By Kumar David –
Finance Minister Ravi Karunanayake (RK) has announced that foreign currency stashed in Swiss banks by locals may be safely brought home; no questions will be asked, protection of funds guaranteed and hinted that better interest rates than Switzerland may be offered. A decision of this magnitude must have Prime Ministerial, Presidential and Cabinet approval. No, this is not because RK or any of these worthies have money buried in foreign accounts that they are yearning to bring home and splurge – these folks don’t need local megabucks in addition to incomes, perks and wealth. The reason is that the exchequer is penniless of foreign lucre and a desperate Finance Minister is scrapping the bottom of every barrel he spots on the wayside. The import bill is rising, export earnings declining and the trade deficit in 2015 will be worse than 2013 and 2014. Reserves are under pressure and RK’s panic is justified.
Before today’s theme which is the dollar as a tool of US foreign policy, two comments on this matter; one substantive, the other pragmatic. The currency laundering amnesty will be followed by forgiveness of the corrupt ways in which the monies were acquired. To say: “Bring back the loot, it’s protected; but we will prosecute you for corruptly acquiring it” is a non starter. The unavoidable next step thereafter is forgiveness of all large scale fraud; corruption, larceny and kick-backs. Will they forgive only those who committed two crimes – fraud followed by money laundering – but prosecute those culpable of corruption but neglected the second crime of shifting the loot overseas!! That’s screwball; so it will be a blanket amnesty for all crooks, burying good-governance in perpetuity. The second reason I oppose this amnesty is that it is a waste of time; there will be few takers. Big fish have ways to move loot elsewhere out of Switzerland; anyone not in violation of US law (Foreign Account Tax Compliance Act of 2010) will not be under pressure.
The $ versus the US economy
The dollar is the mighty medium of international payment and repository of global reserves, but the US economy is in decline; it is not down and out but the economy is flagging in fits and starts. Here are a few numbers to illustrate this contradictory trend. America’s share of global GDP at market rates is down to 23%, a decline from over 30% in the superpower’s heyday, mid 1990s. In purchasing power parity (PPP) it is 17%; the same as China (16%). [At market rates China’s share of global GDP is 14% and trails the US by 9%]. US share of global exports is down to 10% and imports down to 13%. The US is the biggest export market for only 25 countries, down from 45 a decade ago. US share of global manufacturing is just 17%. Its indebtedness to foreigners is gigantic; foreigners hold $9.6 trillion of $13.2 trillion US publicly traded debt. This is the picture of a fading giant whose global economic clout is dwindling and is deeply in debt to the rest of the world.
However the place of the dollar in the global financial and trading system tells a different story, but before venturing there a one-sided picture which ignores the strengths of the United States must be corrected and I do not mean military supremacy only. The US is way ahead in innovation and technology, in R&D it is still number one though others are catching up, its corporations still hog the top spots, and about 15 of the 20 apex places among world universities are occupied by US colleges in the Times Higher Education Supplement and Shanghai Jiao-tong annual rankings. Remember the splendour of the Eternal City shone even in its twilight years, which Edward Gibbon opines extended from the ascension of Commodus to sole rule in 180AD and endured till 476AD when the last western emperor Romulus was deposed. Gibbon thinks that Rome peaked in the reign of the last of the ‘five good emperors’, Marcus Aurelius (161-180AD). US power peaked in the 1990s when the demise of the Soviet Union certified its uncontested military, economic and diplomatic supremacy, but ah don’t forget, history now moves at a much faster speed.
The dollar however is king! Sixty percent of global reserves are in dollar denominated instruments and a similar proportion of global trades are settled in dollars. About 60% of global GDP in 2015 (70% in the early 1990s) is produced in the ‘dollar-zone’ (as opposed to the Euro, yuan, yen or sterling zones); 55% of global funds are managed by Americans while 45% of global bonds are denominated in dollars. All the world’s banks are all in thrall to American extraterritorial laws and courts. It is a walkover; there is no candidate to contest its supremacy. The Euro is so embroiled in European turmoil that its very survival is questioned; the yen as a global alternative is a tried-and-failed case, sterling is a has-been. The red-back is not going to make headway because of China’s closed financial system, immature legal structure and secretive courts. Beijing is pushing a yuan dominated multilateral bank (Asian Infrastructure and Investment Bank) and promoting it as a medium of trade in Asia, but there are no takers except in transactions with China. The red-back is not a free-float currency and hence unsuitable as a medium of international settlement.
