Interesting article: We Make it the ‘Mighty’ Dollar

[Hyde]

by Asif Ameer

Money only holds value because there are goods and services available to buy with that money. Coconut water would be more valuable than a kilo of gold on an island. It is therefore, not the value of coconut water that has increased, but the diminished value of gold that is reflected.

Pakistan currently produces cotton, rice, fish, fruits, vegetables, pulses and many other goods. These goods in turn, add value to the Pak rupee. The worth of the rupee increases as the amount of goods produced in Pakistan increases. Instead of selling these goods in Pak rupees - which would create a ‘demand’ for the Pak rupee in the International Exchange Market - the State Bank of Pakistan settles it’s export payments in US dollars, known as Balance of Payment (BoP). Thus, any country that imports from Pakistan does not need to purchase the Pak rupee from the International Forex Market to pay for Pakistani products. This may sound trivial, but such a practice takes away from the value of the Pak rupee and transfers it to the US dollar (think Petro-Dollar). The Pak rupee then becomes like gold on an island as not much is left to be bought with.

Currently the State Bank of Pakistan uses the dollar and euro to settle its BoP account. One should realize that the value of the dollar and euro is not static. Due to the financial crises and socialization of the financial losses in the banking sector, American and European Central Banks have been running their printing press on turbo mode. The more the Central Bank prints or issues electronic credit to the markets, the more these currencies lose their value. By using a foreign currency, not only does Pakistan’s economy import American inflation but it also leads to the devaluation of the Pak rupee.

So why use the dollar? This goes back to the Bretton Woods Agreement of 1944 when the dollar was redeemable by gold. The American central bank, called The Federal Reserve, could not print dollar bills if it didn’t have the gold to back up the bills with. Eventually the gold window was closed in 1971 which should have marked the end of the Bretton Woods Agreement, but it didn’t. After all, why should a sovereign country use the currency of a foreign country when that currency can be devalued at the will of a foreign central bank? The whole idea goes against the concept of sovereignty. To add insult over injury, IMF lends loans in dollars to fill the BoP gap - loans that have to be paid back with interest. The interest has to be earned by Pakistan by exporting more of its goods. This is a double-edged sword as interest sucks the value out of imports and dollar inflation dilutes the value of exports.

The State Bank of Pakistan should demand payments for its exports to be settled in Pak rupees. But for the general public to see the fruits of its labour, the federal government needs to stop printing rupees and balance its budget. Otherwise, the fruits of labour that were saved from international bankers would be stolen by the Federal Government of Pakistan via inflation. It is high-time the Ministry of Finance takes notice of these issues as Pakistan has already passed its point of no return towards bankruptcy. Let’s save whatever there is left to be saved for future generations to come.

Source: We Make it the ‘Mighty’ Dollar | The News Blog

 

[Don Jaguar]

I love this picture!!!

 

[bubble123]

So does this means in reality that US can spend as much as it likes without actually having that money ?

 

[AsifAmeer]

So does this means in reality that US can spend as much as it likes without actually having that money ?

BINGO.

Actually, I initially wrote my 4-step policy article for DAWN newspaper. Due to spacing limitation, DAWN chopped off the article and only printed my policy for the implementation of the Gold Standard. I contacted TheNews and they said the same thing and asked me to spilt my Economic Policy article. So I ended up elaborating every policy in a bit different angle. BoP was part of the issue.

If you wish to read my complete article, you can search the defence.pk forum for the "Pakistan's Monetary, Fiscal, Commercial and International Trade Policies" thread.

---------- Post added at 09:00 PM ---------- Previous post was at 08:58 PM ----------

I love this picture!!!

Haan.. pic was selected by TheNews Staff member! I wont take the credit for it! lol

 

[FunkyPeace12]

So does this means in reality that US can spend as much as it likes without actually having that money ?

Pretty much.

 

[AsifAmeer]

Well it mean whatever the whole world produces, the US Federal Reserve Bank can simply print the money and buy it from the world. You will not hear a single politician speak of this issue. I once called in a live TV show and the hosts didnt have a clue what I was talking about. They tried to discredit me asking me how it can be resolved and I explained them how people can dump the Pak Rupee to warn its Govt and right there, they let me loose and completely changed the topic to terrorism from Economics!

