معمارِ حرم باز بہ تعمیرِ جہاں خیز
از خوابِ گِراں خوابِ گِراں خوابِ گِراں خیز
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ادھر آ ستمگر ہنر آزمائیں
تو تیر آزما ہم جِگر آزمائیں

Thursday, 25 September 2008

Economics of Money and Inflation in Historical Perspective

Money! It is around which today’s world revolves. But have you ever thought of how money is defined? We all know that a dollar note is considered as money, but say if someone from outer space comes here and asks what is this money? How would you explain to him what money is? In short how would it be defined? Well there are quite a number of definitions that tend to satisfy the cause and more importantly the type of money used in today’s world. Some of the definitions are:

                “Money is a commonly accepted medium of exchange in commerce.”

                “Money is a legal tender used as a medium of exchange in commerce.”

                “Money is what money does.”

                The official currency issued by a government or national bank

Unlike money inflation is a relatively new phenomenon. Inflation is defined as persistent increase in general price level. In layman terms, if prices of goods of general use persistently increases over one accounting period this percentage increase is called inflation. Just to give you a little insight on inflation, there are two main types of inflation.

One is demand-pull-inflation. In this situation inflation occurs because of difference between the demand of certain commodities and their supply. Say for example; demand for milk and bread increases drastically due to some reason and supply cannot be increased immediately. This will cause prices to increase as well and not only of the milk and bread but all those things that are directly related to milk and bread, thus generally price of almost everything. This is demand-pull inflation.

Second type is supply-push-inflation. In this situation the supply of certain essential commodities contracts suddenly due to certain circumstances, therefore prices would go high because of unmet demand. For example, there is certain country that produces wheat. Its share in global market for wheat is 15%. It is struck by famine during certain year causing wheat production to be almost zero. This would cause the global prices of wheat to rocket-up, because the supply contracted and the therefore demand cannot be met. Take another situation which is closer to today’s world. If United States of America invades Iran for one thing or another. Iran being second largest producer of oil will not be able to export oil to the global market, creating huge shortage of oil. This shortage of oil would kick the prices upwards; making prices of everything go up as oil effects everything else as well. These would be supply-push-inflation as supply contraction would push the prices up.

For centuries man has been using gold and silver coins to fulfil his commerce needs. What is different in gold and silver compared to the modern currency? Since the beginning of time gold and silver or their coins for that matter have their own intrinsic value. Whether they owe this to their chemical properties, physical properties or whatever, it is beyond the scope of this article. But the bottom-line is that gold and silver hold some intrinsic value. Although the respective governments used to put their stamp on those coins, but still it was gold. It could be easily trader with any item anywhere around the world, irrespective of the stamp. Unlike today’s currency notes which need to be exchanged to buy stuff from the foreign countries. Then gold and silver are not perishable. Implying if you bury gold for a thousand years, it would still remain gold when you take it out and not decrease in value by even an ounce.  But at the same time they had their own drawbacks like transportation was difficult and hectic task and security of them was also a problem.

To overcome these disadvantages of gold and silver, some private businessmen came up with a business idea. What they did was to open a shop where they would store gold of people and in return issue a receipt to them confirming that the holder has got so and so amount of gold with the issuer of that receipt. They called this institute a bank and the receipt later came to be known as bank notes. These receipts and gold were inter-changeable and thus equally good for commerce. The scheme because of its usefulness attracted many among people and use of bank notes became more and more common. This popularity of these bank notes made many businessmen to venture in this field. Up until this point everything seems good as the banks provide security to the gold of people and they in turn use bank’s receipts to do the commerce. There is no problem of inflation being faced either. All through the only time things start to get bad is when centuries old human attribute of greed comes into play. According to history not much time after the establishment of bank, greed destroyed fortunes of many people. The bankers when realised that people who have got deposits with them don’t really come to check or collect their gold and are content using receipts, started giving out fake receipts or vanish away with all gold that they have. These fake receipts were the ones which did not have any gold at their back. Therefore, when somehow this news came to the depositors they rushed to the bank to check if their gold was there or not and thus world saw crowds outside of banks. The banks closed because they could not exchange receipts for the gold as they didn’t have the gold of the amount of receipts they had given out. Thus the term, ‘run at the bank’.

