any country, it is actually holding the IOU of the respective country. U.S. external debt is $ 14 trillions. This is financed by China, Japan & India etc. The benefit of such large free loan is available to USA as $ is the Global Currency. At present Indian exchange reserves are going

Page No.:

up not because of trade surplus nor because of RBIs desire. It is a forced loan given by China & India to U.S.A. Paper concludes that contrary to U.S. allegations, current currency war is caused by U.S.A. and not by China. Since U.S. external debt is entirely denominated in $, fluctuations in $ value cause more damage to lenders than the borrower. US has maintained $ hegemony by several strategies including Gold Carry Trade. It was carried out by the cartel of U.S. Government and financial institutions. For a period of about 15 to 20 years they succeeded in depressing gold price and showing a stability in $ value. From 2006 the gold cartel collapsed and gold prices jumped. Today it is impractical for any individual company or small country to conduct international trade in any currency other than $. However, times are changing. U.S. policies on crude oil, gold etc. have failed. China has openly started trading in currencies other than $. And U.S. seems unable to prevent China. If & when U.S. economy collapses and the dollar hegemony breaks down, there will be international financial turmoil. At the end, U.S. will be reduced to one of the top five. It will lose its status as super power No. 1. Americans will have to give up their luxurious life style. Rest of the world will benefit. World will have to develop another global currency which is independent of influence by any super power. Alternatively, there may be a few dominant currencies used in international trade with an international clearing house for international trade transactions. Can philosophical theories complement economic theories! Annexures 1. 2. Concept Vs. Definitions Cause of current inflation in India Thanks. Rashmin Sanghvi.

Page No.: Currency Wars A Matrix of Concepts

Rashmin Chandulal Sanghvi 24th January 2011 Summary of Contents . . . . Identify the problem. Currency Wars. (I) Analyse past and present. Diagnose reasons for the problem. (II to X) Estimate consequences. (XI & XII) Offer solution. (XIII) Detailed Contents If you are busy, just read the paragraphs marked with * & red colour. Then if interested, read the whole paper. Paragraph Nos. I Preface * Paragraph Titles Page No. 1 1 3 3 4 5 7 7 10 11 12 13 15 15 Contd..

What is a Currency War Illustration 1: Exploitation by Europe of its colonies. Colonial Exploitation Exploitation Conspiracy Theory Notes Matrix of Concepts. Some details & analysis of past & present. From page 7 to page 60. Compared with Economic

II III* IV *

Exchange Rate Determination U.S. $ Issues A Brief History of Money Nixon Shock Currency Explosion

U.S.S.R. Implosion Star Wars

Contd Paragraph Nos. Afghanistan VI South East Asian Crisis Yen Carry Trade Indonesian President Suharto Yen as International Currency. Crash of 1997 Some Proverbs VII* VIII.* IX * China and India as Suppliers & financiers to USA. Benefits to USA of $ being the global currency: How U.S. tries to maintain $ Hegemony! Gold Carry Trade List of U.S. Strategies X XI Practical compulsion to adopt $ as the Currency for international trade: Some signs of the trend for U.S. Economy. American Financial Crisis of 2008. XII XIII XIV Probable Consequences of Currency Wars Probable Solutions Relevant Issues of Interest Annexures 1 2 Concept Vs. Definition Cause of Inflation in India 56 58 Paragraph Titles Page Nos. 16 22 22 24 25 25 27 28 33 34 34 37 39 42 42 43 49 51

This is a summary on a vast subject. Several issues are controversial and need considerable discussion. Short Forms: FI = Financial Institutions including banks. Fx = Foreign Exchange Next page: Preface

Page No.: Currency Wars. I. I. Preface

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 (January, 2011) 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. Let us see in details these issues in this paper. 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. In this article we have a look at the ways of abuse. We take illustrations from history so that abstract concepts become easier to understand. 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. What is Currency War? Common Definition. Some people have defined Currency War as competitive devaluation of ones 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. Governments 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 organisations and institutions to pressurise China.

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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. Another definition: I submit that a 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. We will see these details in the present paper. We will also consider the substance behind U.S. allegations. . I have discussed in the past What is a Concept! How a Concept is different from a definition! A discussion on Concept Vs. Definition is given in Annexures. Considering concepts is more serious than just considering definitions. When we consider a matrix of concepts, matters become even more complex. And when we take concepts from different disciplines, things become really difficult. I have attempted to simplify. In this paper, let us consider some concepts from history, human psychology, Government psychology and economics altogether. Considering all these, we try to analyse the past. Based on this analysis we try to understand the present. Based on our understanding, we try to project future. There are good chances that we make several errors and our projection may prove wrong. History repeats itself. And yet no one can predict future. This dichotomy makes life challenging and hence interesting. Hence we make a series of projections. Be prepared for adverse probabilities. Plan to make the future stronger.

Page No.: . Illustration 1: Exploitation by Europe of its colonies.

Pope Alexander VI in the 15th century told Spain & Portugal: Go and win the countries of the world. Who ever wins, keeps that country as her colony. These two countries became prosperous. Soon several others joined them. The Europeans took their ships and armies all over the world. They took over the control of several nations including India by several means. And then they justified the controls by saying: We the white people are supreme race. We are meant to rule over the rest of the world. (Search on the internet White Supremacy Theory. Compare it with the theory that Brahmins are superior to all other castes. Consider how this bogus theory has been perpetrated in India for many thousands of years.) Todays generation will find it ridiculous. But many Indians did believe that the white race is superior to the Indians. Many accepted the exploitation by the white race as normal. But many Indians did not accept White Supremacy or exploitation. They fought back. The 1857 independence war was a war against British Rule and against British Exploitation. Britishers were ready with Sham Dam Dand Bhed Fooling Bribing Fighting and Dividing. If the colonies simply accepted to be exploited, great. If they did not, then fight. Bribe the kings by several means and use their names to rule the Indians and exploit them. Gandhiji was one of the many Indian leaders who saw through this exploitation. He developed worlds unique method to fight back and drive out the shrewd Britishers. Gandhiji used Resistance without War (Satyagraha) to end the exploitation. Then the Britishers used Divide and Rule method to prolong their rule over India. Some other nations got their independence by an open revolt. When the era of colonisation was over, the Europeans and Americans found out new and sophisticated ways of exploitation Economic Exploitation. In economic exploitation, there is little resistance, your soldiers dont get killed and your prosperity is even better. . Colonial Exploitation Compared with Economic Exploitation: Now use the illustration of Colonisation to develop a few phrases and use them in the field of global economics. (i) As long as one person society or country exploits another without the other realising it, it is simply exploitation.

Page No.: (ii)

If the exploited realises and yet does not fight back, it is exploitation of the stupid. If the exploited person resists, it is Resistance. If the exploited person fights back it is War. Who wins or loses the war is a separate issue. In war, all sides are hurt irrespective of who wins. One nation exploits another and there is neither resistance, nor war. This is Equilibrium. In resistance or war, the Equilibrium is disturbed.

(iii) (iv)

(v)

(vi)

Conspiracy Theory Theory: Commit crime. Most likely, you will not be caught. If caught, deny all allegations and confuse the public by disinformation. There are enough gullible people to believe in your denial. Elaboration - Mr. P, a politician conspires to cause damage, or to gain fraudulent advantage from his position. He succeeds in his conspiracy/fraud. However, afterwards, he is exposed. Mr. P is so powerful that no one can punish him. But he needs to save his public image. What will he do? He will flatly reject all allegations. And then he will allege that his opponents have just cooked up the conspiracy theory to malign him. And he will start a disinformation campaign. People will never know the truth. They will be confused. Some will believe in P & some will believe in the opponents. The opponents allegations will be largely neutralised. And human psychology is such that they see no fault in the rich and powerful. While they see numerous faults in the weak. Human naivet crosses the limits when: The powerful abuses the weak. And public criticises the victim instead of the aggressor. This is commonly seen when a powerful politician or bureaucrat abuses a poor. Illustration: U.S. Government is exploiting others in some fields for many decades. People have made allegations against U.S. Government. U.S. Governments first response is:

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Just deny everything. Rely on the fact that very few will dare to criticise U.S.A. If some rare person still criticises; then do one or all of the following: (i) (ii) Make his Character Assassination. Broadcast to the world that the critic is just creating conspiracy theories to malign the noble U.S. Government. Spread massive disinformation.

(iii)

Those interested in further research may study the theories that CIA & KGB developed to spread disinformation, counter information and confuse the opponents & the world. U.S. Government is successful in brain washing its people into believing that the U.S. Government and military are not doing anything wrong in the world. And the public sees what it believes. They believe what is beneficial to them. . . Notes: Several Perceptions: History is very interesting. Same event will have infinite different perceptions. I have noted here one perception. You may have many different perceptions. All may be right. None complete. Here the focus is to explain the Currency Exploitation and its variations. So let us all focus on the exploitation; and proceed with this main issue. . Exploitation is Universal: Our exploitation by the white people should not be a surprise. Some Aryans have exploited non-Aryans for thousands of years. Some upper caste people have exploited lower caste people for thousands of years. Some men have exploited women for longer periods. Exploitation really acquires several ways and means and is almost universal. Main need is to understand exploitation. Remove exploitation. Where others are exploiting us, throw them out. Where we have exploited others, stop exploiting.

Page No.: .

Currency war is only one of the several tools available to the exploiter. Larger field is Economic Exploitation. If you want to see how India exploits its agriculturists, read articles by Mr. Sharad Joshi (Shetkari Sanghatana, Pune). I am giving a history of last few decades in one paper. Some of it is from pure memory. There can be errors. Dates & amounts may not be exact. The attempt is to show the chronology of events. Most of the amounts are rounded up. I. Preface Completed

Next: Currency war is a concept. To understand this concept we have to consider several other concepts. It is an interwoven multidimensional matrix. First concept to consider: How does one determine the foreign exchange rate!

Page No.: Matrix of Concepts: Pages to the end of the paper.