So does this means in reality that US can spend as much as it likes without actually having that money ?

 

[SBD-3]

One thing i would like to clarify is that the its not as simple as a coconut and a pile of gold on an island.
1-While a currency's value is also dependent upon the perceptive utility. Its the general acceptability which make a currency more liquid and thus more trustworthy to transact with. Simply speaking say i have two currencies 1-PKR and 2-USD and taken them to three different countries 1-USA 2-Pakistan and 3-Singapore, Which currency can act in all three markets? of course, it would be USD since it is generally enjoys more acceptability than PKR. Similarly happens in Trade when a person in Pakistan wants to trade with somebody in Argentina. One step may be that PKR person discharge its liability in PKR and Argentinian person discharge his in Peso but this would not be a workable solution, why? because Argentinian may not be willing to accept payment in PKR and Pakistani not willing to accept Peso, leading to a failure of possible trade transaction due to lack of acceptability. A liquid third currency like USD which is generally acceptable to both, can bridge the trust deficit, thats why the central banks around the world hold liquid acceptable currencies than a whole basket consisting of every currency across the globe.
2-To get the status of international reserve currency, a lot of factors are important which include, but are not limited to a)Acceptability of that currency b)structure of capital account of that country c)Trade pattern d) liquidity of financial markets for that currency e)availability of substitutes etc. Don't you wonder while China and Japan dominate the world trade, central banks are still hesitant to add RMB to their reserve portfolio and furthermore Japanese Yen still represent a marginal percent of reserve currency compositions? A simplified explanation would be that China's financial markets are still comparatively very restricted creating a drag upon central banks' willingness to add it to their reserve composition and Japan serves at only one end of the trade that is export engine, its growth and currency confidence is strictly dependent upon its exports performance. Why dont we see Russian Rubble making its way into currency compositions even though the official debt/GDP ratio of Russia is 0% (ideally making it one of the safest currency). And lastly, what is a close substitute to US Treasury? while at a time markets did start to see Euro as a substitute to USD but subsequent events in Europe exposed its weakness and thus it was realized that there are no close substitutes to USD. People think gold is a safe investment, but given a buyer buys gold at 1800USD for 1 month and price comes down to 1700 USD, is gold still safe investment for him? when you consider he keeps 1700 USD in his socks (lets assume he is very conservative) but he will have 1700 USD after a month when he gets his money out of that sock.
3-And lastly, Pakistan's Capital Account is closed, means PKR can not trade like USD in global markets. Why so? just google on East Asian Crisis and you'll know why. So it does not make any sense for PKR to make its way to global reserve portfolios given its share in global trade is only a fraction to a single %. (0.13% if i may recall myself correctly).

 

[bubble123]

BINGO.

Actually, I initially wrote my 4-step policy article for DAWN newspaper. Due to spacing limitation, DAWN chopped off the article and only printed my policy for the implementation of the Gold Standard. I contacted TheNews and they said the same thing and asked me to spilt my Economic Policy article. So I ended up elaborating every policy in a bit different angle. BoP was part of the issue.

If you wish to read my complete article, you can search the defence.pk forum for the "Pakistan's Monetary, Fiscal, Commercial and International Trade Policies" thread.

---------- Post added at 09:00 PM ---------- Previous post was at 08:58 PM ----------



Haan.. pic was selected by TheNews Staff member! I wont take the credit for it! lol

Pretty much.

Well it mean whatever the whole world produces, the US Federal Reserve Bank can simply print the money and buy it from the world. You will not hear a single politician speak of this issue. I once called in a live TV show and the hosts didnt have a clue what I was talking about. They tried to discredit me asking me how it can be resolved and I explained them how people can dump the Pak Rupee to warn its Govt and right there, they let me loose and completely changed the topic to terrorism from Economics!

Well if US can just print their way out how can anybody compete with them at all ever ?