Later the authority of issuing those receipts was transferred to the central banks and Federal Reserve in case of US. Most of these institutes are owned by the government apart from US, where Federal Reserve is a private institute as well that makes and follows its own policies. Another bit of information about it is that American presidents for decades had been opposing the establishment of such an institute as a central bank, but finally federal reserve act was passed through senate when most of the senators were on vacation and only a handful were available in senate. Such an important institute was enacted in a single day without consent of more than half of the senators, which had been vehemently opposed for decades. The central bank was for the purpose of providing security to the depositors in case any bank defaults.

During 1930s a couple of really interesting events happened in America. A law was passed making it illegal for people to have possession of gold with them and many were prosecuted and imprisoned on ignoring this law. Therefore whole economy was shifted to paper money, although it was still gold backed. Then there was great recession in the American economy. Thirdly, American currency was devalued by Federal Reserve. Meaning amount of gold at the back of every American dollar was reduced without any reason given to its stake holders who were forced to use that paper money by law. Overnight Federal Reserve which has currency issuing authority removed certain amount of gold at the back of not only new American dollars but also the existing ones. What it caused was sky-rocketing inflation. Before this adventurism with paper money concept of inflation was non-existent, although only in those societies who were not using paper money or were still fully gold backed. This concept was called partial gold standards. Whether this drastic change in economy prolonged recession period or was the cause of recession itself is still debatable and subject of many conspiracy theories as well along with enactment of the very same institute. To deny everything that these theorists say would also be wrong because where there is smoke, there has to be some sort of fire. Therefore, I believe until some clear logical explanation is given for the said step these theories would continues to roam around. If of course, there is some explanation behind this.

After the Second World War, the Breton woods system was formed. According to this system all of the world currencies were to be pegged to US Dollar, while US Dollar was still pegged to gold (gold standard). Dollar was made exchangeable with gold. While US promised to redeem the dollar in gold to other central banks. Trade imbalances were corrected by gold exchanges or loan from IMF. Breton woods agreement signed in 1944 gave the world two more institutions viz. International Monetary fund (IMF) and International Bank for Reconstruction and Development (IBRD) also known as World Bank. The charter of these financial institutions says that no country should be allowed to revert to gold standards and they use every possible mean to ensure that sometimes even using the American military muscle. Therefore in a way the whole of the world was made dependent on the United States of America and its dollar. 

In 1971, American economy was in recession because of heavy American involvement in the Vietnam War. With war expenses sky high and not enough gold to with US Government for to make dollars, the government thought of revoking the gold standards altogether. What did do? What were the implications? Well, for starter it reduced the value of banknotes to just printed pieces of paper. Then the government could technically print any amount of paper as was required and use it. This certainly solved the problem of government not having enough money for their war. But as later the economist came to know that this leads to drastic inflation. Why? Because that piece of paper now no longer has any intrinsic value and is just a ‘legal tender’ which do. As for the rest of the world, it already was not gold backed rather fixed with US dollar in accordance with Breton woods agreement. United States unilaterally came out of this agreement and whole world had to bear the consequences of fiat currency. Previously dollar was fixed to an ounce of gold, after Nixon reneged Breton woods in 1971 it was no longer fixed to gold, something measurable, it was only fixed to printing press of Federal Reserve System of US. The economist agree that decade of 1970s was the worst after 1930s in terms of economic performance. Although oil crisis was the reason behind this as is popularly thought, but the fact remains that oil crisis just added fuel to fire which was already there.

This crisis was stabilized by creating demand for US dollar in international market. An agreement was reached with Saudi Arabia according to which oil could only be sold in dollars and in return US would support “house of Saud” Saudi royal family. After this other OPEC countries followed suit and accept oil payments only in dollars, therefore every country in the world needed US dollars to purchase oil and therefore made dollar a de-facto global currency.

So how does this inflation happen? Well as explained earlier, inflation is persistent increase in general price level. Therefore when more money is printed to take care of expenses more of this money enters the economy, demand for goods increases. As people would have more money they would demand more as well. When they would demand more, prices of goods would increase. The money that is in circulation now does not have any intrinsic value therefore prices of goods vary according to prices of gold, which in turn depends upon its demand and secondly the amount of money in circulation in the economy. More recently in the past couple of years, United States is again engaged in a series of endless wars the so-called “War on Terror”. Keeping other things aside these wars have grown really expensive for American economy which is finding it had to finance this war. They can borrow money from Federal Reserve which runs the printing press but they already are under a debt of billions if not trillions of dollars to this Federal Reserve. The pitifulness of the situation can be judged by the fact that now US government is borrowing money from Saudi Arabia and China at lesser interest so that it doesn’t have to borrow from Federal Reserve which lends at higher interest rates. What this does it that it further weakens already dismal situation of US economy. The state of US economy is directly related to value of US dollar. Therefore meaning that as US economy further weaken so does the dollar, as does the dollar weakens prices of goods that have some intrinsic value increases including oil. When oil prices increase in nominal terms it further increases the prices of other commodities especially food items. When all these prices increase US economy further weakens and the vicious cycle goes on. The inflation that is being observed these days is in nominal terms only and not much in real term, although wages have been decreasing in real terms.