To understand currency wars we may have to understand a matrix of several concepts which will together build the final concept of Currency War & Economic exploitation. II.1 Exchange Rate Determination: What is the right and fair exchange rate for a currency is an issue on which several thesies have been written. At the same time every person who has studied economics at college level has studied two methods of determining exchange rate. Should the rate of rupee be ` 45 per dollar or ` 18 per dollar (as it was in the year 1991)! II.2 Demand & Supply method. If the demand for a currency is high, its exchange rate will be high. On the other hand if the supply of the currency is more than the demand for the currency, its rate will go down. For example, at present U.S. dollar to Indian rupee rate is ` 45 per dollar. Now if the U.S. Government increases the supply of the dollar by quantitative easing, normally the value of dollar should go down. Hence the new rate may be say, ` 40 per dollar or even ` 35 per dollar. The demand of a currency should normally depend upon the exports made by that country and the foreign investment into that country. Thus for example, if India imports more goods than it exports, then the demand for rupee should be lower. Hence the value of rupee should fall. If foreigners make more & more investments into India, they would send more foreign exchange into the country and hence value of foreign exchange will go down whereas the value of rupee will go up. Note: It should be understood that in real life economics individual theories do not have complete playground. In theory, in college one would explain an economic theory as if all other factors remained same (Ceteris paribus). In real life several factors work simultaneously. Some factors are at cross currents. And all markets are manipulated by interested parties. A simple illustration is the share market. A stock analyst may study the balance sheet and may work out a value of the share as the right value. However, when one goes into the share market, the price at which the share would be traded may be quite different from the fundamental value. In fact, it would be a rare event when the real market price would be nearer the intrinsic value of shares. In the same manner the real value of a currency may be widely different from its intrinsic value.

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While several forces are acting simultaneously, some are understandable, some are beyond the understanding of a commercial man. In philosophy ones intentions (Bhavna) have a great influence on the force of money and weapons. Hence final results will depend upon the thinking and intentions. Some aspects of this concept are known as Will Power Power of Positive Thinking. Impact of Negative Thinking and so on. Intentions are unknown and keep changing. They affect future. Hence prediction of future is not possible. We can only project probabilities. II.3 Purchasing Power Parity (PPP): When the real value of Indian rupee in India is compared with the real value of dollar in U.S.A., one can get the fundamental exchange rate of the currency. To find the real value of a currency in a country, a practical method is to find a representative basket of goods & services which are common in both countries. For example, if a basket of goods & services costs ` 50,000 in India and $ 5,000 in U.S.A., then the exchange rate for the two currencies should be ` 10 per dollar. A representative basket of goods & services may be considered as the normal consumption by a family over a period of one month. Consider a family of five persons living a middle class standard of living in India. One would say that the family can live with an income of ` 50 000 per month at a middle class standard of living. At the same time, a family of five persons living a similar standard of living in U.S.A. may need $ 5,000 per month. Hence under the PPP method the value should be ` 10 equal to a dollar. II.4 In reality, for determining correct exchange rate what is more important is the goods & services which are being traded in the international market. In other words, India exports iron ore, cotton yarn, handicrafts & software services. India imports machinery, chemicals & electronics. In all these considerations, the family consumption does not figure in. Hence the PPP rate does not really work in the international market. The PPP rate is a guideline and not final determining factor. And yet, IMF World Bank and important international institutions now prepare comparative statistics on PPP basis. According to these comparisons, dollar is overvalued four times its intrinsic value; or rupee is undervalued to one fourth its intrinsic value.

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University of Pennsylvania has prepared World GDP tables on PPP. A summary:

Country China USA India

GDP at Market Rate $ Trillions 5.7 14.6 1.4

GDP at PPP rate $ Trillions 14.8 14.6 4.4

II.5

There are allegations that multinational corporations in association with their governments try to suppress the prices of commodities. Hence they get the commodities at a cheap rate. They also try to sell their own products at high rates. This is a simple exercise of exploiting the countries having poor knowledge of economics by those people who are experts in economics. For last forty years U.S.A. has been having a trade deficit. In other words, the value of goods & services imported by U.S.A. are far greater than the value of goods & services exported by U.S.A. As a simple logic, the value of dollar should be depreciating. However, all over the world people invest in U.S.A. Hence there is a huge inward flow of foreign exchange into U.S.A. Hence the value of dollar has remained high. Some beliefs have been perpetrated by certain authorities. Especially the U.S. Government. U.S. Dollar is a safe haven. U.S. dollar is as valuable as gold but more convenient & efficient than gold. At some time (before 1972), these beliefs had substance. Over period, substance has gone down and today they are myths. But old beliefs die hard. These and similar myths have made people believe that it would be better to invest in U.S. dollar rather than their own currency. Hence there has remained a continuous flow of money into the U.S.A. We will see in this article, how these myths came into being and how today economists realise their true substance (or absence of substance). II. Exchange Rate determination issues completed Next: A summary of issues on US $.

II.6

Page No.: 10 III. III. U.S. $. Issues:

We will see how U.S. became Super Power No. 1 and how $ became a global currency. What advantages U.S. has enjoyed. How U.S. has tried to maintain $ as the global currency. Some of the wars & strategies that U.S. Government has executed to maintain $ hegemony. Whichever nation tried to move away from $ as international currency has been attacked. Today what is the position! Can U.S. maintain that hegemony? Are we in for a tectonic shift in the global economy? What can happen if $ collapses like the Russian Rouble? Will India benefit or suffer? We cannot predict future. But based on our analysis we can make a Case Scenario. We can make several different projections. And be prepared for the same. Also, expect the unexpected. Something may happen which we cannot even project today.

III.

Devaluation of Dollar. Following is a simple statement driving home a point. Real implications are too many and complex. In the year 2006 the price of gold was $ 400 per ounce. Today (January 2011) the price of gold is $ 1400 per ounce. This means that in four years time dollar has depreciated to 28% of its value in the year 2006. In other words there has been a devaluation of 72%. In the year 2006 the parity between Indian rupee and U.S. dollar was Rs. 45 equal to a dollar. Today also the parity is ` 45 equal to a dollar. Hence while we believe that in terms of dollar, rupee has not been devalued, in reality against gold rupee has depreciated by 72%. See the gold price chart. Why it remained steady for long period & why it has started steep climb up!

III.

List of Initial thoughts on U.S. $ completed.

Page No.: 11 IV. 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. IV. 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

Page No.: 12 Powers. In 1991 & 1992, U.S.S.R. was destroyed economically & disintegrated politically. That left U.S.A. as the Super Power No. 1. In the year 1934 U.S. Government declared that the value of U.S. dollar would be: One ounce of gold equal to . 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 promice. 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. IV. 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.

Page No.: 13 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. (This is a short summary. For details, see internet on Bretton Woods Agreements & their collapse.) All countries abandoned relationship with gold. They printed paper currency without strict restrictions. IV. 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

Page No.: 14 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.

IV.

Brief History of Money completed.

Next: How USSR was destroyed by using Economics See how history, economics, politics, psychology etc. are interwoven.

Page No.: 15 V. V. 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 2nd 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.

V.

V.

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

Page No.: 16 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. Observation so far: Both super powers were in a weapons race burning billions of dollars with no end of race in sight. V. 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. Please see map in the next paragraph. This is an old map of U.S.S.R. as it existed before 1991. We can see that U.S.S.R. was really a large country locked in from most sides.

Page No.: 17

V.

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.

Page No.: 18 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. V. 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. (The facts are not as simple as this sentence. There are several tribes & groups in Afghanistan. Each tribe wanted its own rule. There was severe infighting. The rest is a different history.) 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. (199192.) 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. V. 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.

Page No.: 19 V. 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. Thousands of soldiers were retrenched. They became mafia who knew nothing else than to run guns. Through all these events started massive depreciation of Rouble. From four Roubles to a dollar - to eight Roubles to a dollar, from eight to twenty and from twenty to hundred Roubles to a dollar. Nobody knew what was happening. Yet no one outside Russia was concerned because the world did not use Russian Rouble for international trade and western countries wanted Russia to fall. The exchange parity deteriorated so much that today it is almost 31,500 Roubles to one US dollar. Russia has simply deleted three zeros from its currency. So 1,000 erstwhile Roubles are now called one Rouble. Current parity is 31.5 Roubles to a dollar. No economic theory can explain this, be it purchasing power parity, chart, fundamentals, technicals - nothing could justify depreciation of four Roubles to a dollar to 31,500 Roubles to a dollar. Russian economy was totally in shambles. (I have written a separate paper explaining that Economy is dominated by sentiment. Sentiment and logic have no relationship. The paper is on my website.) Eight East European countries dominated by U.S.S.R. became free. Most dramatic was the fall of Berlin Wall. Fourteen other nations merged by U.S.S.R. into itself also became free. U.S.S.R. was divided into several countries. The major portion that remained separate is now known as Russia. V. Now consider this entire history again. U.S.A. used pure economic forces to destroy super power No.2. In the process U.S.A. did not suffer a single soldier. USA spent huge amount of money on helping Taliban and

Page No.: 20 Pakistan. However, this was financed by issuing $ notes which the world took away happily. See paragraph IV.3 above. Today U.S.S.R. does not exist. U.S.S.R. has been destroyed. You can call this as economic murder or currency murder. Whereas U.S.S.R. wanted to expand & access Indian Ocean by annexing Afghanistan, it got broken up & Russia got further away from Indian Ocean. See the next map. Such a great victory for USA!

Notes: It may be noted that the collapse of USSR was also a collapse of controlled economy. Main reason for collapse was internal chaos. USA planned & used the opportunity to destroy USSR & remove competition to its status as super power No. 1. . By now, this article could have disturbed some readers. Purpose of this article is to expose exploitation. It is no surprise that even today some people believe that they are superior to others because of Colour of Skin, Caste, Religion, Gender; or simply without any reason. And they are convinced that they have right to exploit others. Some exploiters dont even know that they are exploiting others. Let us call them Illusioned Exploiters.

Page No.: 21 Some persons may be exploiter in one aspect of life and exploited in another aspect. Ways of nature (Maya) are infinite. . Many times the exploiter turns exploited. Tables get turned. A man may be exploiting his wife. He may not even realise when the wife starts exploiting him. He may not realise the exploitation for the whole of his life. Same goes for societies & nations. If this article can reduce exploitation any where, the efforts will be worth while. Some authors write articles on pure economics. Here we are considering economics together with history, psychology and philosophy. Life is not lived in compartments. V. USSR Implosion completed.

See how USA played strategic game to defeat USSR by using Economic exploitation as well as by supporting the Taliban. Afghanistan became the instrument for making USSR insolvent. Now, with the same instrument, USA has become insolvent. The Afghan war expenditure is bleeding US budget. US rule does not prevail even in Kabul.

Next: How a cartel created South East Asian Crisis. Bankers made a killing in Fx derivatives. G4 achieved their political objectives. IMF & UN helped.

Page No.: 22 VI. South East Asian Crisis VI. Countries mainly affected by the South East Asian (SEA) Crisis: Indonesia, Malaysia, Thailand, South Korea and Philippines.

In nature, several streams of events simultaneously develop. Eventually, the combined result of these streams is some thing too radical to guess. Let us see some such streams of events. VI. Yen Carry Trade. 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.

Page No.: 23 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

Page No.: 24 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. (See internet on a Cartel of Bankers speculating on international currencies.) VI. President Suharto. This is another stream of developments. 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 Sukarnos 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.

Page No.: 25

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. VI. 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. VI. 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.