One thing i would like to clarify is that the its not as simple as a coconut and a pile of gold on an island.
1-While a currency's value is also dependent upon the perceptive utility. Its the general acceptability which make a currency more liquid and thus more trustworthy to transact with. Simply speaking say i have two currencies 1-PKR and 2-USD and taken them to three different countries 1-USA 2-Pakistan and 3-Singapore, Which currency can act in all three markets? of course, it would be USD since it is generally enjoys more acceptability than PKR. Similarly happens in Trade when a person in Pakistan wants to trade with somebody in Argentina. One step may be that PKR person discharge its liability in PKR and Argentinian person discharge his in Peso but this would not be a workable solution, why? because Argentinian may not be willing to accept payment in PKR and Pakistani not willing to accept Peso, leading to a failure of possible trade transaction due to lack of acceptability. A liquid third currency like USD which is generally acceptable to both, can bridge the trust deficit, thats why the central banks around the world hold liquid acceptable currencies than a whole basket consisting of every currency across the globe.
2-To get the status of international reserve currency, a lot of factors are important which include, but are not limited to a)Acceptability of that currency b)structure of capital account of that country c)Trade pattern d) liquidity of financial markets for that currency e)availability of substitutes etc. Don't you wonder while China and Japan dominate the world trade, central banks are still hesitant to add RMB to their reserve portfolio and furthermore Japanese Yen still represent a marginal percent of reserve currency compositions? A simplified explanation would be that China's financial markets are still comparatively very restricted creating a drag upon central banks' willingness to add it to their reserve composition and Japan serves at only one end of the trade that is export engine, its growth and currency confidence is strictly dependent upon its exports performance. Why dont we see Russian Rubble making its way into currency compositions even though the official debt/GDP ratio of Russia is 0% (ideally making it one of the safest currency). And lastly, what is a close substitute to US Treasury? while at a time markets did start to see Euro as a substitute to USD but subsequent events in Europe exposed its weakness and thus it was realized that there are no close substitutes to USD. People think gold is a safe investment, but given a buyer buys gold at 1800USD for 1 month and price comes down to 1700 USD, is gold still safe investment for him? when you consider he keeps 1700 USD in his socks (lets assume he is very conservative) but he will have 1700 USD after a month when he gets his money out of that sock.
3-And lastly, Pakistan's Capital Account is closed, means PKR can not trade like USD in global markets. Why so? just google on East Asian Crisis and you'll know why. So it does not make any sense for PKR to make its way to global reserve portfolios given its share in global trade is only a fraction to a single %. (0.13% if i may recall myself correctly).

Thank u a very helpful post. Pity world isn't serious about this stuff or maybe plain ignorant.

 

[AsifAmeer]

Hasnain,

Here is what I have suggested in my article

The State Bank of Pakistan should demand payments for its exports to be settled in Pak rupees.

No country needs to hoard PKR on its balance sheet. When there is a trade deficit b/w a country and Pakistan, Pakistan should demand the other country buy PKR from the forex market and make the balance payment to State Bank in PKR. Suppose there is a trade deficits for Pakistan with China, then Pakistan needs to buy Yuan from the open market and pay the chinese from that. I dont see a problem there. Ofcourse, China can demand dollar for their exports. Thats their call. But why repeat a mistake just because EVERYONE is doing it?

Currently, even the State Bank of Pakistan doesnt demand PKR. Isnt that like saying "I cook the best food but I refuse to eat it myself!" Wheres the confidence in your own currency? Where is the floor going to come from for the PKR? Mind it, what I am reminding here was the whole premise of "FREE-FLOATING" currencies after the Gold window was closed in 1971.

Saying that Dollar is a universally accepted it currency. Yes sure! but thats just the sympton. "We" are the cause - Hence the title of my article.