I tend to believe no matter how desperate be a situation, there always is a solution to it. The solution being hard to come up with or not is a separate matter and depends on the particular situation. In my opinion a possible and only solution to this problem is reverting back to gold standards and if not gold other commodities can be used for the purpose of trade, those commodities that have their own intrinsic value and is not just a printed piece of paper. These commodities can be silver, Iron, Wheat, Rice or oil. It might seem old thing to you but it is the only possible remedy to the curse of inflation, fiat paper money was a bad idea. Gold standards would close down the printing press of the government and give some real value to the money of people and make wealth of people independent of those sitting in the government, thus more secure. At the same time it also makes economies of countries independent of US hegemony when their currencies are linked to some other real commodity instead of US Dollar. What right does the government has to erode the hard earned money of people whenever they want? Or what right does the person sitting in Wall Street has to devalue the hard earned wealth of a person sitting in Africa? Therefore, the gold standard would make people and nations more independent of their government’s policies or US hegemony respectively. It would give them more authority over their own wealth and it would get the world rid of the curse of inflation.

Saturday, 13 September 2008

Comformity???.............

"Sitting there, he pleaded with himself into writing that first letter. The ordeal was a sense of apprehension of reading what he would write. What if it wasn't a hopeless piece of work? Zhan bit his lip and smothered out that first letter. "C". A brown "C', or rust as the label said it. Ever since he'd taken up writing, he always used crayons for acts of expression; he believed it allowed him to write without that brashness that came with the pen. A crayon was a medium not to be trashed and forgotten. 

'Conformity' he began,' is an act of belonging. It is man's struggle to be charitable in his acceptance of ideas and ideology. It is the simplest of sacrifices one makes for a human relationship. Conformity approaches one's initial bias by rewarding it with the stature of acceptance. Even those who rebel out of tradition continuums, conform at the poles. Conformity by its very nature results out of an act of thought. Conformity is the original sin.'

He paused for the slightest of moments, as if to perhaps contemplate what he had only just claimed.

'The East in its mystical framework takes into consideration the conditioning of man. Thus, the initiate gets to observe how he perceives everything based on what he was conditioned to perceive and how he responded based on how he was be expected to respond. That is not in itself an elusive task to accomplish. You and I, in moments of misplaced sincerity, sometimes feel as if our lives are being constrained by forces beyond our influence or control. As if we have all been allocated timeslots and are being subjected to a subtle experiment. Everyone has left the red pill for the blue one. This feeling of doubt, perhaps even a sense of utter bereavement, refuses to last for any considerable period of time. No mysteries are solved, no conspiracies exposed and no revolutions erupt. The solace of our monotony is rejuvenating. What I cannot help but wonder is where this theatre of self-reassurance leads to? Does it create in us the inklings of a pattern of amnesia for the conformity of contemporary response - or say contemporary behaviour? Let us imagine that the members of most social, political and cultural sororities are coerced into acquiring this reflex. Each individual now follows this pattern, and when faced with an analogous predicament, they may look for a comparable solution. If I easily dismiss my doubt in being controlled, would I not then be as easily able to dismiss the doubts I have of my faith? This is by the far the surest track to instil a doctrine moral and religious hypocrisy into the psyche of the masses. Suddenly all those New World Order plots seem slightly subtler, slightly more plausible and possibly more true. ' "

I'd written all of that a few months ago in condescending cynicism. I had also failed to notice that I had fallen into the very same fallacy that I had been busy describing in the slightest of time spans. With the bravado of enlightenment and all that, of course.

Let me explain. For the longest time, I had been accepting morals and ideas, not just on the basis of conformity but also on whether I could intellectually subscribe to its justification or prohibition. Hah, I thought, I don't fall into the trap of letting myself be a complete hostage to conformity. Then if at any occasion I found myself making an ethical opinion, I'd readily find myself delving into the matter, until I could attach to it an abject morality. It would assure me with a sense of righteous personality and complete that struggle in me. Everything deconstructed to smallest detail: The devil's in the detail as we all know (excuse the pun). All thought of and debated, of course.