Page No.: 26 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. I read this speech on IMF website during those years. After some time I wanted to copy and save the speech and hence went to IMF website. This speech was removed. VI.6 Notes: The 1997 crisis was known as South East Asian or SEA Crisis. Initially this crisis affected South Korea, Thailand, Indonesia, Philippines and Malaysia. All these five countries were economically ruined. Essentially they were attacked by G Governments through the cartel of financial institutions which speculate in foreign exchange. Having succeeded in making huge gains by selling short the currencies of these five countries, the cartel then attacked Mexico, Argentina & Russia. These attacks were again successful and the currencies of these countries depreciated drastically. Then there were attacks on China & India. However, because of substantial foreign exchange regulations in these two countries, the speculators did not succeed. They did not dare attack U.S. currency.

Page No.: 27 One can say that many countries around the world were attacked. Still the name of the crisis remained South East Asian Crisis. Current crisis started in September, 2008 with U.S. banks & financial institutions. It quickly spread into Europe. Rest of the world is affected to a much lower extent. In fact some countries are prospering irrespective of this crisis. Correct name of the crisis of the years 2008 to 2010 should be American Financial Crisis or Western Financial Crisis In this article we will refer to the current crisis as the American Crisis.

VI. South East Asian Crisis completed.

US Government used its clout with the financial institutions to make SEA nations insolvent. It then used U.N. & other friendly nations to dethrone President Suharto & liberate East Timor. Achieving political goals through economics. U.S. also sent a message to the world that who ever tries to avoid $ as the International currency, will meet the fate of the SEA nations. Some Proverbs: African Proverb: When Elephants fight, grass gets crushed and trees get hurt. Greek Proverb: When a demon becomes so huge that no one can defeat him; God plants seeds of destruction within the demon himself. Indian Beliefs. Law of Karma What ever you cause to others will come back to you. History repeats itself. And yet no one can project future.

Next: Third world as the lender of money & supplier of goods to USA.

Page No.: 28 VII. VII. China and India as Suppliers & Financiers to USA.

U.S.A. has developed a strategy to supply imported goods to its residents at low price. As a strategy, U.S. decided to stick to export of services, weapons & high value technology products. It was a deliberate policy to shift commodities production to the third world. This would reduce the cost of production. Since third world had low over heads, low cost of labour, nil or negligible pollution control laws, & insignificant damages liabilities, their cost of production was lower than the cost of production in U.S.A. U.S. MNCs set up subsidiaries in the third world. Outsourced production & reserved marketing rights within U.S.A. to themselves. The trend was so set up that the marketing & distribution margins were far more than the production margins. Then they claimed that there was great technology innovation in U.S.A. & hence they were making good profits. Even Economist Magazine published articles claiming that U.S. economy has great Factor Productivity Growth, it will have permanent growth & there will be no recession in U.S.A. McKinsey & Company published a report in the year 2001 & world media carried the reports that U.S.A. had achieved permanent increase in the rate of growth in productivity. Hence U.S. companies will make super profits. Will continue to make super profits. They were not interested in commodities production. It was for the third world to produce at low cost & supply to U.S.A. See the report on this web link. http://www.mckinsey.com/mgi/reports/pdfs/productivity/usprod.pdf Several well known economists have written articles on this subject. In my submission, innovation was not the chief contributor. Real contribution was by: (i) Exploitation of the third world through the currency manipulation. (ii) Forcing low prices on commodity suppliers & pushing high prices on U.S. products & services. All lobbies worked with the active collaboration of the U.S.A. Government. After all, the business of U.S. is Business. Consider an illustration. Indian ready made garment manufacturers were supplying garments at a cost of $ 4 to $ 5 to the U.S. chain stores. They in turn sold within U.S.A. at $ 20. It was evident that Indian manufacturer (as well as the farmer growing cotton) would earn a small margin & the U.S. distribution system would earn super profits.

VII.

VII.

This was not enough. They still wanted lower costs. Hence U.S. experts together with IMF & World Bank experts advised commodity supplier countries to depreciate their currencies. Benefit for the third

Page No.: 29 world were supposed to be: within the country all suppliers of goods & services including labour still get their prices. And yet outside the country, they could achieve competitive strength. VII. Even Indian Government went on a long cycle of devaluation of rupee. Remember, in the year 1981, rupee rate was: $ 1 = ` 8. Now it is ` 45. Indian Government & RBI understanding was: with every depreciation of Rupee: (i) Imports become costly. Exports become cheap. Hence Indian trade balance improves. Fx reserve position improves. (ii) Customs duty which gave more than direct tax revenue, would increase. (iii) There will be more employment in India. Little did Indian Government & RBI realise that (i) Continuous depreciation of rupee was increasing cost of production in India. Imported products & especially crude oil increased cost of production. (ii) With high cost of imported machinery, Indian factories were becoming less competitive. (iii) It was a strong incentive for Indian rich to transfer their wealth to Swiss & other foreign accounts. (iv) It was a strong disincentive for any one to invest in India. And when all commodity suppliers devalued their currencies, only countries that benefited were the developed importers of commodity goods. Especially U.S.A. (This paragraph VII.4 is a small summary. It deserves entire paper.) Who is more guilty of this misleading depreciation of rupee! U.S. or Indian Government! To be ignorant is a crime in this world. Punishment of the crime is that you will be exploited. What were all the Indian experts doing! Were they only repeating what the U.S. experts told them! Ultimately, India became near insolvent in the year 1991. With massive liberalisation of the economy, entire picture has changed. That is a separate interesting story. VII. Loan to US: When a person holds any currency note, in effect, he has given loan to the Government issuing that Currency. If you hold ` 100 with you, you have given a loan of ` 100 to the Indian Government. The paper note has no intrinsic value. It is just a piece of paper. It is true that when you give that note to the shop keeper, he will give goods worth ` 100 to you. Today, we all need money to transact our business. And in India, rupee is the legal tender. Fact remains that when the Government issues paper

Page No.: 30 currency it is getting value for nothing. Any one who takes money, is giving a loan to Government. When an Indian black money holder holds $ in Swiss bank, he has given loan to the US Government. He could hold gold or any other real asset. But he chose to hold an IOU by the US Government. When the RBI holds say, $ 200 billion in Fx reserve, RBI has given loan to the US Government. In reality, central banks hold a combination of treasury bonds & currency account. Bonds are of course plain simple loans. But we do not consider them as loan given to USA. We consider it as our reserve. What is the value of that reserve! In the year 1991 Indian Fx reserve was less than $ 5 billions. Since then, the Fx reserves have increased to approximately $ 300 billions. Out of this amount, let us say, the dollar component is worth $ 200 billions. (Actual mix of reserve is a secret maintained by RBI.) Thus in last 20 years, India has lent approximately $ 195 billions to the US Government. China has lent, say, $ 1.5 to $ 2 trillions to US Government. (Total Chinese reserves are more than $ 2.6 trillions.) Japan has lent say, $ 700 billions to the US Government. (Total Japanese reserves are more than $ 1 trillion.) Whole world together has lent $ 14 trillions to the US Government. Almost no one realises that he/she has given loan to the Government. But that is the underlying fact. VII. Forced Loan to US: China, Japan & India have decided that they will not allow their currencies to appreciate against US dollar. Any appreciation of their currency & their exports will be hurt. Now US either deliberately or helplessly depreciates $. These three nations have no option but to buy dollars & sell their own currencies in the market. In this way, they will make a competitive depreciation of their own currencies. But qua the $, their currencies will maintain value. If you want to maintain the value of your currency against $, you have to keep buying $ continuously. By quantitative easing of $ 600 billions, US Government has/will depreciate $. In a competitive effort, all three nations will buy $ and will not allow their currencies to rise. Whether they like it or not, they have to keep lending to US.

Page No.: 31

This is the Currency War. In this war US fires at every body & the victims still support US. The day we stop trusting dollar, our exploitation will stop. China, Germany, Brazil & several countries are trying to find a way out. So far, there is little success. So far. VII. We are familiar with the India story. Similar was the case with China. It was encouraged & praised as a miracle economy when it supplied toys & shoes at low cost to U.S.A. China developed special economic zones simply to export goods. Chinese outside the SEZs remained poor. They were starved & are being starved (comparatively) so that Chinese SEZs could export goods at low cost to U.S.A. China developed huge export surpluses. Where do you invest the surplus! In U.S. currency & treasury bonds only! See the story in perspective. China would supply goods to U.S.A. U.S. Government will simply issue IOUs to China. All treasury bonds & even currency notes are simply IOUs. Their value is equal to the capacity & intentions of the issuer. China was lending to USA & supplying goods to USA by keeping her own people poor. US residents enjoyed wasteful consumption at a low cost. VII. With this policy, U.S.A. was very happy that Chinese & Japanese currencies had low values. When the Japanese auto & electronics industries grew so well that their competition started hurting U.S. production & ego, they forced Japan to revalue Japanese yen year 1986. China is far behind Japan in terms of technology input in exports. Hence U.S.A. never asked China to revalue its currency. Until the 21st Century.. when U.S. economy had started facing difficulties & unemployment started soaring. It is unwritten law that all countries around the world should so arrange their currencies & economies that U.S.A. should benefit. China became the first country to oppose U.S. instructions. Hence the beginning of current Currency War. Now who is causing the currency war: China or U.S.A.! When you keep issuing IOUs & no one ever asks for repayment, in essence you are not paying any one any thing. U.S.A. owes to the world 14 trillion dollars and U.S. is incapable of repaying the loans. It has got a continuous trade deficit for many decades. Supposing the world becomes wiser & asks for repayment. What will U.S. do! Well it will refuse to pay. That is what it did in 1972. The Nixon Shock has showed us what lies in future.

VII. VII.

Page No.: 32 Conclusion: U.S.A. has developed a strategy: (i) to supply imported goods to its residents at low price. (ii) To get a high price for its own services & products.(iii) To transfer the global resources to U.S. & to enjoy the same at the cost of rest of the world. (iv) If any thing goes wrong, blame the world. Further notes: Exporters of India are giving out Indian resources at low or Nil cost to U.S.A. while half the Indian population is poor. And the export lobby claims that they are the saviours of Indian economy & they deserve incentive in the form of continuous depreciation of Rupee. And even RBI buys the argument! Similarly, Japan has supplied goods & services to USA. Keeping large masses of Japanese population at lower middle class so that the U.S. residents enjoy luxuries of life at little cost. This is another long story. Interested readers may search on internet. If you want news which are not biased by western interests, find Japanese authors in Japan who write in English. History keeps repeating itself with all the countries. During last 500 years, the Chinese did not allow any European nation to rule them. They are not allowing the white to exploit them even now. It may be interesting to note that the Britishers minted money by buying opium from Afghanistan & India and selling it to China. British authorities were smugglers and drug peddlers. Chinese prevented the British traders from selling opium in China. This caused the famous Opium Wars in the years 1839 to 1842. It is an interesting reading to see how the Britishers & the Chinese report different versions of the same wars in their own history. VII. China and India as Suppliers & financiers to USA. Completed. This is a long story told in pages. On internet you may find books or essays written on each paragraph. Next: See how US has reaped enormous benefits by making $ as International trading currency.

