Debt based prosperity
K. Abeywickrama
US President Barak Obama, plans to spend around US$850 billion on
“stimulus packages” and is confident that “the greatness of the American
people” will enable them to overcome financial crisis. This is in
addition to the US$800 billion already allocated by the earlier Bush
administration.
It is suggested that more will be required. At the time earlier
President Bush passed his stimulus package the USA National Debt was
already US$10.7 trillion. With the additional stimulus packages and the
ever accumulating US debt, the US National Debt will surpass US$13
trillion by end 2009.
Prospect
Can these debts be securitized and sold to foreign countries and the
US public? This is an unlikely prospect, considering the recent
performance of the US economy. So the US Federal Reserve must simply
print the dollars.
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No amount of bailout packages will be enough to cushion the
world economic crisis |
The USA and the UK are the most spectacular victims of the crisis
they helped to create: over half million US workers have been losing
their jobs each month in the recent past; 171 US banks and financial
institutions are close to failure and need assistance and over two
thousand others are in distress.
Several millions have lost their homes and at least a good part of
their savings. Now, Americans, corporations and citizens, are looking to
their government to be rescued through huge financial bailouts and
social and public spending.
Sri Lankans should take heart that the country has been relatively
unscathed, apart from the loss of some foreign employment and export
revenues. The financial system is comparatively secure, despite the
decline in foreign exchange earnings, because of the sound regulatory
system of the Central Bank of Sri Lanka. Unemployment is at an all time
low due to numerous infrastructure projects.
It is to the credit of the Sri Lanka Government that in spite of
pressure from international agencies, Sri Lanka declined to fully
liberalise its currency and its exchange regulations and privatise the
State banks. If they had succumbed to these pressures, the Sri Lankan
economy would have also faced a possible collapse.
Real roots
But to understand the real roots of this international crisis, we
have to go back into history to the changes in the international
situation immediately after World War 2. The “Allied Nations”,
comprising 44 countries that were among the victors in the war, gathered
in July 1944 in Bretton Woods, New Hampshire, USA, to design the
framework of the new world economy.
The USA was the only country that did not see war on its soil (except
for the bombing of Pearl Harbour) and it was now overwhelmingly the
world’s strongest economy and the only large creditor nation.
The meeting agreed to establish the International Bank for
Reconstruction and Development (better known now as the World Bank
organisations), the General Agreement on Tariffs and Trade (GATT) and
the International Monetary Fund (IMF).
Mechanism
They also agreed to create an exchange rate mechanism with the US
dollar as the international currency against which all other currencies
would establish their exchange rate.
The British pound was longer supreme as the country’s economy was in
heavy debt due to war expenditure. The US dollar value was established
at 1/35th ounce of gold and this rate of exchange was assured to anyone
wanting to cash dollars for gold.
The dollar was now the international reserve currency and is still
the main currency used in international transactions. But the USA has
not been a responsible caretaker of the world’s international currency.
That is the main problem of the world today.
Economist
The idea did not go unopposed. The British delegate to the conference
was the renowned economist, John Maynard Keynes. Instead of a reserve
currency he proposed an International Clearing Union that would be a
supra international bank and regulate payments for trade transactions
and issue its own currency, the bancor. Participating nations would be
forced keep their deficits within limits or face punishment through
higher interest rates on bancor-based credits.
The US delegate Harry Dexter White rejected the proposal and his
voice was the most important. He also secured US control over the IBRD
and the IMF, giving it veto powers over their decisions.
Currency based on the gold standard could not be sustained by the
USA. With its dominant position as the reserve currency, the US Federal
Reserve could not be prevented from expanding the dollar supply to meet
the expanding global ambitions of the USA. |
