“Global Imbalances & the Impending Dollar Crisis” by Mr. M.R. Venkatesh, CA, Columnist and an Author

Moolyankan Diversified Fund (MDF) in association with Corporate Wisdom recently organized an interactive session with Mr. M.R. Venkatesh. Moolyankan, which has recently received many accolades from corporate, is a stock market investing fund house, managed by students of DoMS, IIT Madras. Mr. Venkatesh is a Chennai based Chartered Accountant who addresses the business concerns relating to International trade and business strategies. He is also an accomplished writer and columnist with the Hindu Business Line, Industrial Economist and Rediff. Mr. Venkatesh has authored many books including “A handbook on anti-dumping” and “Global Imbalances and the Impending Dollar Crisis”.

Starting the session, Mr. Venkatesh pointed towards the debate which has been in talk for quite some time. The debate pertains to idea, that fundamental assumptions that have governed the world economy so far, were true of not. The issue before us is so profound that it is impossible to believe that we will have a safe landing. Talking about Global Imbalances, Mr. Venkatesh said, www meant world without walls and with it world looked seamlessly integrated. But then in 1997 Southeast Asian Crisis struck, which was popularized as Southeast Asian currency crisis. But that actually was a political crisis that manifested itself into a currency crisis. Investment from various parts of the world flew to Southeast Asian Nations, whose currency was pegged at a fixed level. But as soon as a few billion dollars were removed, the exchange rates collapsed. Every currency in Southeast started devaluing and moreover, every Nation entered into a competitive devaluation mode to keep its exports going. The result of all this was only one beneficiary, the importer (US in this case).

Indian finance ministers started aligning the monetary and fiscal policies with the global standards and exports were given a boost. But these exports brought US dollars that led to currently accumulated Forex reserves. But our policy makers did not know how to utilize this fund. As a result of which the reserve found its way back again to US in the form of investment in US treasury bills which give paltry return of 2-2.5%. This whole activity was known as Global Flow of Funds. The current dollar crisis first became evident in 2006 when Fed refused to give M3 figures of dollar. Now people are selling dollars buying everything else mainly commodities like Gold, Silver, Tin etc. That is the reason behind strong Gold prices in spite of falling dollars. With outsourcing, even the job of defending the dollar has been outsourced to countries like India and China because these are the countries sitting on huge piles of Forex reserves and a weak dollar could cause substantial harm. India has close to $300 billion Forex reserves and we still want more.

US’s huge deficit, which is close to India’s GDP, is funded by India and China. Americans cannot stop consuming and reason behind this is the ever weakening institution called family in the US society. While on the other hand in India, where family is a very strong institution, we save close to 35% of our GDP. The irony is America has the option of getting the money for its consumption from countries like India and China because we save more then we consume but we do not have other option to park our money. All this is leading to Global imbalances. Mr. Venkatesh said that third world war will not be fought on a battle field but by the click of the mouse in financial markets.

Recently the China has realized the implications of global flow of funds. So in order to keep the Forex in the country, they started increasing the consumption. But this has not been very successful so far. While India, on the other hand, is a consuming Nation by Chinese standard and a saving Nation by the US standard. In India we attach a social stigma to the debt and farmers commit suicides for failing to repay their debt while US seems to be enjoying and flourishing on debt money.

India is a balanced society and that is what going to keep us safe from the turmoil in world markets but that doesn’t mean decoupling theory is correct because if it is then globalization never happened.

Vishal Chourasiya
DoMS Interface