Page No.: 33 VIII. Benefits to USA of $ being the global currency: In paragraph IV.3, Currency Explosion, on pages 13 & 14, we have seen the benefit that U.S. has enjoyed for having $ as global currency. Now let us consider an illustration. Let us assume that U.S. owes $ 2 trillions to China. Current (January 2011) rate is 7 Yuans equal to $ 1. (7 Yuans = $ 1). Now US is pushing China to revalue Yuan. Assume that Yuan is revalued so that new rate is 6 Yuans = $ 1. As far as US Government & Central Bank (Federal Reserve) are concerned, they have made no loss or profit. Their borrowing is expressed in their own currency. It remains same. As far as Chinese Government & Chinese Central Bank are concerned, they have lost 2 trillions Yuans. Earlier their balance sheet showed Fx reserve of (2 x 7) 14 trillions Yuans. Now with revalued Yuan, they will have Fx reserve of 12 trillion Yuans. Logic: This is one of the several reasons why China is resisting revaluation of Yuan & U.S. is pushing. US keeps pushing currencies around the world to adjust their values such that US benefits. Since all transactions are mentioned in $, generally, US is not affected by rate fluctuations. Other countries may lose or gain. Generally, lose. The benefit of your currency being accepted outside your country is that you keep issuing IOUs & the world believes that it has received its payment. You never have to repay. If one individual asks for repayment, there are ten more to accept your IOUs. In effect, the world is gifting you trillions of dollars. So you enjoy the luxuries of life. Why save! The world is saving for your benefit. There are more benefits. Let us keep them for some future discussion. VIII Benefits of $ being Global Currency completed. Next: How US maintains its hegemony over world trade!

Page No.: 34 IX. How U.S. tries to maintain $ Hegemony!

There are several ways that U.S. employs to ensure that the $ remains global currency. U.S. will not give up the tremendous advantages that it has got used to. We will see some of these ways in brief. When some one considers value of rupee, he would say 45 rupees are equal to $1. However, if he wants to value $, how would he state the value? $ is valued in terms of gold. If gold price rises, it means $ value has depreciated. It is in the interest of U.S. Government that gold price remains steady or goes down. U.S. would want people to invest in $ rather than in gold. How do you control the value of gold? IX. Gold Carry Trade U.S. Government and a small, select cartel of FIs played this game. It is explained in some hypothetical steps. U.S. Government would lease gold to Union Bank of Switzerland (UBS), Goldman Sachs, Lehman Brothers, Citibank, etc. Let us say, 100 tonnes of gold is leased. Gold may or may not move out physically. In these days of digitalisation, who wants the real thing! Virtual is better than the real. The custodian will issue receipts to the FIIs that it is holding gold on behalf of the FIIs. Receipts will be in smaller quantities. Some people do insist on physical delivery. Women would rather wear jewellery than hold digital receipt of gold. One Asset in hand is better than two digital assets. Where required, gold will be delivered. FIs will pay a small lease rent to the Government. FIs will sell gold in the spot market. They will get cash which will be used in the banking business to earn income. Net of lease rent, FIs will earn profits. FIs will buy gold in futures. As far as FIs are concerned, they have sold gold and bought gold. Hence technically, the gold taken on lease is still with them. It is possible that for all the transactions lease sale on spot buy in futures only custodians receipts have changed hands. It is also possible that some gold is actually delivered in the market. In fact it is planned to continue deliveries in the market so that gold prices

Page No.: 35 continuously go on reducing or at least remain stable. In last ten years, several Central Banks around the world and U.S. Government have sold hundreds of tonnes of gold. And gold prices remained range bound for almost twenty five years after the Nixon shock was over. (Barring a few disturbances for specific reasons.) This way they make no losses on sale and buy operations. The cartel was happy & confident in Gold Carry Trade. Bankers who made profits out of air, were taking huge bonuses and congratulating them selves for being so intelligent. U.S. Government was happy that $ to gold price was stable. This process could continue with some disturbances till the year 2006. Banks could legally say that they have fulfilled all banking reserve ratios and the balance sheet is great. They are earning profits and every thing is rosy. U.S. Government can legally claim that it is still owning 8000 MTs of gold. A part of this gold may have physically moved out, got converted into jewellery or may be lying in some ones lockers as his/ her investment. Even if some gold is lying in Fort Knox as custodian, it has been sold out virtually by the banks. After the dot com bust and Enron plus Arthur Andersen collapses in 2001, world had started losing confidence in U.S. By 2006 the trend became intense. More and more people were buying gold instead of hoarding $. By 2008 gold buying rush became gold buying avalanche. Today, prices have risen from $ 400 per ounce to $ 1400 per ounce. All the banks which had conducted Gold Carry Trade had to stop selling gold and start buying gold. But if all the banks need to buy say, 2000 tonnes of gold, it is simply not available in the market. (This explains steep rise in gold prices between 2006 & 2010.) All these banks could have incurred huge losses. American Government does not make losses as long as banks are able to keep their promice. However, many banks have gone insolvent. U.S. Government has bailed out the banks. Consider how much leased gold is recovered and how much not recovered. This will remain a top secret until some one leaks out the facts. Conclusion: The Gold Carry Trade cartel has failed. So have the banks. Bail Out doles kept some banks running & some went insolvent. And no one has blamed the Gold Carry Trade. US Government keeps bailing out others. Who will bail out US Government!

Page No.: 36 IX. If Any one refuses to accept $ as currency, attack & destroy. The South East Asian crisis was created because of several reasons. One was: they dared to move to Yen instead of $ as global currency. Whole world knows that: (i) Saddam Hussein of Iraq was not involved in the World Trade Centre attack. (ii) There were no weapons of mass destruction in Iraq. Iraq was attacked only because Saddam dared to sell oil in Euros. Saddam was humiliated & killed. Iran became dominant in Asia. When a compliant Shah was the ruler, U.S. armed Iran. However Ayatollah Khomeini took over the control of Iran & disturbed U.S. plans. Iran was attacked by Iraq in the year 1980. It is rumoured that Iraq (Saddam Hussein) was instigated by U.S. to attack Iran. U.S., U.S.S.R. & Spain supplied weapons to both sides - Iraq & Iran. They made money. Iraq & Iran were seriously damaged. U.S.S.R. was destroyed because it was competing with U.S.A. Euro was attacked. And even now, at every opportunity, American experts would denounce Euro. But Euro has survived US attacks. With Euro, a large market for US $ has vanished. IX. China: I feel US may have developed a strategy to break and destroy Chinese economy. U.S. cannot tolerate any one challenging its Super Power Status. It may take them 20 years or 30 years or 2 years to achieve their goal. And the strategy may have started before ten years. After China is finished some people may realise the strategy. Most will never realise. One Possibility: US owes approximately $ 2 trillions to China. One day, US can declare that it will not honour its debt. There will be a global crisis. China will lose $ 2 trillions. US $ will be devalued. Who will win and who will lose? In 1972 Nixon told France that it will not honour commitment at $ 35 per ounce of gold. In the year 1979 Ayatollah Khomeini became the ruler of Iran. USA seized all Iranian assets in USA and refused to honour its debt to Iran. It can do the same to China.

Page No.: 37 IX. List of U.S. Strategies This is a summarised list of a few of the U.S. strategies. Some are already discussed at length in this paper. . Promising full convertibility into gold, becoming a prominent currency and then breaking the promice. Nixon Shock. Series of wars to maintain dollar hegemony. While U.S. Government is against Diamond Trading Corporation (DTC), global diamond trade is in dollar. Crude oil and gold are traded in $ - though U.S.A. exports neither. Series of strategies to maintain high value of dollar like Gold Carry Trade. Asking other countries to devalue or revalue their currencies. Japanese Yen fluctuations. Indian Rupee devaluations & depreciations. Suppressing the prices of commodities supplied by others. Crude oil price strategy. Chinese commodity supplies at low prices. Maintaining double standards. KYOTO agreement. Nuclear NPT, WTO. Attacking Swiss and other tax havens. Permitting Delaware as tax haven within U.S.A. Subverting international institutions to own advantage: U.N., IMF, World Bank. Attempting to subvert even OECD and other regional international bodies. Siphoning off whole worlds savings & consuming the same: Euro dollar, Petro dollar, Japanese & Chinese dollar. Scuttling the IMF SDR & replacing it by U.S. $ as the international currency. Pentagon. Continuously having some war some where in nonwhite countries. Outside North America & Europe. Selling weapons to both sides of warring nations. Lobbies in U.S.A. Pentagon, Insurance, Pharmaceutical industry, Banking & Financial Institutions. Permitting all these lobbies to grow in wealth & power at the cost of the consumer. Then subsidising consumer by exchange rate policy & $ hegemony. Installing dictatorial Governments that suit U.S. policies Pakistan, Panama, Peru, Iraq, Afghanistan, Nicaragua & so on.

Page No.: 38 Conclusion: U.S. has adopted several means to maintain $ hegemony. These have become apparent. World is losing confidence in U.S. That is the beginning of end for U.S. hegemony. Paragraph 4 covers a broader issue: How U.S. maintains its status as Super Power No. 1. Awareness & acceptance of the root cause of the problem is the first step towards solution. IX. How U.S. tries to maintain Hegemony. Completed.

Next: It has become practically impossible for any one to trade internationally in any other currency.

Page No.: 39 X. Practical Compulsion to adopt $ as a Global Currency:

Once $ became global currency it became a necessity to trade in $. Small entities just cannot survive if they do international trade in any other currency. U.S. does not even have to lift a finger to cause losses to small entities. X. Illustration: Shipping Corporation of India (SCI) has to quote its freight in U.S.$. Even if it lifts cargo from Mumbai to supply to Africa, the freight will be quoted in $. Actual payment may be made in rupee but converted into rupee at the rate prevailing on the day of payment. SCI tried to quote freight rate in different currencies. For example, for freight from U.K. to Finland in Euro, for Asian trade, in rupee etc. In six months time SCI had to return to U.S. $. Why? Almost All the shipping costs are quoted in $. Crude oil is traded in $. Expatriates salaries are quoted in $. Several port services are quoted in $. Together, more than 70% of its costs are quoted in $. Even ship purchase cost would be in terms of $ - even if it is built by South Korea. ECB (loan) on ship would be in $. Now consider an illustration (all figures are assumed.) SCI quoted freight in rupees say ` 45,000. SCIs Profit & loss account - currency wise Break-up is as under: $ 1000 700 200 100 ` 45 000 31 500 9 000 4 500

Revenue Cost in $ Cost in INR Profit in INR

100% 70% 20% 10%

Its costs are 90% or say, `. 40,500. On the date the freight is quoted, the $ - Rupee rate was say, ` 45 equal to a $. Now its revenue is fixed in terms of rupee. It will get only ` 45,000 irrespective of the conversion rate when SCI pays its costs. Supposing, at the time of payment of costs, the rate changes into Rs. 50 equal to a $. The costs are fixed in $. So SCI will have a cost as under: ($ 700 x 50 = ` 35 000 ` 9 000) ` 44,000. Large part of its profit is wiped out.