One thing i would like to clarify is that the its not as simple as a coconut and a pile of gold on an island.
1-While a currency's value is also dependent upon the perceptive utility. Its the general acceptability which make a currency more liquid and thus more trustworthy to transact with. Simply speaking say i have two currencies 1-PKR and 2-USD and taken them to three different countries 1-USA 2-Pakistan and 3-Singapore, Which currency can act in all three markets? of course, it would be USD since it is generally enjoys more acceptability than PKR. Similarly happens in Trade when a person in Pakistan wants to trade with somebody in Argentina. One step may be that PKR person discharge its liability in PKR and Argentinian person discharge his in Peso but this would not be a workable solution, why? because Argentinian may not be willing to accept payment in PKR and Pakistani not willing to accept Peso, leading to a failure of possible trade transaction due to lack of acceptability. A liquid third currency like USD which is generally acceptable to both, can bridge the trust deficit, thats why the central banks around the world hold liquid acceptable currencies than a whole basket consisting of every currency across the globe.
2-To get the status of international reserve currency, a lot of factors are important which include, but are not limited to a)Acceptability of that currency b)structure of capital account of that country c)Trade pattern d) liquidity of financial markets for that currency e)availability of substitutes etc. Don't you wonder while China and Japan dominate the world trade, central banks are still hesitant to add RMB to their reserve portfolio and furthermore Japanese Yen still represent a marginal percent of reserve currency compositions? A simplified explanation would be that China's financial markets are still comparatively very restricted creating a drag upon central banks' willingness to add it to their reserve composition and Japan serves at only one end of the trade that is export engine, its growth and currency confidence is strictly dependent upon its exports performance. Why dont we see Russian Rubble making its way into currency compositions even though the official debt/GDP ratio of Russia is 0% (ideally making it one of the safest currency). And lastly, what is a close substitute to US Treasury? while at a time markets did start to see Euro as a substitute to USD but subsequent events in Europe exposed its weakness and thus it was realized that there are no close substitutes to USD. People think gold is a safe investment, but given a buyer buys gold at 1800USD for 1 month and price comes down to 1700 USD, is gold still safe investment for him? when you consider he keeps 1700 USD in his socks (lets assume he is very conservative) but he will have 1700 USD after a month when he gets his money out of that sock.
3-And lastly, Pakistan's Capital Account is closed, means PKR can not trade like USD in global markets. Why so? just google on East Asian Crisis and you'll know why. So it does not make any sense for PKR to make its way to global reserve portfolios given its share in global trade is only a fraction to a single %. (0.13% if i may recall myself correctly).

 

[AsifAmeer]

What is the US going to compete in when they dont produce anything? All they gotta do is borrow, consume, monetize, repeat.

Well if US can just print their way out how can anybody compete with them at all ever ?



Thank u a very helpful post. Pity world isn't serious about this stuff or maybe plain ignorant.

 

[SBD-3]

Hasnain,

Here is what I have suggested in my article


No country needs to hoard PKR on its balance sheet. When there is a trade deficit b/w a country and Pakistan, Pakistan should demand the other country buy PKR from the forex market and make the balance payment to State Bank in PKR. Suppose there is a trade deficits for Pakistan with China, then Pakistan needs to buy Yuan from the open market and pay the chinese from that. I dont see a problem there. Ofcourse, China can demand dollar for their exports. Thats their call. But why repeat a mistake just because EVERYONE is doing it?

Currently, even the State Bank of Pakistan doesnt demand PKR. Isnt that like saying "I cook the best food but I refuse to eat it myself!" Wheres the confidence in your own currency? Where is the floor going to come from for the PKR? Mind it, what I am reminding here was the whole premise of "FREE-FLOATING" currencies after the Gold window was closed in 1971.

Saying that Dollar is a universally accepted it currency. Yes sure! but thats just the sympton. "We" are the cause - Hence the title of my article.

The trade and reserve dynamics are not as simple as they apparently are suggested by theory. I hope you would have known that Pakistan has recently established a swap line with Peoples Bank of China and Central Bank of Turkey just for this purpose. Anyways, what i was saying is that central banks's appitite for a reserve currency is not simply driven by one factor. For example, While PKR clearing will only be available with SBP. USD clearing is available with at least three countries (Fed in US, Singapore and London) Just in case Fed fails to clear a trade settlement, we can always route to its alternative destination. Moreover, Central banks dont merely hold currencies in hard cash, but since the trade pattern is recurring, a mix of investment trench and liquidity trench is maintained. The domestic RMB market is very restricted for central banks to make direct investments of their investment trench in RMB denomination. For the time being, the Central banks have to resort to offshore RMB market in HongKong and a nascent market in Singapore which is still in negligible volumes and issues. Thus even if a central bank would like to hold RMB as a currency, its appetite is limited due to market structure.
If you would have read upon the east asian crisis, the same happened with Thailand. They allowed their currency to be openly convertible as the dollar and euro, but when speculation hit the market, Thai banking system was demolished. Do you know that George Soros (a hedge fund Icon) single-handedly defeated Bank of England (who has theoretically complete control over the GBP) when he started buying GBP from the open market with a view that GBP was over valued, Bank of England came in with interventions to keep GBP stable but soros had so much money that eventually BoE had to stop and GBP appreciated as soros deemed. But soros cant do this with USD and perhaps Euro (cuz it is still a smaller market than USD) because he can not significantly affect the USD market. Its just like one has 10PKR and goes into the market whose total volume is 100PKR (so he effectively holds 10% of the market) thus he can dictate the market. But when you take the same 10PKR into a market with 10000PKR volume you can not do so as you did in smaller market (because now, you only represent 0.1% of the total market). The same is with Pakistan, if Pakistan risks opening its currency convertibility with small PKR market some "george soros" can demolish the whole Pakistan economy with speculation. (Just a hint Pakistan's whole GDP is 180 Billion Dollars and an average global hedge fund operate with around 500 Billion USD assets under management).

