Thursday, May 29, 2014

Can We Have a Virtual Gold Standard?

Beijing has contacted major banks and producers of gold asking them to support its bid to establish a Global Gold Exchange in Shanghai.

The stated aim of the initiative is to lessen the extreme volatility in the price of gold; but lurking not too far behind is the ambition to have the Yuan compete with the US$ as an international reserve currency.  (A reserve currency is one all governments must hold to facilitate trade.)

How realistic is that ambition?

The Chinese certainly seem to have the right credentials. Their economy is now, according to the latest World Bank purchasing power parity estimate, larger than that of the United States, and last year China overtook Germany as a global trader.

But I doubt if the Yuan will ever become the world's reserve currency, and that has nothing to do with China's credentials:  it's because I think the Information Age is creating the possibility of an entirely new monetary system, free of dependence on any single country, no matter how large and dominant.

To explain what this new option is, I have to provide some background.

Through most of history, the only acceptable international currencies were gold and silver, either coined or as bullion.

Paper money began as promissory notes issued by private financiers stating values in terms of gold (or more rarely, other precious commodities).

When governments began to issue paper currencies they were initially on a "gold standard" that imposed a ceiling on how much money was available for use. That proved a serious constraint in times of rapid economic growth or war, both requiring a swift expansion of finance.

Not surprisingly, governments went off the gold standard under pressure, and once that happened, the problem of international exchange rates became a primary concern: there was no agreed common measure of value.

The problem was especially difficult at a time when the leaders of imperial Europe believed the strength of a country was founded in its capacity to maximize exports and minimize imports.

To achieve that ideal they engaged in reckless manipulation of trade rules and currency exchange rates, dignifying their sharp tactics as "trade and monetary policy."

But all they achieved was endemic economic instability.

The major European empires sought to cushion themselves by monopolizing the markets of their colonies, but that only deepened the poverty of their victims, rendering them useless as consumers. 

Among the nations of Europe and North America, the volatility put all countries on a downward spiral of falling trade, consumption, production and employment.

As factories closed and millions lost their jobs, the world sank into the Great Depression of the 1930s. The mass misery of those times empowered fascists of the Left and Right, and a British-led effort to set them violently against each other mushroomed into the Second World War.

After the war, as the world's sole economic super-Power, the United States moved swiftly to create a system in which currency exchange rates were fixed and trade restrictions removed.

A new International Monetary Fund established the currency values of all its members in terms of gold at $35 an ounce. The US$ was deemed "as good as gold," and that freed the system from the rigidities of linking currencies directly to metal.

The IMF system functioned well until the massive export of US$ to fund postwar reconstruction in Europe and Japan, and to fight the proxy conflicts of the Cold War, caused a glut of the currency abroad.

When foreign governments with huge holdings of dollars tried to convert them into gold, Richard Nixon refused. The central agreement of the IMF was thus destroyed, and all currencies left to "float" to their market valuations.

That happened in 1972-1973, and since then, the world monetary system has lurched along with floating currency rates set by opaque, volatile "and staggeringly large international financial flows.

As the United States economy was by far the largest in the world and petroleum was priced in $, it became necessary for all trading nations to hold the currency in their own reserves.

That is what made the US$ the world's "reserve currency."  

Against that background it is quite clear that the Chinese ambition to have the Yuan replace the $ in international trade is a pipe-dream.

The Chinese economy is nowhere as large, diverse or vital as the American, and GDP comparisons based on PPP calculations will not impress hard-eyed financiers called upon to decide which currency they want to hold in large quantities.

In addition, the Information Revolution has opened up the possibility of an international monetary system with a fluid market-imposed gold standard operating largely on autopilot.

It could work something like this: exporters of a particular product or commodity would price it in terms of the domestic cost of gold in their countries. Importers would decide what was the best buy based on the gold price in their own countries. Supply and demand would set the purchase price.

Such an arrangement is possible because information technology can sift through enormous amounts of data to present buyers and sellers with clear choices.

The free global marketplace that would evolve from such interactions can be envisaged as a giant e-Bay, with a reformed IMF producing a periodically adjusted scale of currency valuations as reflected in millions of trades. It would also monitor overall balances in trade and payments flows and work with national authorities to head off problematic situations.