Page No.: 40 Consider, the rate had changed into say ` 40 SCIs profit would jump to ` 9 000. SCI Profit & Loss A/c @` Revenue 45,000 Cost Profit 9,000 + 35,000 (700 x 50) = 44,000 1 000 @` 45 000 9 000 9 000 28 000 34 000 1 $.

In other words, the variation is in $ cost. $ 700 x ` 5 ` 3,500. With INR going down to ` 50 SCIs profit is reduced by Rs. 3 500 & with INR going up to ` 40 SCIs profit is increased by ` 3 500. Such a huge fluctuation in profits just because of exchange rate fluctuation is something beyond the control of SCI. In reality, SCI had to revert to quoting the freight in terms of $. It can manage shipping business, not exchange rate fluctuations. The issue is, if SCI had quoted freight also in $ then its picture would be as under: $ Revenue Cost in $ Cost in INR Profit in INR 1000 700 ` 50 000 35 000 9 000 6 000

With depreciation in Indian rupee SCIs profit would still be protected. Indian companies experience in the year 2009 has proved that $ keeps moving unexpectedly. Hence even forward booking of $ can be disastrous. Companies have incurred huge losses in hedging. X. Some implications of $ being global currency Gold is traded in $. Let us say, an Indian importer imports gold in different ways: (i) (ii) Directly from South African Mines; From Traders in London or Dubai.

Page No.: 41

At all places gold will be quoted in $ though USA does not supply gold. Even South African mines will quote gold in $ and not in Rand. Hence whenever Rupee - $ parity changes gold price in India changes though whole of the gold comes from Non-U.S. sources. Fluctuation in Rand does not affect us. When $ gold price went up from $ 400 per ounce to $ 1400 per ounce, it was actually a massive devaluation of $. If South African mines were quoting gold in Rand, Indian gold prices would have remained ` 9,000 per 10 gm. & not shot up to 20,000 per 10 gm. (One American Ounce = 31.1 Grammes.)

X. Compulsion to adopt $ as a Global Currency completed.

Next: While US is trying desperately to maintain its hegemony, is it likely to succeed for long!

Page No.: 42 XI XI. XI. XI. Some signs of the trend for U.S. Economy.

Its crude oil price strategy is slipping out of its hands. Gold price strategy has already slipped out of the Cartels hands. Articulately developed myths have started breaking down: (i) U.S. is invincible. World Trade Centre Attack and U.S. failure to catch Bin Laden. (ii) Americans are honest. Enron, Arthur Andersen & scores of other scandals in U.S. (iii) U.S. Economy is strong. Dot com bust, (iv) American Financial Crisis of 2008 to 2010. This is a subject by itself. It is not covered in this paper. In brief, whole crisis was caused because of the Bankers greed. American financial crisis also pulled down all those who had invested in U.S. economy, or simply in $ lying any where in the world. People dependent on exports to U.S. are also affected. In near future, they may be in for a rude shock.

XI.4

SEA countries, Iraq, Iran, Venezuela and China all have tried to do international trade in currencies other than $. There will be more attempts. Creation of Euro has eroded demand for $. Saudi Arabia, China and some other Governments have started buying gold and selling $. Despite all these facts, one may observe that the common man still thinks: U. S. is a great economy. Sage Tulsidas had said: Samarth Ko Nahi Dos Gosain. (Ordinary people do not find faults with the wealthy & the powerful.) Our sages were great experts in human & society psychology. (Individual thinking & collective thinking.) Many people in & outside U.S. believe that U.S. is a dynamic country. It has always come out a winner from any crisis. It will again come out a winner after the current Currency Wars. Let us watch how events develop. XI. Observations on economic trends completed. Next: If & when US economy collapses, $ loses its hegemony, what will happen!

XI.5 XI.6

Page No.: 43 XII. Probable Consequences of Currency Wars.

When USSR collapsed, not many were bothered. World trade was not affected. However, when US (the largest buyer in the world) collapses, what can happen! Let us see a few probabilities. XII. One Possible Scene: US economic demise. World is losing confidence in US. Arabians may stop investing in $ & instead invest elsewhere. They stop selling crude oil in $ and accept all other major currencies of the world. Russia, India and China trade in ACU or Yuan. All countries ask for cash payments in currencies other than $. Then US will have to live within its means. American will have to give up luxuries of life and live as rest of the world lives. This will mean a drop in U.S. GDP recession. $ will devalue to say, Rs. 10 equal to a $. All goods imported into U.S. will be 4 times costlier. Hence there will be huge inflation in USA. Recession coupled with inflation means stagflation. XII. U.S. & China War US and China may have an open traditional war. It will be real third world war. It will also be a disaster for almost the whole world. Both USA and China are powerful and stubborn. One is declining super power and the other is rising super power. Like Jungle animals, they may decide who is right by fighting. Lehman Brothers and AIG believed: We are too big to fail. They failed. World believes that a war between two nuclear powers is unthinkable because of its harsh consequences. We hope, the unthinkable does not materialise. XII. U.S. learns to live within its means. US people and Government learn to live within their means. They generate trade surplus and start paying off loans to the world. World maintains patience till US repays the loans.

Page No.: 44 US stops fighting Afghan and Iraq wars, evacuates its entire military and machinery from the two countries. US reduces its military presence all over the world and accepts to be one of the first five countries rather than Super Power No. 1. Only in such a situation (by reducing its war expenditure) can US hope to reduce its budgetary deficits. Do we see signs of a wiser, tamer USA stopping its lordship over other countries! When Obama came to power, world was hopeful of a wiser U.S. Government. Obama promised the electorate to close Iraq & Afghan wars. That was in 2008. In 2010 Obama has increased war machinery in Afghanistan. XII. Material Wealth Vs. Spirituality: In the 20th century after 1960s (it took 20 years to recover from world wars) and in the 21st century we have seen tremendous growth in trade, science, technology and new instruments like computers, internet, wireless communications and so on. All these have made us richer in terms of wealth and military power. The spiritual evolution has not kept pace. There has been some growth but no way as much as the growth in wealth and power. Wealth without wisdom is dangerous. Power without wisdom is dangerous. Wealth and Power together without spiritual evolution are disastrous. U.S. Government has proved in last 75 years that it has no wisdom. It is a rogue Government attacking and killing people all over the world. Sometimes purely for ego Hiroshima and Nagasaki. Sometimes to spread capitalism and prevent socialism. Mainly to maintain its Super Power Status. It supported Pakistan against India and equipped Pakistan to keep fighting with India. Most of the times it has fought wars to keep growing its trade and continue exploitation of natural resources of other nations. Now its power is waning.

Page No.: 45 It knows, it is living a luxurious life on borrowed money. But it cannot give up luxuries of life. At the same time China has emerged as a powerful nation. China is biggest lender to USA. Both are powerful nations. US has tried to sub-due and exploit China. Failed in Subduing China. Succeeded in exploiting China. But now China may not permit further exploitation (To the extent it understands exploitation.) Both US and Chinese Governments are insolvent in spirituality. (Generally all Governments are insolvent in spirituality. But at least some of them are cautious.) These two Governments are they wise enough to avoid an open war? We will know in ten years. Is Indian Government wise enough to stay away from two elephants fighting? XII. Psychological Reactions: Consider psychology. A rich man or a man in authority is accustomed to Power. When he starts losing power, he has fear of losing further power. Fear makes him angry. Anger makes him attack the cause of fear where he is losing power. When a rich man becomes poor, he gets into depression. He may even commit suicide. When a Government bureaucrat retires, he loses power. If he has not trained himself to a life without power, he may get into depression. Human individual psychology applies to Governments and nations also. Attacks by US are due to their fear of losing power and losing $ hegemony. XII. What will happen when U.S. $ collapses? All those people who own $ assets will lose their assets. India may hold $ 150 billions as Fx reserves. This will evaporate. India will suffer a loss of upto $ 150 billions. China will suffer a loss of upto $ 2 trillions.

Page No.: 46

Whole world together will suffer a loss of $ 14 trillions. U.S present generation has over spent money by $ 50 trillions. (This includes internal & external debt & unaccounted provision for social security & medical benefits.) It owes this to future generations. The future generations will lose $ 50 trillions. In other words, US future generations will start with a huge negative balance. They will have to work much harder just to survive because their present generation is living beyond its means. Countries like Japan, China etc. which live on exports to US will see recessions. China has already started taking steps to prevent this situation. It is developing domestic demand and trying to reduce its reliance an exports to US. China is also focussing on other world markets for its exports. Companies like Indian software exporters are unique. They have grown even in the dot com bust of 2000 and the American Financial crisis of 2008 to 2010. However, if $ / American economy actually collapses, can they grow! Probably they may find US markets being reduced drastically. Their share prices may crash. When the shareholders suffer losses, Mumbai property markets can slide down. Within USA unemployment can rise to 20% or more. There can be food riots. Unemployed Americans will attack foreigners and especially the coloured people. NRIs and NR Chinese will return to their home land only to find that the skills in which they specialise are no longer required. Or they can get only one-fifth of the salaries they were enjoying in US before 2006. Their savings left in USA might evaporate. XII. $ Slide to Crash. We have seen in the paragraph V on USSR implosion that the rouble crashed from 4 to 31,500 roubles per $. There was no reason for it to crash below 8 roubles per $. Value of a currency is a matter of confidence in a Government. Confidence is human sentiment. Sentiment is not reasonable. When people lose faith in $, it may not stop at ` 10 per $. It can crash to $100 per rupee. One can argue that USSR had no economists, no think tank on exchange rate parity. They did not save rouble from the crash. But USA

Page No.: 47 has great wizards in economics & a fantastic Think Tank. It will save $ from a disaster. Well, recent past has shown that US has made several blunders. The think tank could not avoid the dot com bust or the American crisis of 2008-2010. Only time will tell whether US $ crashes or survives. XII. Commodity Suppliers will benefit. At present, suppliers to US are supplying the goods at low prices, by sacrificing the needs of their domestic population. When one third of Indian have insufficient clothes to wear, we are exporting ready made garments & cotton yarn. When US economy collapses, this cotton will be available for our own people. Similarly, a lot of goods which are being exported will remain within India. There will be a reduction in prices. U.S. will have to stop its excessive & wasteful consumption. The resources saved will be available for the rest of the world. Let us say, $ is reduced to ` 10. Crude oil is quoted in $. Assuming it continues to be quoted in $, the cost of crude oil will go down by 75%. Imagine petrol being available for ` 15 per litre. Entire cost of transport can go down. This can reduce cost of production in India. There can be a further reduction in prices. We can achieve GDP growth with a fall in prices. Indians who have stored their black money abroad & especially in $, will have to remit the funds into India. We will have more capital available for our own capital programmes. Caution: (i) Nothing will work on its own. India will have to work hard & strategically to gain its rightful benefits. If it does not work, some one else will take away the benefits. (ii) These are thoughts on probabilities. Noone may consider these as prediction of what will happen. XII. Mafia: Now U.S. strengths have turned into a problem. An albatross around its neck. U.S. trade deficit is $ 600 Bn. per year. U.S. budget deficit is $ 700 Bn. per year.

