Thursday, 7 May 2009

The Great FOREX Swindle

Barack Obama and Gordon Brown gave the biggest sigh of relief when the G20 summit in London finished with a commitment by the leading (and failing) economies to make some $1.1 trillion available. According to the “sales pitch” this is a fundamental measure to boost the world economy. If they could, they would be laughing all the way to the banks but are there any reliable ones left?

The Chinese request to get rid of the US dollar and start a new global reserve currency was totally ignored. They did not force the issue at the conference, only before as a matter of principle, because they could become the biggest losers if the USD was scrapped from the Foreign Exchange system.

So what is going to happen? Pretty much the same that has been happening since… 1801. The slaves, now new–slaves will have to work very hard to pay for the Anglo–Saxon financial misdemeanours. Below find part of the G20 leader’s statement that describes some of the actions to be taken:

17. Emerging markets and developing countries, which have been the engine of recent world growth, are also now facing challenges which are adding to the current downturn in the global economy. It is imperative for global confidence and economic recovery that capital continues to flow to them. This will require a substantial strengthening of the international financial institutions, particularly the IMF. We have therefore agreed today to make available an additional $850 billion of resources through the global financial institutions to support growth in emerging market and developing countries by helping to finance counter-cyclical spending, bank recapitalisation, infrastructure, trade finance, balance of payments support, debt rollover, and social support. To this end: we have agreed to increase the resources available to the IMF through immediate financing from members of $250 billion, subsequently incorporated into an expanded and more flexible New Arrangements to Borrow, increased by up to $500 billion, and to consider market borrowing if necessary; and · we support a substantial increase in lending of at least $100 billion by the Multilateral Development Banks (MDBs), including to low income countries, and ensure that all MDBs, including have the appropriate capital.

18. It is essential that these resources can be used effectively and flexibly to support growth. We welcome in this respect the progress made by the IMF with its new Flexible Credit Line (FCL) and its reformed lending and conditionality framework which will enable the IMF to ensure that its facilities address effectively the underlying causes of countries' balance of payments financing needs, particularly the withdrawal of external capital flows to the banking and corporate sectors. We support Mexico's decision to seek an FCL arrangement.

19. We have agreed to support a general SDR allocation which will inject $250 billion into the world economy and increase global liquidity, and urgent ratification of the Fourth Amendment.

In a nutshell, the world economy is going to be “resurrected” by selling more overrated US dollars to the poor countries, by exploiting cheap labour in the “engine of recent world growth”.

How does this work? I gave an example in my blog entry Counterfeit where I found an exchange rate graph between the Chilean Peso and the US dollar for the past 25 years. It shows that the CLP has devalued by 15 times against the USD since. It is a simple process and I shall use Chile as an “imaginary” example.
The IMF lends $10 billion at a “favourable” rate like 10% per annum to be repaid in 10 years. Total to be repaid… $15.5 billion. I can see a profit already. But it does not end here. As the loan is made in USD and needs to be repaid in USD, there is an automatic increase in the exchange rate as a market demand for USD is generated. As every activity in Chile is made in CLP a progressive devaluation starts within a feedback process that is unstoppable.

  • USD sale to Chile increases the value of the USD
  • CLP cheaper makes Chilean labour cheaper
  • Cheaper labour entices multinationals to explore this, increasing their profit margins in… USD
  • This “wealth” increases the value of the USD
  • Chilean labour becomes even cheaper
  • Edollars start being generated increasing the value of the USD
  • Chileans have to pay imported goods and commodities like oil at a higher price on a daily basis in... USD
  • This increases the value of USD and repeats 2 to 7!
  • By the time the last repayment is made it will cost 30 times more in CLP than it did in the first payment

The guy that thought about this is a genius!

If I want to buy an Itunes track for $0.99 it will cost me 50 CLP. Ten years later the same purchase will cost 750 CLP… and I would have to work at least 3 times more to make the same purchase of an international USD based product.

In the end globalization is a misnomer for selling US dollars. It is just marketing and misleading advertising. I came across a Portuguese blog which implies that poverty in Africa and Third World is due to people’s sexual appetite (“oh these Africans are always at it!”) allied with corruption… and it shows GDP graphs from countries like Ethiopia, Malawi and China. It also tries to demonstrate that it is the ever increasing population in Africa that maintains the GDP in total stagnation. How unfair is this? Ethiopia, Malawi, Uganda and many more, are countries that entered into the IMF trap and are burdened with debt forever. China never did! So they thrive.

That is the reason why China, when a final decision was made, kept very quiet and "forgot" their original statement to eliminate the USD from the Forex system. They have loads of dollars and at present have no interest to change. A capitalist profit beacons with their main rhetorical enemy, the IMF, at the helm. The reason why the EU, screaming so loudly at the start of the summit, had squeaks of excitement at the end of it is that these IMF loans are going to be made in euros too. They’re in! Result!

How could this be made fair? For the “imaginary” Chile, the IMF should make their loans in Pesos effectively buying them and offloading USD with fixed forward prices for essential commodities like oil. But this would depreciate the USD. It will never happen. Pigs may fly long before.

The G20 summit could have been a fundamental economical milestone for the future if it was not made ultimately as an escape route for the United States and the United Kingdom. First by finding the REAL value of the USD and other strong currencies (taking away all the hype and artificial growth that surrounds their value); then by making the IMF an instrument for real help instead of a corner shop that sells overrated USD.

As of today the corrected Forex table should read like this:

1 USD =
0.2 EUR
0.66 GBP
1.49 INR
100 CLP
14.47 MWK

Barack Obama and Gordon Brown escaped the above correction; some will say they paid their way out, hence their smiles. However, there will be other "instalments" in a very near future. Meanwhile someone, somewhere in an emergent or poor market, in the “Southern cotton fields”, paid in meagre pesos, meticals, rupees, shillings, has already been conscripted to pay for it all.

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She's fit?

My apologies for this Julie... one day I may tell you the story.