Such a system would provide a completely elastic gold standard for multiple currencies and with great economy of effort, take into account a diversity of social factors in exchange valuations.   

Sunday, May 25, 2014

A Quiet Indian Peace Bid on Kashmir

Just after the conclusion of the general elections and before the results were known, the Prime Minister’s Special Envoy on Kashmir, Satinder Lambah, made a speech in Srinagar laying out the most comprehensive peace plan India has ever made.

He said the speech reflected just his personal views but The Times of India's brief report by Indrani Baghchi (buried at the bottom of page 15 in my edition of the paper), said “the highest levels of government” were involved in crafting it.

The proposal is that that Line of Actual Control (LOC) become the de jure international border while India and Pakistan move to erase it for all practical purposes.

For that to happen, there would have to be a general demilitarization and normalization throughout Kashmir, and the winding up of terrorist training facilities in Pakistan. There would be no tariff or non-tariff barriers to trade and no constraints on the free passage of people or on development of transport infrastructure.

Presumably, somewhere along that continuum, the special constitutional provisions in effect on both sides of the border would be brought in line with the new realities.

What might give the proposal a chance of success is the changed regional dynamic resulting from the projected withdrawal of NATO forces from Afghanistan at the end of 2014.

A significant element of the new dynamic has been the Pakistani response to the American effort to bribe the drug-running Haqqani terrorist network away from control by the ISI: Islamabad is now engaged in bombing the assets of its former client, inflicting heavy losses.

Other aspects include the energized Moscow-Beijing axis in the face of the situation in the Ukraine, Uighur terrorism in China and the tensions boiling up along Asia's eastern seaboard.

From West Asia shell-shocked by what can now be called the Arab Winter to China teetering on an economic precipice, there is a new sense of vulnerability throughout the continent.

That has caused erstwhile supporters (Saudi Arabia and China), to cool towards Pakistani sponsored “Islamic terrorism,” and even the ISI might have begun to see that if the Haqqanis can be turned into a Frankenstein’s monster, so can all its other proxies.

The wild card in all this, of course, is the British interest in continuing to control the $60 billion drug trade out of Afghanistan. That is the glue binding the ISI to British policy, and it remains to be seen if the new regional situation can weaken the bond. .

In the past, India-Pakistan peace initiatives have led to violent provocations to prevent progress. In the current circumstances, that will have to be more than the usual cross-border terrorism or attacks on consulates. It will have to be something of the order of 9/11 or 26/11, precipitating war. As I have noted before, there is evidence the British and their allies in the United States have been trying to set the scene for that.

Among the recent signs that something nasty is in the works is the disappearance from his Karachi residence of noted Indian gangster-terrorist Dawood Ibrahim. He can only be up to no good.

I do not think we will have to wait long to find out if we have chaos in South and Central Asia or a major move towards regional peace.

Wednesday, May 21, 2014

Headline Awaited

Readers of the Indian Express in New Delhi seem to have got a collector's item on 15 May, an edition rushed into print with a placeholder banner headline across the front page:

If the paper had an editor with chutzpah (rather than one who reprints daily full-page excerpts from The Economist), he could have got away by pretending it was intentional, a philosophical statement on a world moving too fast.

Reminds me of Chou en-lai's response when Henry Kissinger asked what he thought would be the verdict of history on the French Revolution: "It's too soon to tell."


Monday, May 19, 2014

The Blindness of Thomas Picketty

I haven't read Thomas Piketty’s book on Capital in the 21st Century, but going by numerous and lengthy reviews, the French academic deserves the Blind Economist of the Year Award.

At a time when the connective and analytical technologies of the Information Age have opened up the possibility of a truly egalitarian use of capital, he argues the opposite: that capitalism is bound to create increasing inequality.

The reason for this massive misreading is obvious: he looks not at the reality of the world but at the distorting mirrors of statistical analysis that cannot capture new and emerging phenomena.

If we look at the real world it is clear that a quiet revolution is taking place against a system that has, throughout its history, allowed the corporate elite to apportion a lion’s share of wealth to itself.