 

[SBD-3]

This is a very well referred article on the same dilemma that you're referring to.....It gives you an insight so as to why we and world can not go away from USD
The grasshoppers and the ants – a modern fable - FT.com

May 25, 2010 8:33 pm
The grasshoppers and the ants – a modern fable

By Martin Wolf

Everybody in the west knows the fable of the grasshopper and the ant. The grasshopper is lazy and sings away the summer, while the ant piles up stores for the winter. When the cold weather comes, the grasshopper begs the ant for food. The ant refuses and the grasshopper starves. The moral of this story? Idleness brings want.

Yet life is more complex than in Aesop’s fable. Today, the ants are Germans, Chinese and Japanese, while the grasshoppers are American, British, Greek, Irish and Spanish. Ants produce enticing goods grasshoppers want to buy. The latter ask whether the former want something in return. “No,” reply the ants. “You do not have anything we want, except, maybe, a spot by the sea. We will lend you the money. That way, you enjoy our goods and we accumulate stores.”

Ants and grasshoppers are happy. Being frugal and cautious, the ants deposit their surplus earnings in supposedly safe banks, which relend to grasshoppers. The latter, in turn, no longer need to make goods, since ants supply them so cheaply. But ants do not sell them houses, shopping malls or offices. So grasshoppers make these, instead. They even ask ants to come and do the work. Grasshoppers find that with all the money flowing in, the price of land rises. So they borrow more, build more and spend more.

The ants look at the prosperity of grasshopper colonies and tell their bankers: “Lend even more to grasshoppers, since we ants do not want to borrow.” Ants are far better at making real products than at assessing financial ones. So grasshoppers discover clever ways of packaging their grasshopper loans into enticing assets for ant banks.

Now, the German ant nest is very close to some small colonies of grasshoppers. German ants say: “We want to be friends. So why do we not all use the same money? But, first, you must promise to behave like ants forever.” So grasshoppers have to pass a test: behave like ants for a few years. The grasshoppers do so and are then allowed to adopt the European money.

Everyone lives happily, for a while. The German ants look at their loans to grasshoppers and feel rich. Meanwhile, in grasshopper colonies, their governments look at their healthy accounts and say: “Look, we are better at sticking to the fiscal rules than ants.” Ants find this embarrassing. So they say nothing about the fact that wages and prices are rising fast in grasshopper colonies, making their goods more expensive, while lowering the real burden of interest, so encouraging yet more borrowing and building.

Wise German ants insist, gloomily, that “trees do not grow to the sky”. Land prices finally peak in the grasshopper colonies. Ant banks duly become nervous and ask for their money back. So grasshopper debtors are forced to sell. This creates a chain of bankruptcy. It also halts construction in the grasshopper colonies and grasshopper spending on ant goods. Jobs disappear in both grasshopper colonies and ant nests and fiscal deficits soar, especially in grasshopper colonies.

German ants realise that their stores of wealth are not worth much since grasshoppers cannot provide them with anything they want, except for cheap houses in the sun. Ant banks either have to write off bad loans or they must persuade ant governments to give even more ant money to the grasshopper colonies. Ant governments are afraid to admit that they have allowed their banks to lose the ants’ money. So they prefer the latter course, called a “bail-out”. Meanwhile, they order the governments of the grasshoppers to raise taxes and slash spending. Now, they say, you must really behave like ants. So the grasshopper colonies go into a deep recession. But grasshoppers still cannot make anything ants want to buy, because they do not know how to do so. Since grasshoppers can no longer borrow, to buy goods from ants, they starve. The German ants finally write off their loans to grasshoppers. But, having learnt little from this experience, they sell their goods, in return for yet more debt, elsewhere.