Page No.: 48 Every day it needs to borrow $ 2 billion. If U.S. does not get more foreign money every day, its financial wheels will stop. U.S. Government will not be able to pay salaries to its staff and to its military. If China and Japan stop subscribing to U.S. Treasury bonds for one month, U.S. wheels will stop. Alternatively, U.S. has to continue printing notes and issuing within U.S.A. This will cause inflation. Americans are not used to severe inflation for many years. U.S. will not be able to maintain its nuclear installations at hundreds of places in different countries and in different sub marines around the world. U.S. army, air force and navy will have to be called back from the whole world. Remember: When USSR Government called back its military from Afghanistan and Eastern Europe, USSR Government was insolvent. Government retrenched the personnel called back from front. These people only knew using guns. They had no other skill. So they formed mafia gangs total number going upto 4000. In Russia, no businessman is safe without protection from some mafia. When U.S. Government will call back its Marines from the world and release them on innocent U.S. residents there will be more mafia gangs. Guantanamo Bay and several other incidents around the world have proved that these gangs will be more cruel than Russian gangs. And U.S. may have many mafia gangs already working in U.S. Will U.S. be safe haven for anyone! Even proper American natives may start thinking of migrating elsewhere. It is said: What you cause to others comes back to you. Timing and form is uncertain. But coming back is certain. XII.10 Inflation: Current inflation in India and governments helplessness in controlling inflation is a direct result of Currency Wars. It is discussed in Annexure 2. XII. Consequences of Currency Wars completed. We have seen several probabilities which may result if the Currency wars escalate. Let us hope that US becomes wiser, less aggressive & lives within its means. Next: Is it possible to remove $ hegemony & stop the exploitation of the rest of the world! What are the alternatives!

Page No.: 49 XIII. Probable Solutions: XIII. 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. XIII. 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.

Page No.: 50 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.

XIII. Probable solutions to do away with $ hegemony completed. Next: Main paper is completed here. There are some relevant issues. In the next paragraph we discuss some economics & some philosophy.

Page No.: 51 XIV. Relevant Issues of Interest XIV. Money Creation: How does a country create money? Central bank passes a journal entry in its books. It debits Government (loan to Government) and credits a reserve account in its own books. Then for the amount concerned, it prints notes and gives to Government / or credits Government account. Government can then use the credit balance for its payments. In the past, when cheques used to take 1 to 4 weeks for clearance, businessmen also created money. They would issue more cheques then their credit balance with bank. Now with immediate clearance on computer, this avenue is limited. XIV Gold weight & rate. Normal metric ounce is = 28.35 grammes. However, US uses troy ounce for gold. It is = 31.10 grammes. Hence one tonne of 1,000 Kg is = 32,154 troy ounces. When the price is $ 1,400 per ounce, it is $ 45,015,000 per Mt. (32,154* 1,400). ($ 45 millions per tonne.) Hence $ one billion will get 22.21 tonnes of gold. 8,000 Mts. of gold = $ 360 billions. XIV. Expansionist policy. Expansion of the Kingdom by attacking neighbours is a tradition followed for last few thousand years. Why did Kings expand their Kingdoms! To get more resources, more wealth, more revenues which otherwise did not belong to them. USA has held Saudi Arabia; and through it oil exporting nations as its virtual colonies. For several decades U.S. could control the price of crude oil. We, the Indians may not see the truth. But those who are exploited, do see it. They have a seething anger at USA. Hence Bin Ladens attack on U.S. World Trade Centre in September, 2001. Even after the tradition of Kingdoms is replaced by capitalism/ socialism/ communism the expansionary habits of Governments have not reduced.

Page No.: 52 We (human beings) are still an underdeveloped form of life practising jungle law more than logic and fairness. We are driven by greed and fear. Not by love and truth. History has shown us that: Whenever a man, a society or a nation becomes more powerful, it wants to growMan in wealth, Society in wealth and culture, Nation in wealth and geography. More powerful person is less tolerant of others opinions and ideology. One nation wants to acquire the land of its neighbour as long as it considers the two separate. When the Kingdoms of Pune and Surat were separate, Shivaji Raja considered it legitimate to attack Surat and to rob it repeatedly. Pre-British within India there were 700 Kingdoms and all wanted to expand. More powerful would usurp the land of its neighbour. Neighbour either surrendered or fought back. There was always a war somewhere or the other. Today, with one country India all the wars within India have reduced to some border skirmishes between states (similar to Maharashtra and Karnataka border disputes). Whole country considers parties to the dispute as stupid politicians. In the 20th Century, Europe considered itself to be most advanced continent. It could be true in material terms. But there was no spiritual evolution. Hence Europe fought two wars. Both the wars were caused by Colonial Exploitation available to U.K., France, Spain, Portugal, etc. and not available to Germany. Germany started wars to extend its boundaries to Atlantic Ocean and to make own colonies. Separatists keep fighting. Unitists see no reason to fight. When man will evolve and become human; U.S., U.S.S.R., U.K., China and all expansionists will be considered stupid. XIV. Advait.. Every one will have different opinions, beliefs and ideologies. And yet, at the root, we are all one.

Page No.: 53 We are like leaves of the same tree. If we consider ourselves as separate: Our different opinions will hurt egos and cause clashes. When we evolve spiritually, we realise the unity in all and futility of fights over differences. An evolved person does not want to rule over anyone and does not permit any one to rule him. XIV. Law of Karma Theory: In India, all the three religions Hindu, Jain and Buddha have fully developed literature on the Law of Karma. It says Everyone will experience the consequences of what she/ he does. What you cause to others shall be caused to you by nature. However the timing and form of your experience cannot be predicted. I personally submit: The law of Karma applies to a society and even a nation. Indian philosophy says A person will face the consequences of (i) what he himself does, (ii) what he abets and (iii) what he confirms / accepts. If the Government commits a fraud and people enjoy the fruits of the fraud without protesting or asking the Government to stop the frauds; then the Government and the people both will face the consequences. The butcher kills the goat. One who eats the mutton has not killed the goat. Still he is also a partner in the act of himsa and he has to face the consequences. Butcher has killed the goat for his customer. The cause of killing is the customer. Customer has to face the consequences. Even the Christians say you shall reap as you sow. This means the law of Karma is understood almost universally in several different ways. Now add the Law of Karma to entire discussion on economics. One section of the law of Karma says if you remain a silent spectator of a fraud; and you do not protest against the fraud; you are Guilty of Silence where you should speak up. The law of Karma and the theory of Punarjanma (Reincarnation) constitute one complimentary set of theories. You will never know the

Page No.: 54 time when you face the consequences. Hence to a person unaware of this set of theories, this Samsar (world) appears to be unjust and unfair. A person commits Karma by action, speech and thought. Ordinary base level people commit sins in action. An evolved person will not commit a sin even in thought. Law of Karma - Illustration: U.S. Government is at a base level. It kills lakhs of people just to maintain crude oil at a low price and to maintain dollar hegemony. It will be a long & arduous journey before it evolves into a civilised person and stops committing heinous atrocities. In fact, mankind on earth needs substantial evolution. Application of Theory: U.S. caused the SEA crisis by first creating asset bubbles and then pricking the bubbles. Between 1990 and 2010 U.S. has experienced asset bubbles and in September, 2008, nature pricked the US asset bubbles. U.S. destroyed U.S.S.R. by (i) Dragging U.S.S.R. in massive costly star wars (ii) bleeding U.S.S.R. in Afghan wars and ultimately making U.S.S.R. insolvent. Now U.S. itself has become insolvent because of excessive consumptions and continuous wars. XIV. Maya: All this is simply a drama of Greed and Fear. All individuals and all entities are in the grip of Maya. Some smart people have perfected the play of Greed. The societies that permit unbridled greed are bound to collapse. The percentage of greedy people in USA, China and in India (any society for that matter) may be same. Indian politicians and industrialists have proved this. Indian regulatory system has worked better than the U.S. regulatory system. Indian culture denounces greed whereas U.S. culture praised greed. Hence the difference in the two countries. So far. Even in India, greed is gaining respect in several fields. Beware.

Page No.: 55 If we study international economics in depth, we understand the Indian concept of Maya. What appears does not exist. What exists, does not appear. And knowingly, we are tempted by what is apparent. XIV. Un Ekant Vad: On each issue covered in this paper, considerable information is available on the internet. Most authors give facts in a Politically Correct manner. Hence the real issues are left for the reader to discern. In this paper I am submitting my frank views. I am open to discuss & learn more on the subject. On each issue, there can be several different views. That is Un Ekant Vad at its peak. We cannot try to get unanimity on such subjects. 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. What will be the future? I am placing an analysis. Every one may make his own informed opinion. Finally no one knows what will happen. But be prepared

Many Thanks Rashmin Sanghvi

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An illustration of Concept Vs. Definition Ahimsa Ahimsa (non-violence) is a word also & a concept. As a word it simply means non-violence. However, consider it a concept & a whole world of thinking opens up behind it. Jain & Baudhh religions are almost entirely built around the concept of Ahimsa. Consider some illustrations of Ahimsak (nonviolent) thinking & we know what is a concept. Display of ones wealth power degree etc. is a himsa (violence). Talking aggressively is also a himsa. Driving car in a way that causes inconvenience to others is himsa. Aggressive tax planning which is far removed from truth & substance is also a himsa. Tax evasion is not even to be discussed by a true Ahimsak (follower of non-violence). If a person keeps fighting with all & sundry over petty matters; you cannot even discuss Ahimsa with him. However, consider a Jain who would not even eat green vegetables in monsoon. He is a wealthy person being proud of his wealth & eager to display his wealth. He is unfit for finer discussion on Ahimsa. You will be able to discuss the finer aspects of the concept with a non-vegetarian person who is sensitive to the feelings of others. Eating habits do not determine the level of thinking & sensitiveness of a person. Now we know the difference between a word & a concept. Concept has a lot of thinking gone into it. And if one does not know a concept, we cannot discuss the subject with him. Intellectual discussion with a person not appreciating a concept would be futile. Now consider Unekantvad (Un-Ekant-Vad). (i) When both Jain & Baudhh religions talk of Ahimsa, why do we need two different religions! Consider Upanishads. One would conclude that under Hindu religion also, himsa is impossible. Any himsak (violent) person is not a follower of true Hindu, Christian or Muslim religion. And yet every Ahimsak person also has a different way of thinking & living. (ii) A tax consultant may not believe that Ahimsa & tax evasion have any relationship. But a tax commissioner may agree more readily. But on this issue, we will have strong views from many CAs.

