Category Archives: Gold standard

Should USD be restored back to Gold Standard?

By Apek Mulay

Introduction
The US stock market is up more than 140% since its lows in 2009 [1]. However, US joblessness is also high. The twin deficits (Budget and Trade) have resulted from growing income disparity and offshoring high paying manufacturing jobs from the US. Questions also arise about the QE policies of the Fed. During the great depression of 1930, John Maynard Keynes came up with the idea that in order to stimulate the economic growth, government needs to do its spending to compensate for decreased spending of unemployed and underemployed [2]. One important difference between the US economy of the 1930s and that of today is that during the former the US did not have a huge National Debt of 16+ trillion dollar. There existed no credit cards prior to the great depression. Hence, Americans in past had the habit of saving money or spending their real wages. The concept of ‘Living beyond means’ rarely existed during the era of Great depression. It is the US monetary policies since Reaganomics that have led to consumers living ‘beyond their means’ and the existence of institutions that are ‘too big to fail’ [3].

The monetary policy of the US since the 1980s has been such that wages of Americans have trailed their real productivity [4]. Since wages contribute to consumer demand and productivity attributes to supply of goods into the economy, the supply side economics put forth by Ronald Reagan’s economic advisors have significantly increased the supply of goods into the economy but has not let the wages of Americans catch up with their productivity [5].

Now, the US Fed has played a key role in continuing this monetary policy. As a result of this monetary policy, the Fed has lured Americans to borrow money in order to maintain an artificially high standard of living. Americans have mortgaged their houses, mortgaged their cars and are living on a huge pile of consumer debt. The government has so far encouraged Americans to remain indebted by lowering the rate of interest on their home mortgages. While businesses have been able to reap huge profits, the consumer debt of Americans has been growing exponentially. Without a rise in demand from increased consumer borrowing, the excess of supply of goods would have remained unsold.

If consumers do not buy manufactured goods, manufacturers would have to lay off employees if their warehouses begin to stock pile inventories [4]. The question is, how has US been able to sustain this model for so long and can US sustain it any longer.

Bretton Woods agreement and Gold standard
After the Second World War, the US was the only developed country which had not experienced the war fought on its soil. Hence, while the war damaged and devastated economies around the world, the US economy benefitted from World War II. Firstly, the war enabled US citizens to get employment in factories which produced munitions for their European allies [3]. The US got paid back from its European allies in the form of Gold. After becoming the global nexus of Capitalism, the US was able to dominate the world. US gold reserves grew from the gold it received from its European allies [6].

Also, the US government, under presidency of Franklin Roosevelt, accumulated gold from its domestic citizens by making it illegal to withhold gold [7]. As a result of above two policies, US became the world’s largest holder of gold reserves. After the WW2, a system similar to a gold standard, sometimes described as a “gold exchange standard”, was established by the Bretton Woods Agreements [8]. Under this system, many countries fixed their exchange rates relative to the US dollar and central banks could exchange their dollar holdings into gold at the official exchange rate ($35 per ounce). This option was not available to firms or individuals. All currencies pegged to the dollar also had a fixed value in terms of gold [8].

As US became a global nexus of capitalism, US-based multi-national corporations (MNCs) influenced ‘Free Trade’ agreements between member nations in order gain free access to the markets and increase their consumer base [9]. Free trade implies no import duties imposed on goods imported from abroad. Since USD was the global trade currency the system needed the countries around the world to have reserves of USD in form of foreign exchange (FOREX). These FOREX reserves determined the buying power of currencies. US also owned huge FOREX reserves of member nations and in this way exercised control over their domestic and foreign policies [4].

Over years the countries destroyed in world war gained their economic footing and their economies grew. However, As a result of ‘Free Trade’ MNCs in US continued to offshore manufacturing jobs to low wage countries in Asia [9]. Semiconductor jobs were the first wave of jobs to be offshored in 1960s to Japan [9].

Twin Deficits and Decoupling of USD from Gold standard
There was a phenomenal growth of Japanese exports during the 1960s and 1970s. Beginning in 1960 at US$ 4.1 billion, Japanese merchandise exports grew at an average annual rate of 16.9% in the 1960s [10]. The growth in Japanese exports was from Japanese government push to increase productivity and also because of growing demand for Japanese products as United States and other foreign markets grew and trade barriers in major market countries were reduced on account of General Agreement in Tariffs and Trade (GATT) amongst member nations [9].

Due to price competitiveness of Japanese products imported into US without import duty, US trade deficits with Japan started to soar in 1960s due to growing year over year trade imbalance. Lyndon B. Johnson enacted across the board income tax cut by 20% as part of United States Revenue act of 1964 by lowering the size of the federal budget as John F. Kennedy was unable to pass this bill as he did not lower size of federal budget [11]. Due to lower revenue earned from income taxes, US budget deficit also started to grow as a result of revenue act of 1964.

These combined deficits resulted in Balance of Payment deficits where the net cash inflows were lower than the net cash outflows from US starting from 1960s. In 1971, gold was re-priced to $38 per ounce, then again to $42 per ounce in 1973. The Balance of Payment deficits and resulting depreciation in value of USD motivated people to sell their greenbacks for gold. The imbalances caused gold to flow out of the US and a loss of confidence in the United States ability to supply gold for all future claims by dollar holders [12]. Finally, in late 1973, the U.S. government decoupled the value of the dollar from gold altogether. This move caused price of gold to quickly shoot up to $120 per ounce in the free market.

While decoupling of USD from gold allowed US to run more deficits and print its currency to balance those balance of payment deficits, it continued the government policies of trade and budget deficits. While USD unpegged from Gold standard, it continued to be a global trade currency. All countries started printing their own currencies which resulted in inflation but as a result of printing more currency, the wealth creation increased and so did the economic growth increase. It needs to be noted that Bretton Woods system of Gold standard ushered in a period of high global growth with over 4% annual growth in GDP in US, known as the Golden Age of Free market capitalism. However, it came under pressure due to the inability or unwillingness of US to maintain effective capital controls and due to instabilities related to the central role of the dollar.

These instabilities were a result of failure of US to trim its twin (trade and budget) deficits which resulted in gold flowing out of the US and a loss of confidence in the United States ability to supply gold for all future claims [12]. In order to retain the gold standard, US should have restored a balanced economy to have effective capital controls and eliminated its budget and trade deficits to stabilize the dollar.

Crony Capitalism with USD as Global trade currency
Decoupling USD from Gold standard was verily the root cause of growing disparity in US and it also transformed ‘Free Market Capitalism’ to ‘Crony Capitalism’. The whole reason USD was pegged off Gold standard was to print currency inspite of running large Balance of Payment deficits. It was done to keep offshoring jobs from US to Japan resulting in trade deficits and to lower taxes across the board resulting in budget deficits. Since USD was no longer tied to Gold standard, a lot more USD was printed in order to sustain the twin deficits which resulted in rising inflation. The unemployment of US workers due to offshoring of jobs resulted in decrease in domestic consumer demand. Hence, United States economy experienced a decade of rising unemployment and inflation (known as stagflation) under the Political pressure favored stimulus resulting in an expansion of the money supply to sustain the twin deficits [13]. When Ronald Reagan came into office in 1981, he promised to revive the US economy from Stagflation by enacting huge tax cuts for richest Americans and Corporations.

These policies are commonly associated with supply-side economics, also referred to as trickle-down economics by Reagan’s political opponents. However, Reagan’s policies resulted in budget deficit rising from 2.5 percent of GDP to over 6 percent of GDP [14]. To reduce budget deficit for his re-election, Reagan increased payroll taxes in 1982 by promising Americans that the revenue would be used for Social Security trust fund. However, the rise in payroll taxes went towards paying for budget deficits from tax cuts enacted by Reagan. This burdened small businesses and entrepreneurs as self-employment tax jumped as much as 66 percent [14]. Reagan’s 1986 tax cuts resulted in wealthiest faced a 28 percent tax rate, while those with lower incomes faced a 33 percent rate; in addition, the bottom rate climbed from 11 percent to 15 percent [14]. This was the beginning of the untouchable privileged class due to ‘Crony Capitalism’ and the end of confidence in the American Dream (the idea that wealth and privilege are attainable by anyone who works hard). As of today, US have an annual budget deficit of 400 billion and annual trade deficit of 600 billion.

