King Dollar

Its been a while since the previous post,but all is well that I was able to think about some highly debated topic to write and voice my opinion on it. This time around at the end of recession I was thinking about a topic that is continuum of recession. After thinking through for some time I came to conclusion that there is nothing better to write other than dollar.

Every now and then someone or other keep talking about dollar demise and replacing dollar. The American influence has now so deep rooted that even we people in India worry about dollar rather taking care of our problems. What will be the effect of Dollar demise is what we need to see but before getting there we need to surf through the history to understand how dollar came to the power? It all so happened during the World War II when the European Nations were in need of money.Since the United States were one of the few Non-Colonized country at that time not involved in the war, the Allied Powers (Great Britain, France and other countries) chose to deposit their gold as collateral for the money. After the war ended the US dollar was floating around based on the amount of Gold it had. This includes the amount of gold given as collateral by other countries. According to Gold Standard a country can float its currency equivalent to the amount of gold it possess. Since US had all the collateral gold it flouted its dollar freely.
France, taking a note of more dollar in the market started to get back the collateral gold that she has deposited around the year 1970. Looking at this other countries followed suit. This is the start of dollar crisis if rightly seen. Had the US withdrew the excess dollar the dominance of it would have been not severe where it can bring down other economies together.
During the same time the consumerism grew in the US that led to uncontrolled consumption. Here is a country that is now becoming a market for all the countries in the planet. This action indirectly fueled the dollar crises, because the money is now created out of thin air to match this demand.

Let's just rewind back and see other Currency Demise. There were other currency demises including the UK Pound sterling, but dollar demise will be little more painful than those for the same reason as this past recession. Unlike other i differ and i can only believe that it will not be detrimental rather better for the developing countries. The consumerism will have a shift from one end to the other. Now,here is my concern, instead of setting another currency standard the countries should return to the Gold standard or any other similar commodity based standard. What is the use of this? Countries will have ample opportunity to price their produce more competitively and this standard will be stable and less inflationary than the present system. There is also another reason why at least developing and exporting countries need to think beyond dollar because the influence of china is so huge that I doubt the US will be able to maintain its position as largest consumer.

How will this effect be to India is a question we need to look at and analyze. This will be more bloody for India then any other country. This is because of the stupid IT outsourcing industry that our government is promoting. The situation is so dire in India, that there is no investment in other areas including agriculture, manufacturing or in research. Once was a exporter, now the country is importing rice from other countries. But there is a better way to get us out of this, but this process will take long time but will definitely be fruitful. I came to this conclusion because I lost confidence in our government and it I am sure the idiotic politician will not allow any change to happen in either because of lobbying or their investments.

What would be simple process is to avoid these IT outsourcing companies for some time and start focusing on other industries like manufacturing, food processing and other research areas in medicine and drug development. This will force the government to start focusing on other areas and divert funds form the IT SEZ. This will make India become a consumer and producer economy. What Infosys done to India is nothing but making the people loose their identity.

The effect of replacing dollar will create some problem for the US. If dollar is replaced as a trade currency some of the main commodities traded in the US markets like Oil and Gold will become expensive in dollar terms but cheaper for other countries.This will make the US interest payments on their debt costlier and also prevent creating money out of thin air. The free credit will vanish,but all is not bad for the country as people will start saving money and thus giving a more stable economy rather having to undergo bubbles every 8 t o 10 years. The property market in the US will collapse again only to stabilize and become firmer.

Before concluding let me give my prediction for the dollar demise. If the present situation in the US and rest of the world continues then the dollar demise is inevitable and could happen as early as 2013 or by at the latest by 2015. The demise of dollar will have a major impact on India due it over dependence on dollar. Countries like India should stop subsidizing rather promote internal consumption.It should also support manufacturing rather than services to save itself from becoming a fiasco