It is a revolution that promises to reverse that process and equalize societies more comprehensively than any with flags and incendiary slogans. Consider the following:

1. The Internet and Worldwide Web allow small and medium sized enterprises to find and cater to niche markets. In effect, that destroys the mass market, which is no more than a conglomeration of niches homogenized by advertising.

2. Without a mass market, giant corporations have no reason to exist. Their decision-making hierarchies make them corporate dinosaurs, incapable of competing with smaller companies capable of adjusting far more swiftly to changes in consumer demand.

3. Without giant corporations to finance, the great bourses of the world will also become dinosaurs, especially as they face competition from crowd-funding. That fund-raising model is already revolutionizing indie film production in the United States – Spike Lee movies are now entirely financed that way – and will undoubtedly spread to all other economic sectors under a new American law that allows crowd-funding for profit. That law, which is sure to be replicated around the world, allows very tiny enterprises to raise funds publicly, in effect, creating innumerable little stock markets, tapping into minuscule pools of capital.

4. An added kick to the old gargantuan world of industrial production comes from the combination of off-grid renewable energy and 3D printing. It makes possible high quality manufacturing in areas without the heavy and expensive infrastructure that has always before been necessary for industry.

What all this means is that the global corporate elite created by the mercantile and industrial eras will have millions of new competitors capable of eating its lunch.

The days of corporate biggies strong-arming governments and riding roughshod over social and environmental concerns are over. Not because of any Good Corporate Citizen Code of Conduct, but because the biggies and their weird values will no longer exist.

Friday, May 16, 2014

What Now for India?

I was dead wrong about the outcome of the elections, but not in my trepidation about what is happening in India.

A great flood of money has washed through our electoral system, empowering forces that are rooted in the divisive communal politics the British introduced during the colonial rule and have fostered through proxies since independence.

Where that money has come from and what it will require the new government to do should be of acute concern to Indians.

All indicators signal that we are headed for a period of undisguised crony capitalism that will see foreign interests in the driving seat, acting through major Indian corporations.

Those alliances are by no means secret, and some are notorious, especially RIL's hookup with BP that has given the most predatory of the energy majors a role in the pricing of our sovereign natural gas resources.

The association of the TATAs with British interests dates back to the opium trade era of colonial rule, and its diversification in recent decades seems to have included, most obviously in the controversy over the allocation of 2-G spectrum licenses, a shadowy role in launching the corruption scandals that tarred the UPA government in its final years.   

The Ruia Brothers of ESSAR and the Vedanta-Cairn India combine also have an earned notoriety.

Beyond the interests of these usual suspects, we can definitely expect the new government to push for foreign/private investment in the Defense Sector, and the forging of an Indian "military-industrial complex."

Such a combination of forces first emerged in the United States after WW-II, and during the Cold War it spread to all major industrial countries, including supposedly "Socialist" countries.

Once created, the arrangement has proved impervious to democratic control, for it thrives on creating and manipulating violent international confrontations, using intelligence agencies subverted from their legitimate roles. "National security" is used to trump all efforts at democratic control. 
On the social front, we can expect to see big business profit from an unprecedented alienation of land from small farmers and inattention to environmental concerns.

The outlook overall is thus grim indeed for India, unless by some miracle Narendra Modi in power jettisons those who financed his rise and implements a truly democratic and indigenous agenda

The Congress in Opposition

The prospect described above offers the decimated Indian National Congress a golden opportunity to rebuild itself as a broad-based representative of national interests.

If a BJP government follows the negative trajectory described above, it will have to step rough-shod over the interests of millions of Indians, especially small farmers and the economically powerless. It will have to misuse the intelligence and police services.

If the Congress sets out to give a voice to those injured by such policies, it can expect to reap a rich dividend at the next general elections.

To do that, it will have to organize a national network to report on what is happening, and perhaps start its own media organizations to provide fair coverage.

At the very least it should have a website to publicize what is happening in the country.

Intelligent use of social media -- which it seems to have not done at all this time around -- should help the rebuilding process.

