A parasite on world economy

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Some of the world leaders can be very blunt when making a point before their audience. Prime Minister Valadimir Putin who was previously President of Russian Federation, is generally very outspoken when expressing his opinion on issues that irritate him.

Speaking to a group of youth in central Russia, he accused the United States of acting as a parasite on the world economy by accumulating massive debt that threatens the global financial system. Elaborating his point of view further on the US economy, he asserted that the country is living on debt. It is not living within its means, shifting the weight of responsibility on other countries and in a way acting as a parasite.  This was not the first time that the former KGB official was so critical about the external sector management of the US economy. He had, very often in the past, censured the US foreign exchange policy and its propensity to cover deficits with treasury bills and bonds held by sovereign clients such as China and Russia.  If the US encounters a systemic malfunction, this affects everyone, is his favourite comment. Putin is also always insistent that the world should be seeking new reserve currencies for trade and savings. He also does not support the debt agreement likely to be announced soon by Obama. The idea was not that great overall because it simply delayed the adoption of a more systemic solution.

We feel that the views of Putin, though not couched in very diplomatic language, are extremely relevant to the current situation and must be given due weight in all the discussions on the world economy in order to design a new international financial and trading system that is more just and attuned to enhance the economic prospects of the countries in keeping with their efforts to grow faster and push ahead in the development race. It was not a coincidence that the dominance of the US economy at the global level almost gave it a veto power to manage the international financial system, and in the process, catapulted the US dollar as a reserve currency which was universally accepted to settle international trade transactions. Unfortunately, its role has grown to an extent over the years that it is now used as a store of value and a kind of international instrument for future settlements and almost for all other purposes.

The sad part is that the popularity of US dollar has not diminished despite rapid growth of certain other countries and relative decline of the US economy in the recent past. The SDR, Yen and Euro, once touted as the emerging reserve assets, have also failed to make much headway in assuming their rightful position and reducing the importance of the US dollar as a reserve currency. On the other hand, certain major emerging economic powers like China and India had no way to utilise their growing current account surpluses except to continue accumulating their foreign exchange reserves mostly in US dollars, treasury bills and bonds. It is interesting to note that the US itself has, so far, not made any worthwhile effort to reverse this trend by balancing its external sector that would necessarily entail living within its own means but has covered the deficit by issuing various kinds of paper or, in other words, promising payment in future. The asymmetry of the system could be seen from the fact that it allows the US to delay the adoption of a more systemic solution almost for an indefinite period and that too virtually on its own terms. For instance, what would happen to the purchasing power of trillions of dollar now held by the surplus countries after Standard s & Poor downgraded US top-tier AAA credit rating.

Moreover, what would happen if the value of the dollar falls steeply in the international currency market or inflation in the US reduces the real worth of its currency. The strange aspect is that countries with huge surpluses have not been prudent enough to see the game and rebuff the parasite by increasing their own domestic consumption or investment and refusing to play the game by the rules set under exploitative conditions. We are, however, happy that Putin, in his own peculiar way, continues to highlight the issue that affects the economies of a large number of countries.

One solution could be the elevation of some other important currencies to the position of reserve currencies but, as experienced over many decades, such a transition is neither easy, nor is expected to be entirely satisfactory to a large part of the world. However, this does not debar the think tanks from trying harder and seek better alternatives. Multilateral financial institutions like the IMF and the World Bank could also take a lead to seek ways for a more symmetrical world economic order. Unfortunately, however, the US authorities do not seem to be sparing even their next generations from the ill-effects of their profligacy. The approval of the bill by the US Senate to lift the government s dollar 14. 3 trillion debt limit by up to dollar 2. 4 trillion on 2nd August, 2011 is yet another indication that the country is not serious to make sacrifices in the near term and balance its books, but is prepared to mortgage the future of its next generations more heavily for financing its present consumption levels.



Courtesy: Business Recorder

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