That was it, that would complete the process within me and it would be over. Like the above written story. And like it, I would rejuvenate in misplaced sincerity and chuck everything out of the window. You know of the cliché where everyone attacks the religious leaders and clergy of having done nothing but orate and repeat? Just like that.

It was only later - much later - that I began to notice the real essence of morality. I'd always figured that unless you actually understood why you were committing an act, you weren't really committing the act with purpose. I had also never tried to equate the more complex moral questions like war and abortion with things like rudeness and procrastination. But instead of going on about what thought about it this time, let me just say this: No matter what the circumstance or issue, the morality of any situation is of equal importance; it's about choosing what one personally feels is correct. And its about actually making an effort to follow on with that choice It's really simple. As long as morality stays within us, it'll only stay there. I think it's time we take it out and led it spread some.

Tuesday, 2 September 2008

Another Cold War?

Russia and the U.S. seem destined to be moving towards another Cold War. The recent intractability of both Parties has brought back the old memories when former Soviet Union and the United States were locked in horn for a period of not less than 40 years in the last century. Robert Gates, the defense secretary of the U.S., said a few days back, "Russia has taken a U-turn and is heading towards Past now." And the Russian President Dmitry Medvedev replied in an unmistakable tone that Russia was not scared of another Cold War, although it did not want it. No doubt that the stand-off between the two countries is at highest point since the demise of the U.S.S.R. in 91, many aspects need to be considered before conveniently using 'New Cold War' for the recent rhetoric of Kremlin and White House. Many ask, did the cold war really end? Or is it just the same war now being fought with a changed global strategic balance and on new Eurasian fronts. No doubt the same trust deficit is there between the two parties but the world surely has changed since 91, and this Cold War, if it is that, will be fought differently than the previous one.The world was quick to announce the end of Cold War in 1991. Everyone was hailing 'New World Order' in the uni-polar world but little did they realize that the Cold War mentality had not changed. Although the economy of Moscow was in shambles yet it never ceased to be a strategic competitor of Washington. The Warsaw Pact was dissolved but NATO kept on growing and never disbanded itself. Many argues that the U.S. has always been wary of the Russians, and the Yanks had never let go of their isolationist policy towards the Russians. The pacified era of Boris Yeltson did not bear any sign of Cold War but the rise of national Vladmir Putin did mean that Russia was eager to regain its erstwhile strategic space. It was only a question of time as when would Moscow announce its revival on the world stage, which now has a different global strategic balance then what one observed in 1991.Analysts say that global strategic balance of power is shifting from unipolarity to multipolarity where many regional organizations have sprung up to assert in world politics. The global hegemony of the U.S. is over whelming but it is under strain and challenges in many regions. Gone are the days when the U.S could bestride on any continent of its choice with no one to challenge its authority except certain 'rogue' states. Washington's engagement in Afghanistan and Iraq seems to b e taking toll on its economy. China is no more the same as it was in 80's; its economic and military might has increased many fold in the recent years. Now there is a strategic alliance of the Chinese and the Russians to check the U.S. in its backyard. The center stage of the previous Cold War was central Europe, and now the recent Georgian conflict is termed as the first battle of the new Cold War.Georgia is a former Soviet Union country in the Caucasus region along with Armenia and Azerbaijan. Tiny Armenia, which borders Iran and Turkey, readily accepts Russian protection. It is Georgia, a vital region for the Wes, which is centre of attention these days. Pipelines through Georgia supply Europe with 1 million barrels of oil per day. Mr. Saakashvili, president of Georgia, is a pro-U.S. leader who has shown his ardour to join NATO on various occasions. The lobbying for NATO invites the wrath of the Russian; As Moscow sees NATO against the spirit of political understanding that took place between Gorbachec and George H.W. Bush. Georgia went to war with Russia recently over its break away provinces viz. South Ossetia and Abkhazia. Although the Western media did its best to paint Russia as a bully in its region, it remains undeniable that Georgia first attacked on the peace keeping Russian troops in the region. The result was inevitable; The mighty Red Army crushed the Georgian batallions and asserted its rule in the region. It was a clear signal for the West that Russia would not allow any U.S backed intervention in the region go unpunished. The U.S. vehemently supports Georgian stand and pushed the European world for sanctions on Russia. The Georgian conflict led to the build up of NATO ships in the Black Sea, and the heated harangue between the two parties followed. The situation had been restive in the Eastern Europe too prior to the Caucasus war.In the Eastern Europe, Polan and Ukraine are the major fronts in this new Cold War. Poland and Czech Republic recently signed a missile defense shield agreement with the U.S. Although the U.S maintains that the defense shield in these countries will be for rogue states like Iran yet Moscow hardly buys this and was left in fury over the agreement, and vowed that Poland will face nuclear strikes in regions in which it hosts the shield. These new threats from the Russians can not be discarded now as rhetoric especially when the shadow of the Georgian war still looms. Ukraine is the other country which is bone of contention. Moscow has not been on good terms with Kiev since 2004, their pro-democracy Orange Revolution which saw a U.S backed candidate Viktor Yushchenko coming in power. Ukraine was also involved recently in a spat of words with Russia over a Ukrainian Black Sea por, Sebastopol, which was leased to Russia till 2017 by the previous government. The population of Ukraine is sharply divided between the U.S and Russia for their support. 17% people of Ukraine are Russians and Moscow takes special interest in their politics; while U.S is eager to bring Ukraine on the tables of NATO. While Russia struggles to grow its influence in the Eastern Europe, the situation is not that desperate for her in Central Asia.The Central Asian states, viz. Kazakhstan, Uzbekistan, Turkmenistan, Tajikistan and Kyrgyzstan, are currently wedged between Russian and China. Several are resource rich and endure varying levels of autocratic rule. The U.S faces difficulty in this region, for this is the area of Shanghai Corporation Organization (SCO). Washington applied for membership of the energy club (read SCO) but was bluntly refused in 2005. In 2005 Uzbekistan had to tell U.S to scrap American bases from its region owing to the growing pressure of the Russians and the Chinese. Stakes are high in this region, as this is the area termed as 'heartland' by Mackinder. Although the U.S. found it easy last time to grab the support of the Western Europe against the communist ideology, it would not be a walk in the park this time.The U.S is in Atlantic alliance (named NATO) with the Western Europe. This time NATO seems divided on how to deal with the Russians. This was evident in the last meeting when Germany vetoed against the inclusion of Georgia and Ukraine in NATO. France is also hesitant in calling the Georgian war its own war as White House wishes. The reasons behind this reluctance are not difficult to interpret. The West Europe does not feel threatened by the communism as they earlier used to. A quarter of oil and gas of Europe is provided by Russia with Germany and italy its biggest gas consumers. They do not want to be a part of this scepticism game that Russia and the U.S play.Trust deficit and scepticism is all time high as it was in the previous Cold War. Russian prime minister Vladmir Putin recently came on CNN and alleged that the whole Georgian conflict was orchestrated by the U.S to benefit one of its presidential candidate. He was pointing towards John McCain, the Republican candidate, who has often relied on his anti-Moscow rhetoric in his campaign. McCain has often called for the ouster of Russia from G8 and WTO. On the other hand, the U.S alleges that Russia is still living in the Past and has not gotten rid Cold War mind set. Both party accuses each other of continuing the Cold War. When one compares the previous Cold War with this new one, he will find many disparities.The New Cold War is different than the previous one in a sense that it is not an ideological war.. It is a war of strategic space with both super powers asserting themselves. While the U.S enjoyed global hegemony for 18 years, this time it is being checked by the Russia in its backyard. Many people would like to compare the recent Georgian war with the Soviet invasion CzechSlovakia in 1968. Sergey Lavrov writes in Newsweek, "Those who long for Cold War may wish to compare Russia's defense of its peace keepers and innocent civilians to the Soviet aggression of last century." Russia might not be ready now to check the U.S in all areas as it did in Vietnam and Korea, but the Russians' strategic might is sharply increasing thanks to the rising oil prices. There remains no doubt that this new Cold War will be fought differently.Both countries never let go of the Cold War mind set and they have only chosen new war fronts for their battle. The world has changed since 1991, as many new colossal entities like SCO and EU have emerged. The goergian war showed: no matter how much you turn to Europe but you can not run from your geography. There is a hint in it for countries like Ukraine. Moreover, the Europe is not ready to repeat the history by isolating Russia again. Whatever the results of this Cold War may be, this remains beyond doubt that a tussle between two super powers will harm the global interests, and the world's fight against terrorism, poverty and other menaces will be jeopardized.


I would like to thank the author of this article Mr. Husham Ahmad Cheema for permitting me to publish his work on my blog