The Long View

In the long view of history, the particulars of who, what and why of this election are likely to disappear in the face of one overwhelming fact: a single political party has once again become the representative of the nation as a whole. 

The fact that regional caste-based politics have been shown the door is a major positive development. 

The end of the myth about a "Muslim vote bank" is also something to applaud. 

Perhaps that will begin the process of bringing to an end the regressive idea that religion can be the basis for electoral politics, allowing organizations such as the RSS to reinvent themselves and become truly national in identity and purpose.


Wednesday, May 14, 2014

Short the Market!

As the Sensex and Nifty surge to all-time highs and giddy pundits predict that Narendra Modi’s projected rise to the Prime Ministerial gaddi will send the markets into the stratosphere, I would like to hand out an outsider tip: short the market!

Most of the money inflating the Indian indices has come from foreign institutional investors (FIIs), and if reality bites on the 16th, we can expect a torrid flow back and a radical correction in the markets and the value of the Rupee.

That will create a sense of panic and doom and lay the whammy on those trying to put together a non-Modi government.

Perhaps that, rather than the fabled “animal spirits” of foreign investors, is behind the ballooning markets.

Look at it from the point of view of the Powers that be, the Permanent Members of the UN Security Council.

The United States and China are engaged in a delicate pas de deux, the one pushing for a process that would bring in a multi-party democracy in Beijing and the other insisting that the existing Beagle Boys gang is best for the Chinese people.

(I think Michelle Obama and kids pushed the American message with great delicacy on their recent trip to China but had little success – even after the Pentagon tried to assuage Chinese fears of losing Tibet by flicking the kill switch on one of our B-15 troop transports. It also seems to me that Beijing’s mad dog behavior towards Japan and Vietnam is intended to signal its readiness to take off the gloves.)

At this suspenseful stage, neither Beijing nor Washington wants a regime in New Delhi capable of an assertive foreign policy.

Britain, France and the Russian Federation all have important arms supply relationships with India that would not be improved by having a strong and stable government in Delhi.

Additionally, Britain’s hopes of investing in India its ill-gotten trillions from organized crime, especially the “illicit drugs” trade out of Afghanistan, depend on weakness in Delhi.

Going by recent developments, I think the main conduit for those investments is going to be the TATA group. Its Chairman emeritus has just been given a knighthood of “the order of the British Empire” – yes, the same one that killed about 500 million Indians in less than 200 years – and his successor’s background is in infrastructure (the sector into which most FII money will probably go). Also,Voltas, a TATA company, continues to signal that the Brits will not want for toadies when they come, again.

In combination then, my tip to savvy investors is to short the market for the aftermath of the 16th, and go long on TATA Infra.

Monday, May 12, 2014

Fateful Scenarios for 16 May

In 2008 I posted on this blog an item recalling some of the epochal markers of Indian history in the month of May, including:
  1. The birth of the Buddha
  2. Vasco da Gama's 1498 arrival off the coast of Malabar; 
  3. The beginning of the great uprising against the British in 1857; 
  4. Gandhi's settling in Satyagraha Ashram, his first home in India after returning from South Africa in 1915; and
  5. India's first nuclear test (just as the US Congress began hearings to impeach Richard Nixon).
Will the 16th see yet another fateful addition to that list? And if so, what might happen? Among the possible scenarios:
  1. An outright BJP sweep and a government led by Narendra Modi. If the atmospherics of coverage by our bought-and-paid-for "elite media" are any indication, this is a consummation devoutly to be desired. I do not think it likely.
  2. An outright sweep by the Congress. This would surprise everyone, including the Congress High Command.
  3. A hung parliament, with a substantial force of "secular Third Front" parties. Most likely in my view. 
  4. Narendra Modi loses badly to Arvind Kejriwal in Varanasi and the RSS unleashes its muscle in a bid to question the fairness and legitimacy of the polling. The India Today "pre-poll" in Varanasi indicating that Modi would win overwhelmingly and all others lose their deposits seems to be a preparatory step in that direction. So does the whining about the unfairness of the Election Commission.
However, the wild card in any of those scenarios could be international developments that create chaos in India and more broadly, Asia. This could include:
  1. The reappearance of the missing Malaysian Boeing 777 in a 9/11 type attack intended to spark an India-Pakistan war. 
  2. A large-scale labor revolt in China and the return of deposed-imprisoned Central Committee member Bo Xi Lai at the head of a rebel faction of the People's Liberation Army. This could spell the effective end of the current power structure in Beijing.
  3. Either 1 or 2 above would set off a global economic collapse.
  4. Manipulation of the jet stream to cause a complete failure of the monsoon over India. Environmental activists have been sounding the alarm for many years about the nature of the experimentation under Western military aegis to change global climate. Altering the path of the jet stream has been high on their list of concerns. The weird and extreme weather this winter in the United States and Europe (including sand from the Sahara blowing across Britain), would support speculation that trials have been under way.
Awaiting the 16th with bated breath, we should remember T. S. Eliots dark take on history in Gerontion:

