The Evolution of a World Currency and its implications...1

The idea struck with the recent release of the trailer of Ice age 4. The kind of deranged systems in place is leading us to destabilizing the trade and investment correlation of economies, or to adopt a new standard dismantling the United States status of superpower in regards to its structural credit dependency and deficit balance of payments which can never be repaired.

Tracing back the system of exchange of economies prior to 1971, when the balance of payments were settled in precious metals like gold and silver formed the basis of domestic currency as well. Till that time, the Fed Reserve's note was backed 25% by gold, and an ounce was pegged at $35. If the economies wanted to increase their money supply even for general economic expansion, they had to keep gold in their hand by circulating trade and payments surpluses. The sovereigns reduced the supply of domestic credit in order to raise interest rates and either allied or lured other economies in order to attract foreign financial inflows when the rulers faced issues of trade deficits or had to undertake military campaigns.

The international financial dynamics self-operated itself with checks and balances. The countries reeling under the pressure of trade deficits, went ahead spiking their interest rates and lured foreign capital, on the other hand, it undertook measures such as reducing government spending, raising taxes on consumption, which in turn forced economic slowdown thereby reducing the purchase of imports. What a novel approach.

The only system destabilizer then, was spending on military and war. Such kinds of transactions which spanned across the World Wars, enabled the US to aggregate 80 % of the world's monetary gold deposit by 1950, giving the dollar the status of an substitute/proxy for gold standards. Lets now statistically be aware of the overseas military spending by US, the entire payments deficit for the next three decades happened with the expenditure cost of the Korean War. On the other hand, its private-sector trade and investments was exactly in tandem.

The scale of spending in the Vietnam war and other foray's of interference in the economic peace and war in the recent years made the US deficit volatile in international arena and thus making the dollar status of gold convertibility was suspended through the London Gold Pool. The status in the ground reality was not so easily detached as the Central Banks of countries, continued to settle their balance of payments in U.S. Treasury securities, just by the virtue of non-availability of any other asset in sufficient supply to signify the strength and reliability for central bank monetary reserves to replace a pure asset such as gold. This quality of the dollar made the US overconfident and its currency strength gave it the leverage to shift from an asset based country to a debt-based. Such kind of power to the T-bill standard made the US insulated from any disorder of balance-of-payments and financial restraints. Power corrupts, Absolute power absolutely; Such grant of invincibility status to its currency enabled its capital markets and the economy to be increasing debt-leveraged, allowing US the power to play with innovation of financial instruments. Politically, It also enabled the U.S. Govt to structure foreign policy and military campaigns without much thought for the consequences in regards to the balance of payments.

Currently, the problem is the potentially infinite supply of dollar credit. The subsequent growth in the reserves of central bank and the sovereign country funds ultimately, has been recycled into the dollar inflows by inducing more purchases of U.S. Treasury securities. Thus, in a sense, the foreign central banks and (indirectly the taxpayers) YOU are responsible for financing most of the U.S. federal budget deficit. The fact that this deficit is largely military in nature - for purposes that many foreign voters oppose - makes this lock-in particularly galling. So it hardly is surprising that foreign countries are seeking an alternative.

US is not suffering from a trade deficit, as one would like to think and believe. The country's foreign military spending has been accelerating, even after the end of Cold War. The other pointer has been the incessantly increasing capital outflows from the US. The reasons being the status of the "God Status"(check the reason in the next blog) of the financial institutions, especially Fed Bank and its money lending spree to foreign governments from the third world countries. It has also loaned money to countries who have been suffering from deficit to cover up their payments deficits, and even to private borrowers (people who have declared bankruptcy in 2008) to buy foreign infrastructure wen it was being privatized, foreign stocks and bonds, and even to the arbitraging industry, so that they can borrow at a low interest rate to buy higher-yielding securities abroad.

The manipulation for quick returns by banks and their arbitraging customers will be always distorting the prevalent exchange rates dynamics in the currency world. The Fed has been and will be flooding the economy with (QE) liquidity in their attempt to increase growth, but in reality they would be creating bubbles in the US asset prices.... more to come ... in this article..