As it happens, in the wider world, there are other ant nests. Asia, in particular, is full of them. There is a rich nest, rather like Germany, called Japan. There is also a huge, but poorer, nest called China. These also want to become rich by selling goods to grasshoppers at low prices and building up claims on grasshopper colonies. The Chinese nest even fixes the foreign price of its currency at a level that guarantees the extreme cheapness of its goods. Fortunately, for the Asians, or so it seems, there happens to be a very big and exceptionally industrious grasshopper colony, called America. Indeed, the only way you would know it is a grasshopper colony is that its motto is: “In shopping we trust”. Asian nests develop a relationship with America similar to Germany’s with its neighbours. Asian ants build up piles of grasshopper debt and feel rich.

Yet there is a difference. When the crash comes to America and households stop borrowing and spending and the fiscal deficit explodes, the government does not say to itself: “This is dangerous; we must cut back spending.” Instead, it says: “We must spend even more, to keep the economy humming.” So the fiscal deficit becomes enormous.

This makes the Asians nervous. So the leader of China’s nest tells America: “We, your creditors, insist you stop borrowing, just as European grasshoppers are now doing.” The leader of the American colony laughs: “We did not ask you to lend us this money. In fact, we told you it was a folly. We are going to make sure American grasshoppers have jobs. If you do not want to lend us money, raise the price of your currency. Then we will make what we used to buy and you will no longer have to lend to us.” So America teaches creditors a lesson from a dead sage: “If you owe your bank $100, you have a problem; but if you owe $100m, it does.”

The Chinese leader does not want to admit that his nest’s huge pile of American debt is not going to be worth what it cost. Chinese people also want to go on making cheap goods for foreigners. So China decides to buy yet more American debt, after all. But, decades later, the Chinese finally say to the Americans: “Now we would like you to provide us with goods in return for your debt to us. Thereupon, the American grasshoppers laugh and promptly reduce the debt’s value. The ants lose the value off their savings and some of them then starve to death.

What is the moral of this fable? If you want to accumulate enduring wealth, do not lend to grasshoppers.

 

[AsifAmeer]

Sorry for the late response. I was out of town. Hasnain I get your point what you're saying. You highlighter 2 issues with BoP being settled in PKR.
1. It exposes PKR of International Speculation.
2. SBP would have to act as an International Clearing house for its PKR.

Very valid points. Here's what I would say about Speculation. No one will bet their money against a tidal wave with sound reasoning. I am talking about Bank Reserves or liquidity. This cant happen till the Govt brings its financial house order in place.

About the 2nd point, I do not have enough info to speak on this issue.

Hasnain, your inputs have been by far the most informative and technically objective.

I would like you to review my 4-step Economic Policy as well and let me know where you see the flaws

Pakistan's Financial Tsunami

This is a very well referred article on the same dilemma that you're referring to.....It gives you an insight so as to why we and world can not go away from USD
The grasshoppers and the ants – a modern fable - FT.com

 

[SBD-3]

Sorry for the late response. I was out of town. Hasnain I get your point what you're saying. You highlighter 2 issues with BoP being settled in PKR.
1. It exposes PKR of International Speculation.
2. SBP would have to act as an International Clearing house for its PKR.

Very valid points. Here's what I would say about Speculation. No one will bet their money against a tidal wave with sound reasoning. I am talking about Bank Reserves or liquidity. This cant happen till the Govt brings its financial house order in place.

About the 2nd point, I do not have enough info to speak on this issue.

Hasnain, your inputs have been by far the most informative and technically objective.

I would like you to review my 4-step Economic Policy as well and let me know where you see the flaws

Pakistan's Financial Tsunami

Will be glad to do so (if i could) cuz i am just a student of economics, but i will try my best to see if i could add some value.

 

[lem34]

So does this means in reality that US can spend as much as it likes without actually having that money ?

simply yes. Its based on a fraud. If arabs stopped accepting it for oil america would collapse. Or if china dumped its holdings.