All about Dollar

U.S Dollar is going through its most critical phase now. It is facing an unprecedented test of confidence. All these years, U.S was exporting paper ($) and importing real goods. This may come to an end soon.

Lets study the history of the mighty dollar first. Dollar was fully pegged against gold from 1800's onwards. An ounce of gold was worth around $20. This price never fluctuated much till 1970's - mostly it was in $20-$22 price band. Thus, for nearly two centuries, the value of the dollar remained stable against the gold.

Then, the most infamous president in U.S history, the most crooked of them all, Richard Nixon, removed the gold standard and made it a fiat currency - well not quite - he pegged it against the oil. In a masterstroke, he laid the foundation of dollar imperialism by forcing the biggest oil exporter in the world (Saudi Arabia) to trade its oil in dollar.

That single act changed everything. Dollar became the world's most preferred currency. If China wants to import oil, they have to pay in USD. Not in any other currency. They have to earn USD first by exporting goods to U.S.

This is the reason why no central bank in the world wants their currency to rise against the dollar. China is artificially controlling the value of yuan so that it will not rise against the dollar. If it does, well - it actually is - it will be expensive for the U.S to buy goods from China and China won't get dollar through export. And if it doesn't, China won't be able to buy oil.

Through that single act, U.S managed to get an unlimited credit card. A card for which there is no repayment - not even a minimum amount due.

U.S had gone a step further with oil exporting countries. Not only they have to accept USD as the trading currency, but they will have to invest the proceeds - USD - into U.S treasury bonds. U.S will use the interest on those bonds as a return for lending them their military and other technologies - for example construction.

This is called petro-dollar recycling. U.S will print this worthless papers called treasury bonds, sell them to these suckers and the suckers will feed U.S with their resources. By suckers I mean every other country on earth.

Then U.S went one step further. If anyone steps out of the line (like Saddam did - he tried to trade oil for Euro), they will use military force. And how does U.S feed this most destructive force on Earth? With your money!!

It is estimated that the recent bailout of U.S economy cost anything between 12-15 trillion dollars. How did they get the money? They just printed it. Conjured it out of thin air! None of those trillions went into real economy like commodities or other goods and services. All of it had gone to financial services - mostly false economies. It went to those who had made a casino out of U.S economy - who literally blackmailed U.S Government with the threat of bankruptcy.

This is not the end of the story. Worse is not over yet. U.S will need another infusion of trillions of dollars. We have only seen the beginning.

Citibank recently reported a profit after the bailout. I am not sure about the numbers. But it was pathetically clear that it was done to boost the share price. Months before that profit announcement, the regulators amended an accounting treatment to suit Citibank.

Suppose you have an investment for $250 Million dollars in some bonds or fancy financial instruments. The current market value of it is $1 Million. The old accounting practice was mark to market - meaning you are supposed to record the market value and write $249 million loss to your P&L. This is conservative, sensible accounting. If I am not mistaken, in India, the norms are tighter. If the market value has gone up to say $500 million, still you will record it at $250 Million. You are not allowed to show the notional profit in your P&l, unless you actually gain the profit by physically selling the investment.

Do you know what U.S Government did? They invented a new accounting method. Even if the value of your investments fell down by 99%, you can still value it at its original cost or even higher, depending upon what a computer model predicted as its potential value. Translated into layman's words - never trust the balance sheet of any U.S Bank from now on.

Why did the U.S government allowed this? Because they are the biggest shareholders of Citibank. They wanted Citibank's share price to go up at any cost. They wanted the Federal Reserve balance sheet to look healthy now that people like Ron Paul are demanding a Federal Reserve audit.

Do you know how the balance sheet of the Federal Reserve will look like?

On the liability side, $15 Trillion. On the assets side, companies like Citibank, Fannie mae, Freddie Mac etc.

How do you think a Country which borrows $4 billion a day will be able to pay back these trillions? If I were the creditor to U.S, what would I do? I would try to find out an ingenious way to come out of this s*it.

That is what countries like China, Saudi and Japan are doing. They are all thinking hard to come out of this unscathed. If dollar loses its reserve currency status, all these creditors would lose trillions because the treasury bonds would become worthless. Not that it already isn't.

There could be 3 situations. situation one - the bullet become larger. Somehow, all these will subside and we all wait for the next bubble to burst and then the bailout becomes much, much larger and eventually uncontrollable. Instead of biting the bullet now, you bite an cannon ball later and die.

Situation two - all these U.S debts would be consolidated in a bank like IMF as SDR's - special drawing rights. That would mean that instead of dollar, international transactions would be in some other form like the SDRs. I have an inkling this is the way things would eventually go.

Situation three - Instead of spending, U.S begins to save. Instead of importing stuff, they consume less and begin to export stuff. This would mean a 180 degree turnaround - a complete U turn. Unless the rest of the world sees a clear, tangible shift towards this, most likely it would be situation 1 first and then situation 2.

In situation 2, USD would be worthless and U.S would be indebted in some other sensible global currency forever. Hyperinflation would hit U.S economy. In comparison Zimbabwe (inflation - 1000000%) would look like a rich country.

The problem with one country controlling the reserve currency is that unless that country shows fiscal responsibility, the rest of the world suffers - of no reason their own. Like Iceland did. Like the rest of the world suffers now.

To my friends in U.S and elsewhere : switch your investments to Gold or real estate in an asian country like India. India's economy is really unique. Exports form only 20% or less of our GDP. Our domestic economy is one of the strongest in the world. Holding onto your USD or related instruments, you are taking the risk of your life.

You can make money out of this. Short USD and go long on gold.

Peter Schiff tells us a story about asians and an american in an island:

"Some people that got stranded on an island, and I think it was 6 or 7 were Asians and there was one American and as soon as they were on the island they had to divide up the jobs. And one Asian was given the job of fishing, the other one was hunting, one of them got the job of gathering fire wood. So they all had jobs, and the American was assigned the job of eating. And so at the end of the day, they would all gather around and prepare this feast and the American would sit there and eat it. But he would´nt eat it all, he´d just leave enough crumbs so he could give to the 6 Asians so they could go on and repeat it again tomorrow, spend all day preparing a meal for the American to eat. Now, the way modern economists would look at it, they would say “Well, this American is vital to the whole island economy. Without him nobody would have to fish, nobody would have to hunt, nobody would have to gather fire wood. He is creating all this employment on the island”. But the reality is, every Asian on that island, his lot in life would be dramatically improved if they kicked the American off the island because now they would have a lot more to eat or maybe they wouldn´t have to spend all day hunting and fishing and they can lay on the beach a little bit”

Thats the silver lining of the whole thing. If the dollar collapses, the rest of the world may face a temporary crisis. But the living standards for the rest of us would be much, much higher. Asian countries would be the biggest beneficiaries.

Lets kick this cancer out before it is too late.

Note: Please also see my earlier post on the subject: http://sydneymurugan.blogspot.com/2009/01/why-we-carry-you.html

"Thakarachenda" - a movie by Avira Rebecca.

Ever tasted hunger? Ever faced homelessness? Ever felt what it is like to be at the receiving end every day of your life?

If you want to know how life is at the bottom of the pyramid, watch this movie.

Click on the title - it will take you to the story.

Good movies in Malayalam are so hard to come by these days. It was released (?) in 2007.

Watch it, my friends. Experience how it is like to be poor.

If possible, watch it with your kids. Tell them about poverty. Let them know that the comforts we take for granted carry a price tag.

This is an honest movie. And it shows.