Recently I read an editorial titled “Uncle Sam’s Scam”. It refreshed the memories of a Zeitgeist movie I saw long ago. It was about how the United States has tricked the world to satisfy its avarice and accumulated so much wealth that not even in the next 50 years can any country dream of. Ironically, many of us are not even aware of the scandal going around us. When our police are busy capturing thieves who stole a few lakhs from the banks, the people who stole Trillions of Dollars are sitting in the White House ( or in the Treasury next to it )! The reason US is also the most technologically advanced nation also lies in this very fact because it’s obvious that money attracts talent and talent leads to innovation. Here’s a brief description of the truth (as I see it) :
Let us start with the World Bank’s list of Top 10 countries by its GDP ( Gross Domestic Product : its the combined sum of all the goods and services produced within the borders of the country. Basically, it is a measure of the economy of a country ) :
(Note : The GDP specified is in Million $ )
|3||People’s Republic of China||4,326,187|
It is clearly evident that US figures in the TOP of the list with 14 Trillion $ economy. The closest is Eurozone or the “European Union”, which is actually a union of many European counties, so it cannot be considered as a “one entity” and has been excluded from the rankings. So, effectively, Japan is the 2nd country in the list with close to 5 Trillion $ economy. The difference, is 9 Trillion $.
About 200 years ago, India or rather the Indian-subcontinent had the largest economy in the World. Now it ranks 12th. So what did the US do to come to the Top of the list ? Looking into the annals of the period of its independence, we see its conditions were similar to what other countries suffered during independence. Nor there is any clarity in the argument that they’ve had adequate time to develop and grow given that they got independence in the 18th century, because that would contradict the fact that United Kingdom was never even captured for a millennium and around half of the world (including both India and US ) were under the U.K. territory at not-so-long-ago point in the history. So then what is the arcane recipe to affluence they’ve got ? The answer is, an amalgam of Debt as Money and the “Globalized” Dollar.
While it may seem blatant to us that the US is the richest country in the World, the truth is only partial. What completes the truth is the fact that US is also the most indebted country in the World. Every time the US economy or their budget rose, so did their National Debt. To understand the point I’m trying to make here, you should have some basic idea about the money system in a country. As of now, I assume you do have a bleak idea about the entities like “World Bank”, “Reserve Bank of India” or “US Treasury”. The important thing to note is that whenever the government needs to spend more money than it actually accrued from the tax revenues, it needs to borrow it from the Central Bank, which in case of India is the RBI and in case of US is the Treasury. The Central Bank allocates the government a loan amount, which the government prints in the form of the national currency (as “new” money) and spends it, while in return the government signs “bonds” which are nothing but an official agreement of “promise” signed by the government that it will pay back the amount it has borrowed along with the interest back to the Central Bank. Hence, new money is printed by the government only when the Central Bank approves the loan amount which is indirectly restricted by the amount of “Gold” the Central Bank has (i.e. there exists a limit up to which the Central Bank can grant loan to the Government and that limit depends on the quantity of gold ). To know the significance of Gold in the current economic structure, you’ll have to know about the evolution of money system, which is quite an article in itself. Perhaps I’ll skip that for now to maintain the focus in the current agenda. So, this is the way the creators of this antiquated money system expected it to work. However, years of adulteration by corrupt governments, economists and industrialists have begot a completely different money system that although seems more profitable in the short-run, can annihilate the world in the near future, if left unchecked.
In the current system, the creation of new money is virtually unrestricted unlike in old days when stringent conditions used to control the amount of new money fed into the money supply of a country. Now taking the US example as the case study, the US can literally print money at its will. Without ignoring the fact that being a capitalist economy US government’s major source of income is from its industrial sector, the US government can still borrow more money whenever they are in need.
In Layman’s terms, US simply creates the money every time it needs to spend.
This is the end of part 1. In the next part, I’ll discuss why this bizarre spending and borrowing by the US government doesn’t hurt its economy. Moreover, how this act of US government actually makes it more richer and sucks money out of the economy of developing countries including India. And finally, what is the role of global entities like World Bank and IMF in this act.