History has many cunning passages, contrived corridors
And issues, deceives with whispering ambitions,
Guides us by vanities. Think now
She gives when our attention is distracted
And what she gives, gives with such supple confusions
That the giving famishes the craving. Gives too late
What’s not believed in, or if still believed,
In memory only, reconsidered passion. Gives too soon
Into weak hands, what’s thought can be dispensed with
Till the refusal propagates a fear. Think
Neither fear nor courage saves us. Unnatural vices
Are fathered by our heroism. Virtues
Are forced upon us by our impudent crimes. 
These tears are shaken from the wrath-bearing tree.


Tuesday, May 6, 2014

Boycott Voltas

India’s largest manufacturer of air conditioners, Voltas – a TATA company – is airing another anti-national television commercial that should cause all Indians who value national unity and integration to boycott its products.

As with its first anti-national commercial, the new one targets Tamils. The pidgin English/Hindi has been dropped but the broad accent remains, and in case you have trouble identifying it, the main character is addressed as Murthy.

Why do I think this is anti-national?

It has to do with the use of accents by the British to divide and control Indians during the colonial era, and more widely, as an instrument of elite governance in Britain and abroad.

To explain that, I have to refer briefly to British history.

The people of Britain represent successive waves of tribal invasions from Europe over thousands of years, each violently dispossessing its immediate predecessor. The defeated tribes became the lower classes and the minority groups of the Welsh, Scots and Irish.

Presiding over that layered social order is a small elite group that arrived in the 11th Century.

Once raw violence was no longer necessary for control, the elite maintained its dominance through an impenetrably nuanced system of social mores. Standards of dress, education, and speech patterns, the use of cutlery and club memberships, old school ties and a range of other insufferable snobberies distinguished the “in crowd.” Outsiders who tried to navigate the system and failed were the subject of open ridicule.

The correct “accent” was an important hoop that outsiders had to jump through to be accepted. (George Bernard Shaw made that the theme of one of his most popular satires.)

The Scots, Irish and Welsh, as well as the “lower classes” generally, were the first victims of this system of governance, and it expanded throughout the British Empire.

Wherever the British ruled, they ridiculed the local accent, and everywhere, local proxies joined in the mind fuck.

In India, every region had its caricatured accent, and the toadies who slurped up to the Brits dined out on imitations. It was a very effective way of creating disunity among Indians

In the decades since independence, the malignant divisive British impact on Indian society has virtually disappeared, but in the last few years, Shah Rukh Khan's films and a number of television commercials (for Voltas and the energy drink Red Bull), have tried to revive it.

Tamils have been particular targets.

I doubt if this has happened spontaneously.

SRK's public persona is that of someone who will do anything for money, and Voltas has its bread very thickly buttered by the British: it had the air-conditioning contracts for the ocean liner Queen Mary 2, and the Burj Khalifa in Dubai.

With that kind of business coming its way, the company is unlikely to suffer at all from a boycott call by a lowly blogger, but perhaps it will raise the political awareness of the corporate biggies at Voltas and TATA.

I urge readers to circulate this post and seriously consider a boycott. The time of colonial toadies is over.

Also, please email this blog to the Ethics Counsellor at Voltas: