- From the dark vaults of history
“They are living beyond their means and are shifting a part of the weight of their problems to the world economy, to some extent they are living like parasites off the global economy.” That is what Putin had to say, in August 2011, about the American economic foot-print on the world. Why Putin would dare say that to the world’s biggest lender and donor, and what is it that he actually meant?
Before answering this we must dig in the past as Putin seems to be echoing the same concerns that Europe had in 60s and 70s. It was French President Charles De Gaulle who vehemently opposed the US “dollar privilege” under the Brentwoods agreement. In 1965, Jacques Rueff, President de Gaulle’s economic adviser, said in an interview:
“… when a country with a key currency has a deficit in its balance of payments — that is to say, the United States, for example — it pays the creditor country dollars, which end up with its central bank. But the dollars are of no use in Bonn, or in Tokyo, or in Paris. The very same day, they are all re-lent to the New York money market, so that they return to their place of origin… if I had an agreement with my tailor that whatever money I pay him he returns to me the very same day as a loan, I would have no objection at all to ordering more suits from him.”
It was the Brentonwoods agreement, referred in Rueff’s above statement, which made dollar the international currency. In December 1944, Delegates from 44 allied nations met, while World War 2 was still raging on, in New Hampshire, United States of America, to negotiate a monetary system intended at promoting the flow of trade among the nations. USA was sure to command the terms and conditions of the agreement after it had left the world in awe of its military superiority by the complete and utter destruction of Hiroshima and Nagasaki. Due to the economic and human cost of the war, Europe was in a deplorable condition and America had already asserted to the world that Britain was no longer to be the center of gravity in world affairs. Therefore, according the terms of agreement, American dollar was priced at 35 dollar an ounce and in principle America was to issue dollar bills against its available gold reserves. Under this system, many countries fixed their exchange rates relative to the US dollar and central banks could exchange dollar holdings into gold at the official exchange rate of $35 per ounce; While Brentonwoods accord allowed the central banks to exchange their gold for dollar, at the same time it was not possible for firms and individuals to demand gold against their paper assets. That meant that the masses were led and forced to use the paper currency.
The oil, according to the deal, was to be sold in only US dollars and Saudi Arabia was quick in rallying other Arab nations to join hands and benefit from the birth of a new monetary system; the petro-dollar
It took some time for Europe to realise that their industrial output and labour hours were not turning the wheel of their economic fortunes as they should have. Many countries were showing willingness to repatriate their gold by 1966, as America only had $13.2 billion dollars’ worth of gold reserves while the central banks holdings and internal money supply reached to about $24 billion. This was enough to put in doubt the credibility of US in being able to cover its gold obligations to foreign nations. Since the dollar was gold backed, its depreciation could only mean that the financial centers around the world were doped into accepting America’s word.
It was in early August 1971 that a French warship reached New York’s shores for a possible gold repatriation under President Charles De Gaulle’s directive. At that time President Nixon of United States, reneging from the country’s dollar obligation, conveniently opted out of the Brentonwoods agreement which practically meant him saying, “We promised to keep your gold safe but we did not intend to keep our promise”. This decision, termed as Nixon Shock in history, melted the dollar into a headlong depression and across the western world dollar bills were being increasingly rejected as tender.
What emerged later was an even better monetary plan from Uncle Sam’s fertile brain. While America faced economic depression due to the floating dollar, practically not backed by anything, the Arab-Israeli war of 1973 and Arab boycott of oil exports boosted the oil price by 400pc, from $3 to $12. This rise in the price of oil paid great dividends both to the American and British oil companies and to other oil exporting nations. The grounds were fertile to replace the obsolete gold standard with a new system. This time the Americans wanted their dollar to be backed by the oil that they never owned which seemed a better option to them than backing it with the gold they never had enough of.
Henri Kissinger, the American secretary of state at the time, subsequently negotiated a deal with Saudi Arabia’s King Faisal. The oil, according to the deal, was to be sold in only US dollars and Saudi Arabia was quick in rallying other Arab nations to join hands and benefit from the birth of a new monetary system; the petro-dollar. The same paper that had eaten up the world’s gold was now as good as before in being able to be printed for all the oil unearthed hitherto.
But America’s appetite went far and farther beyond any imagination in having the debt obligation of more than 20 thousand billion dollars as of 2017 by showering the world with excess paper money and hence also bringing inflation to all the world. To put the figure in perspective, America has the debt obligation that equates to eight years of the gross domestic product of India, when India’s GDP is a by-product of more than 500 million souls’ sweat and toil. Yet, the stark difference between an American’s and an Indian’s lifestyle is mind-bobbling. Maybe that is what Putin meant when he likened America to a parasite. While Russia’s debt is little less than 11pc of its GDP in the face of all the economic sanctions, comparatively, European nations have an average debt to GDP ratio above 90pc and Uncle Sam proudly makes the charts with more than 100pc debt to GDP ratio.
Even playing by USA’s rules and under its crooked monetary system, China and Russia’s economic boom has taken America to a point where New York can no more depend on dollar to worry these powers in economic competition. That is why, perhaps, there is trouble in Myanmar and Syria, two of the economic partners of these economically thriving nations and that is why CPEC is going to cause trouble for Pakistan.