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It is the law of nature that every one will think & act differently even on one and the same concept. This is called Unekantvad. We have considered here two concepts: Concept; and Unekantvad. For understanding these two concepts, we have considered the illustration of the concept of Ahimsa.

Page No.: 58 Cause of Current Inflation in India! Why there is so much inflation in India? Why Petrol prices are increasing? 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. 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, 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.

Page No.: 59 In case you would like to see global expert economists views see the following web links: (i) (ii) (iii) Wall Street Journal: Financial Sense: Octaviourzua: Each one is an excellent, short article. Their conclusion is: USA is exporting its inflation to the rest of the world. Consider economics in another way. Globally crude oil is quoted & traded in $. OPEC (Oil Exporting Countries) realise that when $ depreciates, if they keep the oil price steady in $ terms, they are the losers. They get less in real terms. Hence every time $ depreciates, they will try their best to raise oil price. Hence the current increase in oil price from $ 70 to $ 100 per barrel. For India the oil price in terms of $ goes up by 40%. If India could buy crude oil by paying in rupee or Euro or gold without involving $; then the crude oil price for India would have remained steady. But that is not possible. Hence India is forced to raise petrol prices. Within India, as a matter of policy, diesel prices are generally not increased. Hence the increase in cost is passed on to petrol. (There is a complex equation. To the extent, India produces its own oil, India is not affected by the increase in the cost of imported oil.) Conclusion: Because oil is quoted and traded in $, movements in $ value affect oil importers & exporters. An international cartel conducted Gold Carry Trade. Hence gold prices remained generally steady between the years 1980 to 2000.The cartel started losing its grip around 2000 - 2001. Around the year 2006 the cartel failed. And gold prices shot up from $ 400 per ounce to $ 1400 per ounce. So if your family members are getting married and you have to shell out more money to buy gold, you know the cause. When you buy petrol and pay more, you know the cause. Look at it in yet another way.

http://online.wsj.com/article/SB10001424052748704405704576064252782421930.html

http://www.financialsensearchive.com/fsu/editorials/schiff/2008/0222.html

http://octaviourzua.com/investing-strategies/how-does-the-us-export-inflation/

Page No.: 60 Within India, the issuer of money supply (Rupee) is Government of India. Whenever Indian Government increases money supply, there is inflation in India. General public cannot fight back. Similarly, $ is the global currency. Supply of $ is exclusively in the hands of US Government. Rest of the world is a helpless victim when USA increases money supply and forces inflation on the world. In the year 2010, monsoon was extended by more than one month. This has spoiled the monsoon crop as well as winter crop. Hence food and vegetable supply has gone down. Prices have to go up. This is another factor beyond the control of Indian Government. In real life, there are several forces and counter forces acting on the economy. Inflation is the result of these forces. Is there a way out of US imposed inflation? Well European Union has developed Euro and significantly reduced the importance of $ within Europe. South East Asia, Iraq and Iran have tried to do international business in currencies other than $. They have all been attacked by USA. Venezuela, Zambia and China are trading at least partly in currencies other than $. These issues need more detailed study. India, USSR and a few Asian countries developed Asian Currency Union (ACU). It was damaged when USSR collapsed in 1992. Last strokes to ACU are being given by Indian Government and RBI by refusing to trade with Iran in ACU. There are reports that this action is taken under the pressures from USA. . If you can see on the web all the links given on page 59 , consider the following: When the information on Indias biggest current economic problem (inflation) is so easily available on the web for free, how is it that almost the whole of the media is ignorant about it? Why no one in India is discussing the real cause of inflation?

Thanks. Rashmin Sanghvi

Page No.: 61

New York Times A Secretive Banking Elite Rules Trading in Derivatives By LOUISE STORY Published: December 11, 2010 On the third Wednesday of every month, the nine members of an elite Wall Street society gather in Midtown Manhattan. The men share a common goal: to protect the interests of big banks in the vast market for derivatives, one of the most profitable and controversial fields in finance. They also share a common secret: The details of their meetings, even their identities, have been strictly confidential. Drawn from giants like JPMorgan Chase, Goldman Sachs and Morgan Stanley, the bankers form a powerful committee that helps oversee trading in derivatives, instruments which, like insurance, are used to hedge risk. In theory, this group exists to safeguard the integrity of the multitrillion-dollar market. In practice, it also defends the dominance of the big banks. The banks in this group, which is affiliated with a new derivatives clearinghouse, have fought to block other banks from entering the market, and they are also trying to thwart efforts to make full information on prices and fees freely available. Banks influence over this market and over clearinghouses like the one this select group advises, has costly implications for businesses large and small, like Dan Singers home heating-oil company in Westchester County, north of New York City. This fall many of Mr. Singers customers purchased fixed-rate plans to lock in winter heating oil at around $3 a gallon. While that price was above the prevailing $2.80 a gallon then, the contracts will protect homeowners if bitterly cold weather pushes the price higher. But Mr. Singer wonders if his company, Robison Oil, should be getting a better deal. He uses derivatives like swaps and options to create his fixed plans. But he

Page No.: 62 has no idea how much lower his prices and his customers prices could be, he says because banks dont disclose fees associated with the derivatives. At the end of the day I dont know if I got a fair price or what theyre charging me Mr. Singer said. Derivatives shift risk from one party to another, and they offer many benefits, like enabling Mr. Singer to sell his fixed plans without having to bear all the risk that oil prices could suddenly rise. Derivatives are also big business on Wall Street. Banks collect many billions of dollars annually in undisclosed fees associated with these instruments an amount that almost certainly would be lower if there were more competition and transparent prices. Just how much derivatives trading costs ordinary Americans is uncertain. The size and reach of this market has grown rapidly over the past two decades. Pension funds today use derivatives to hedge investments. States and cities use them to try to hold down borrowing costs. Airlines use them to secure steady fuel prices. Food companies use them to lock in prices of commodities like wheat or beef. The marketplace as it functions now adds up to higher costs to all Americans said Gary Gensler, the chairman of the Commodity Futures Trading Commission, which regulates most derivatives. More oversight of the banks in this market is needed, he said. But big banks influence the rules governing derivatives through a variety of industry groups. The banks latest point of influence are clearinghouses like ICE Trust, which holds the monthly meetings with the nine bankers in New York. Under the Dodd-Frank financial overhaul, many derivatives will be traded via such clearinghouses. Mr. Gensler wants to lessen banks control over these new institutions. But Republican lawmakers, many of whom received large campaign contributions from bankers who want to influence how the derivatives rules are written, say they plan to push back against much of the coming reform. On Thursday, the commission canceled a vote over a proposal to make prices more transparent, raising speculation that Mr. Gensler did not have enough support from his fellow commissioners. The Department of Justice is looking into derivatives too. The departments antitrust unit is actively investigating the possibility of anticompetitive practices

Page No.: 63 in the credit derivatives clearing trading and information services industries according to a department spokeswoman. Indeed, the derivatives market today reminds some experts of the Nasdaq stock market in the 1990s. Back then, the Justice Department discovered that Nasdaq market makers were secretly colluding to protect their own profits. Following that scandal, reforms and electronic trading systems cut Nasdaq stock trading costs to 1/20th of their former level an enormous savings for investors.

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When you limit participation in the governance of an entity to a few likeminded institutions or individuals who have an interest in keeping competitors out you have the potential for bad things to happen. Its antitrust 101 said Robert E. Litan who helped oversee the Justice Departments Nasdaq investigation as deputy assistant attorney general and is now a fellow at the Kauffman Foundation. The history of derivatives trading is it has grown up as a very concentrated industry, and old habits are hard to break. Representatives from the nine banks that dominate the market declined to comment on the Department of Justice investigation. Clearing involves keeping track of trades and providing a central repository for money backing those wagers. A spokeswoman for Deutsche Bank, which is among the most influential of the group, said this system will reduce the risks in the market. She said that Deutsche is focused on ensuring this process is put in place without disrupting the marketplace. The Deutsche spokeswoman also said the banks role in this process has been a success, saying in a statement that the effort is one of the best examples of public-private partnerships.

Page No.: 65 Established, But Cant Get In The Bank of New York Mellons origins go back to 1784 when it was founded by Alexander Hamilton. Today, it provides administrative services on more than $23 trillion of institutional money. Recently, the bank has been seeking to enter the inner circle of the derivatives market, but so far, it has been rebuffed. Bank of New York officials say they have been thwarted by competitors who control important committees at the new clearinghouses, which were set up in the wake of the financial crisis. Bank of New York Mellon has been trying to become a so-called clearing member since early this year. But three of the four main clearinghouses told the bank that its derivatives operation has too little capital, and thus potentially poses too much risk to the overall market. The bank dismisses that explanation as absurd. We are not a nobody said Sanjay Kannambadi, chief executive of BNY Mellon Clearing, a subsidiary created to get into the business. But we dont qualify. We certainly think thats kind of crazy. The real reason the bank is being shut out, he said, is that rivals want to preserve their profit margins, and they are the ones who helped write the membership rules. Mr. Kannambadi said Bank of New Yorks clients asked it to enter the derivatives business because they believe they are being charged too much by big banks. Its entry could lower fees. Others that have yet to gain full entry to the derivatives trading club are the State Street Corporation, and small brokerage firms like MF Global and Newedge. The criteria seem arbitrary, said Marcus Katz, a senior vice president at Newedge, which is owned by two big French banks. It appears that the membership criteria were set so that a certain group of market participants could meet that, and everyone else would have to jump through hoops Mr. Katz said.