After a thousand years as numero uno, what is Rome’s enduring legacy, its lasting gift to human civilisation? Luminance, Latin and Law! In a thousand ways how things were done in Rome illuminated how things would come to be done elsewhere; Latin bonded intellectual Europe – as late as 1687 Newton preferred to write Principia in Latin. Not just laws per se, but the concept of stable and abiding lawfulness derives from Rome. The Code of Hammurabi, circa 1800 BC predates Rome, Asokan Edicts and Laws of Manu are contemporaneous with the Republic, but none are codified and formalised or endured. And what will America’s legacy be in half a century when it will be just one among a few great peers? Something similar; a ‘culture’ of pre-eminence of technology, innovation and entrepreneurship; English (albeit bastardised American English) as the world’s lingua franca; and globalisation, that is an economically compacted world and pervasive democratic pluralism. Much of this will not be because of but despite the constrictions of American capitalism; yes, a contradictory and dialectical amalgamation. Sorry, this paragraph is a bit of a digression from my main theme.
The $ as a political tool
It is the pervasive power of the dollar that underwrites American soft power and its ability to impose economic and trade sanctions on those it does not like (Russia, Iran and North Korea), freeze other people’s reserves (Iran), frighten banks and inflict its tax laws across the world. The dollar is a strange creature; its provenance is rooted in the Fed in Washington which is obliged by laws made in Congress to serve American interests. It functions as the US instrument of commerce, investment and finance. But then, it also doubles up as global money and bestrides the world. The political usages of dollar ubiquity are palpable; Iran’s foreign reserves could be frozen because they lay in US banks as Treasuries, bonds and cash; and the world had little choice but to go along with sanctions against Russia because exclusion from the global settlement system was too frightening for any other country to contemplate. Washington will continue blatant exploitation of this advantage and the dollar will carry on enslaving the world for the foreseeable future.
HSBC grovelled like a worm when thousands of American accounts in its Swiss branch, concealed from US tax authorities – even its CEO Stuart Gulliver stashed away his pay cheque in an HSBC Swiss account of a shady Panamanian shell outfit – were revealed. Last month a US court ordered Bank of China to hand over information on Chinese bank accounts in a dispute between Gucci and fake handbag makers. This has far reaching implications for sovereignty; even the Chinese Embassy in Washington intervened unsuccessfully. Whose law, Chinese or American, are banks in China subject to? The judge even made scathing references to the deficiency the Chinese judiciary. The global overreach of Congress and the US judiciary is underpinned by the power of the mighty dollar and the greed of foreign banks and companies to retain a US foothold, not by US military or diplomatic clout. At times this reach can be beneficial such as exposure of the VW emission fraud and pressuring Lanka into war-crimes investigations with, albeit limited, foreign participation.
The unplanned consequences of dollar global dominance are more potent than these explicit confrontations. A rise in US interest rates will have devastating effects on heavily dollar indebted countries if a significant part of the borrowings are not at fixed interest rates. Debt servicing, already burdensome, can become unbearable forcing devaluation as the balance of payments worsens and confidence in the economy is sapped. Secondly, countries like China, the petro-states, Japan and Singapore who between them hold maybe $4 trillion in US Treasuries (government bonds and short-term paper) will be hit if their values decline (yield rises) in response to Fed interest rate increases or other events in the local US economy. A third unintended effect of global dollar dominance is that countries which hold reserves in dollars are subject to the vagaries of its depreciation or appreciation against the currency of their main trading partners. Fourth, loans and investments from even non-dollar nations are earmarked in dollars (Chinese loans to Lanka may be denominated in yuan – I don’t know) and reinforce dollar dependence. And finally, since US debt liability will exceed its GDP soon it could sap global economic stability; a worst case catastrophe for the whole world is if the US defaults, turning the greenback into play money. If world money is the currency of a broke nation, we are partly there now says Michael Pento (see http://kingworldnews.com/the-terrifying-future-that-we-all-face/), what happens to the global economic order?
To cap it, the American political system is now quite dysfunctional. The extremist Tea Party movement, America’s version of the Taliban, has got the Republican Party by the balls. In 2012 the GOP took control of both Houses of Congress and intentionally fashioned a logjam in legislation and economic policy. Mayhem on Capitol Hill compounds the insecurity of global dollar economics.