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How the world will end...Views: 444
May 02, 2005 9:07 pmHow the world will end...#

Don't give up at halftime. Concentrate on winning the second half
Happened to read this article from one of my friend's blog.. let your thoughts flow on this..

One of these days, China will collapse, taking the US down with it. What will we do then?
Let me explain the scenario I am thinking of.

When we export something, we get dollars in return. Most people think that it is a good thing. Not really. Dollars are good only if we can actually buy something with them. You can, of course postpone the buying. That is a good strategy if the economy of the US is growing so fast that tomorrow’s dollar will buy much, much more than today’s dollar. In that case, it is worth waiting.

Now, the dollar is not like any other currency.

Contrast the dollar with the rupee, for example. If a foreigner is holding a rupee and he learns that India is going to disappear tomorrow, he will buy something with his rupee double-quick. That is because he knows that his rupee will be valueless tomorrow.

The dollar is different because it is not just the currency of the United States of America. It is, in a way, the currency of the world. So when India wants to buy petroleum, it pays in dollars, even though it is buying from Saudi Arabia and not from the US. Saudi Arabia can in turn use those dollars to finance its imports of cheap Chinese goods, and China can simply keep those dollars.

In other words, atleast in theory, if the US were to disappear, the dollar could continue to be worth something as long as foreigners are willing to treat it as if it has some worth. In practice of course, the US hasn’t disappeared. But in a way, that is worse, because not only has it not disappeared, it continues to exist and print dollars. It then offers these dollars as payment for goods it is “buying”.

In a sane world, this stunt wouldn’t continue for long. When dollars flood the market, and people realise that the US doesn’t seem to be producing much to buy with the dollars, the value of the dollar would fall and the Americans would find it cheaper to make some things rather than buy them. But the world is not populated with sane men. In particular, no one has accused the Chinese government of being sane. To be fair, it isn’t just the Chinese government, but most other governments who are up to the same stunt, including the Indian government.

You see, governments love exports. They like to flaunt the dollars that their countries get from exporting, forgetting that ultimately, those dollars are just pieces of paper. When they export, it makes the exporters happy and it helps that exporters are usually an influential lobby. Governments also hate it when their countries import stuff, because they think that importing is some kind of weakness. Besides, imports benefit most people - because they get better choice and lower prices - but they hurt a small section of people pretty badly - the domestic manufacturers and their workers. Naturally, in a democracy, it is the influential lobby that gets heard, not the voice of public interest.

So as I was saying, most governments, including the Chinese government love exports and hate imports. So they give effect to their passions by buying up dollars and keeping them, thereby keeping the value of the dollar high (and consequently the value of their local currency low). The Chinese are the worst offenders in this regard, as they have around 500 billion dollars in their “war chest”. They have an entire army of slave labourers working to supply trinkets to the US at dirt-cheap prices. India is somewhat better; we carry only 140 billion though I think that even this is too much.

Of course, this cannot continue for long, and it won’t. One of these days, the Chinese will find that they can’t continue to supply stuff to the Americans at such low prices for long. The end may come in the form of rebellion in the countryside, but sooner or later the Chinese government will have to sell all the dollars it is holding. If that happens in one shot, the world is in trouble because the Americans will no longer be able to buy all the software we Indians are producing either. When that happens, people will naturally point to it as an example of the dangers of unbridled competition, just as the same people point to the Chinese now as an example of how strong government guidance is required for Capitalism to prosper. Will anyone insist otherwise??

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