Page No.: 66 The one new derivatives clearinghouse that has welcomed Newedge, Bank of New York and the others Nasdaq has been avoided by the big derivatives banks. Only the Insiders Know How did big banks come to have such influence that they can decide who can compete with them? Ironically, this development grew in part out of worries during the height of the financial crisis in 2008. A major concern during the meltdown was that no one not even government regulators fully understood the size and interconnections of the derivatives market, especially the market in credit default swaps, which insure against defaults of companies or mortgages bonds. The panic led to the need to bail out the American International Group, for instance, which had C.D.S. contracts with many large banks. In the midst of the turmoil, regulators ordered banks to speed up plans long in the making to set up a clearinghouse to handle derivatives trading. The intent was to reduce risk and increase stability in the market. Two established exchanges that trade commodities and futures, the InterContinentalExchange, or ICE, and the Chicago Mercantile Exchange, set up clearinghouses, and, so did Nasdaq. Each of these new clearinghouses had to persuade big banks to join their efforts, and they doled out membership on their risk committees, which is where trading rules are written, as an incentive. None of the three clearinghouses would divulge the members of their risk committees when asked by a reporter. But two people with direct knowledge of ICEs committee said the bank members are: Thomas J. Benison of JPMorgan Chase & Company; James J. Hill of Morgan Stanley; Athanassios Diplas of Deutsche Bank; Paul Hamill of UBS; Paul Mitrokostas of Barclays; Andy Hubbard of Credit Suisse; Oliver Frankel of Goldman Sachs; Ali Balali of Bank of America; and Biswarup Chatterjee of Citigroup. Through representatives, these bankers declined to discuss the committee or the derivatives market. Some of the spokesmen noted that the bankers have expertise that helps the clearinghouse.

Page No.: 67 Many of these same people hold influential positions at other clearinghouses, or on committees at the powerful International Swaps and Derivatives Association, which helps govern the market. Critics have called these banks the derivatives dealers club and they warn that the club is unlikely to give up ground easily. The revenue these dealers make on derivatives is very large and so the incentive they have to protect those revenues is extremely large said Darrell Duffie a professor at the Graduate School of Business atStanford University, who studied the derivatives market earlier this year with Federal Reserve researchers. It will be hard for the dealers to keep their market share if everybody who can prove their creditworthiness is allowed into the clearinghouses. So they are making arguments that others shouldnt be allowed in. Perhaps no business in finance is as profitable today as derivatives. Not making loans. Not offering credit cards. Not advising on mergers and acquisitions. Not managing money for the wealthy. The precise amount that banks make trading derivatives isnt known but there is anecdotal evidence of their profitability. Former bank traders who spoke on condition of anonymity because of confidentiality agreements with their former employers said their banks typically earned $25,000 for providing $25 million of insurance against the risk that a corporation might default on its debt via the swaps market. These traders turn over millions of dollars in these trades every day, and credit default swaps are just one of many kinds of derivatives. The secrecy surrounding derivatives trading is a key factor enabling banks to make such large profits. If an investor trades shares of Google or Coca-Cola or any other company on a stock exchange, the price and the commission, or fee are known. Electronic trading has made this information available to anyone with a computer, while also increasing competition and sharply lowering the cost of trading. Even corporate bonds have become more transparent recently. Trading costs dropped there almost immediately after prices became more visible in 2002. Not so with derivatives. For many, there is no central exchange, like the New York Stock Exchange or Nasdaq, where the prices of derivatives are listed. Instead, when a company or an investor wants to buy a derivative contract for, say, oil or wheat or securitized mortgages, an order is placed with a trader at a

Page No.: 68 bank. The trader matches that order with someone selling the same type of derivative. Banks explain that many derivatives trades have to work this way because they are often customized, unlike shares of stock. One share of Google is the same as any other. But the terms of an oil derivatives contract can vary greatly. And the profits on most derivatives are masked. In most cases, buyers are told only what they have to pay for the derivative contract, say $25 million. That amount is more than the seller gets, but how much more $5,000, $25,000 or $50,000 more is unknown. Thats because the seller also is told only the amount he will receive. The difference between the two is the banks fee and profit. So, the bigger the difference, the better for the bank and the worse for the customers. It would be like a real estate agent selling a house, but the buyer knowing only what he paid and the seller knowing only what he received. The agent would pocket the difference as his fee, rather than disclose it. Moreover, only the real estate agent and neither buyer nor seller would have easy access to the prices paid recently for other homes on the same block. An Electronic Exchange? Two years ago, Kenneth C. Griffin, owner of the giant hedge fund Citadel Group, which is based in Chicago, proposed open pricing for commonly traded derivatives, by quoting their prices electronically. Citadel oversees $11 billion in assets, so saving even a few percentage points in costs on each trade could add up to tens or even hundreds of millions of dollars a year. But Mr. Griffins proposal for an electronic exchange quickly ran into opposition, and what happened is a window into how banks have fiercely fought competition and open pricing. To get a transparent exchange going, Citadel offered the use of its technological prowess for a joint venture with the Chicago Mercantile Exchange, which is best-known as a trading outpost for contracts on commodities like coffee and cotton. The goal was to set up a clearinghouse as well as an electronic trading system that would display prices for credit default swaps. Big banks that handle most derivatives trades including Citadels didnt like Citadels idea. Electronic trading might connect customers directly with each other, cutting out the banks as middlemen.

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So the banks responded in the fall of 2008 by pairing with ICE, one of the Chicago Mercantile Exchanges rivals which was setting up its own clearinghouse. The banks attached a number of conditions on that partnership, which came in the form of a merger between ICEs clearinghouse and a nascent clearinghouse that the banks were establishing. These conditions gave the banks significant power at ICEs clearinghouse according to two people with knowledge of the deal. For instance, the banks insisted that ICE install the chief executive of their effort as the head of the joint effort. That executive, Dirk Pruis, left after about a year and now works at Goldman Sachs. Through a spokesman, he declined to comment. The banks also refused to allow the deal with ICE to close until the clearinghouses rulebook was established with provisions in the banks favor. Key among those were the membership rules, which required members to hold large amounts of capital in derivatives units, a condition that was prohibitive even for some large banks like the Bank of New York. The banks also required ICE to provide market data exclusively to Markit, a littleknown company that plays a pivotal role in derivatives. Backed by Goldman, JPMorgan and several other banks, Markit provides crucial information about derivatives, like prices. Kevin Gould, who is the president of Markit and was involved in the clearinghouse merger, said the banks were simply being prudent and wanted rules that protected the market and themselves. The one thing I know the banks are concerned about is their risk capital he said. You really are going to get some comfort that the way the entity operates isnt going to put you at undue risk. Even though the banks were working with ICE, Citadel and the C.M.E. continued to move forward with their exchange. They, too, needed to work with Markit, because it owns the rights to certain derivatives indexes. But Markit put them in a tough spot by basically insisting that every trade involve at least one bank, since the banks are the main parties that have licenses with Markit. This demand from Markit effectively secured a permanent role for the big derivatives banks since Citadel and the C.M.E. could not move forward without Markits agreement. And so essentially boxed in they agreed to the terms

Page No.: 70 according to the two people with knowledge of the matter. (A spokesman for C.M.E. said last week that the exchange did not cave to Markits terms.) Still, even after that deal was complete, the Chicago Mercantile Exchange soon had second thoughts about working with Citadel and about introducing electronic screens at all. The C.M.E. backed out of the deal in mid-2009, ending Mr. Griffins dream of a new electronic trading system. With Citadel out of the picture, the banks agreed to join the Chicago Mercantile Exchanges clearinghouse effort. The exchange set up a risk committee that like ICEs committee was mainly populated by bankers. It remains unclear why the C.M.E. ended its electronic trading initiative. Two people with knowledge of the Chicago Mercantile Exchanges clearinghouse said the banks refused to get involved unless the exchange dropped Citadel and the entire plan for electronic trading. Kim Taylor the president of Chicago Mercantile Exchanges clearing division said the market simply wasnt interested in Mr. Griffins idea. Critics now say the banks have an edge because they have had early control of the new clearinghouses risk committees. Ms. Taylor at the Chicago Mercantile Exchange said the people on those committees are supposed to look out for the interest of the broad market, rather than their own narrow interests. She likened the banks role to that of Washington lawmakers who look out for the interests of the nation, not just their constituencies. Its not like the sort of representation where if Im elected to be the representative from the state of Illinois, I go there to represent the state of Illinois Ms. Taylor said in an interview. This series examines how Wall Street tries to gain an upper hand. Officials at ICE, meantime, said they solicit views from customers through a committee that is separate from the bank-dominated risk committee. We spent and we still continue to spend a lot of time on thinking about governance said Peter Barsoom the chief operating officer of ICE Trust. We want to be sure that we have all the right stakeholders appropriately represented.

Page No.: 71 Mr. Griffin said last week that customers have so far paid the price for not yet having electronic trading. He puts the toll, by a rough estimate, in the tens of billions of dollars, saying that electronic trading would remove much of this economic rent the dealers enjoy from a market that is so opaque. Its a stunning amount of money Mr. Griffin said. The key players today in the derivatives market are very apprehensive about whether or not they will be winners or losers as we move towards more transparent, fairer markets, and since theyre not sure if theyll be winners or losers their basic instinct is to resist change. In, Out and Around Henhouse The result of the maneuvering of the past couple years is that big banks dominate the risk committees of not one, but two of the most prominent new clearinghouses in the United States. That puts them in a pivotal position to determine how derivatives are traded. Under the Dodd-Frank bill, the clearinghouses were given broad authority. The risk committees there will help decide what prices will be charged for clearing trades, on top of fees banks collect for matching buyers and sellers, and how much money customers must put up as collateral to cover potential losses. Perhaps more important, the risk committees will recommend which derivatives should be handled through clearinghouses, and which should be exempt. Regulators will have the final say. But banks, which lobbied heavily to limit derivatives regulation in the Dodd-Frank bill, are likely to argue that few types of derivatives should have to go through clearinghouses. Critics contend that the bankers will try to keep many types of derivatives away from the clearinghouses, since clearinghouses represent a step towards broad electronic trading that could decimate profits. The banks already have a head start. Even a newly proposed rule to limit the banks influence over clearing allows them to retain majorities on risk committees. It remains unclear whether regulators creating the new rules on topics like transparency and possible electronic trading will drastically change derivatives trading, or leave the bankers with great control. One former regulator warned against deferring to the banks. Theo Lubke, who until this fall oversaw the derivatives reforms at the Federal Reserve Bank of

Page No.: 72 New York, said banks do not always think of the market as a whole as they help write rules. Fundamentally the banks are not good at self-regulation Mr. Lubke said in a panel last March at Columbia University. Thats not their expertise thats not their primary interest. Source: http://www.nytimes.com/2010/12/12/business/12advantage.html?pagewante d=1&_r=1&hp