During the Reagan years, US trade deficit started to increase at a rate not seen in the last 60-70 years. The Reagan administration then had to pressure Japan to sign the 1985 Plaza Accord to devalue the U.S. dollar at the expense of the Japanese yen in order to increase U.S. exports. As a result of yen’s appreciation, Japan experienced an economic crash and lost a decade of growth [4]. The Nikkei average went up to about 39,000 in December 1989, but after the crash it hovered around 15,000 during the lost decade of the 1990s. In the last several years it has dropped even more, hovering around 10,000 [4]. Today US is running a great trade deficit with China. US has been able to sustain these twin deficits by printing its currency being a Global Trade currency. However, China has expressed reluctance in increasing its currency (Yuan) compared to USD after looking at fate of Japan from Yen appreciation because of Plaza Accord in 1985 and resulting economic crash. While USD has been printing its currency in order to sustain its twin deficits, excess money printing has also been depreciating the market value of USD in terms of U.S. rate of interest.

Federal Open Market Committee (FOMC) makes key decisions affecting the cost and availability of money and credit in the economy. The panel sets, or sets targets for, short-term interest rates, which in turn affect interest rates paid by consumers and businesses on various loans. Since the great recession of 2007, US Fed has been providing stimulus in form of monetary easing called Quantitative Easing (QE) to lure Americans into borrowing more and further indebting Americans in order to revive the economy. This QE program has been decreasing the short-term interest rates and hence US consumers have been able to mortgage their cars and their houses at lowest interest rates. While lenders have been able to offer lower rates to prospective buyers, the sustainability of this model is in question as interest rates cannot go below 0% and QE is not creating sufficient number of jobs to trim unemployment in US. With increasing borrowing by consumers, consumer debt is also rising and so is the National Debt rising.

The National debt has already passed the debt ceiling twice and because of sequestration which was enforced by republican politicians, forced cuts are being made into government services like Medicare services which primarily affect the poor and destitute Americans [15]. It is also leading to involuntary unpaid time off for government workers which are also called ‘furloughs’ [15]. While ordinary Americans are suffering, bankers are continuing to enjoy their multi-million dollar bonuses [16]. As shown in the Figure 1 below, it shows a trend of rate of interest on USD over years. With excess money printing, the US benchmark Interest rates today are close to 0% and would reach 0% by Jan 2014.

USinterestrates
Figure 1: The trend shows that US interest rates would hit 0% by end of 2013. Source: www.tradingeconomic.com/federalreserve

Once US interest rates reach 0%, USD would have to devalue for any more QE. Additionally, Government will not be able to lure Americans into borrowing more to keep sustaining the economy. While devaluing USD might be considered good by proponents of offshoring, US should also take into consideration a combined 5 trillion in FOREX withheld by Russia and China [4]. Why would US creditors like China and Russia withhold their combined 5 Trillion USD in FOREX reserves if they notice that USD is losing its value? They might consider dumping their FOREX into international markets before USD devalues any further. Such a move would overnight crash the USD and it would lose its status as a Global Trade Currency resulting in US economy going into a depression.

Gold standard for USD and Economic Reforms to avoid Stagflation
The above analysis shows us that US has to eliminate its twin deficits sooner rather than later if it needs to retain its status as Global Trade currency. In order to avoid any Stagflation, economic reforms are needed so that ‘Crony Capitalism’ is transferred into a Free Market system where the Supply and Demand grows in proportion. Only when both supply and demand grow in proportion can money supply be increased without running either trade or budget deficit while still retaining the value of currency. Supply of goods comes from the productivity of people and demand comes from their real wages [4]. Hence, when wages catch up with productivity, consumer demand catches up with Supply. In case of a centralized economy, wages can catch up with productivity only through a progressive tax structure like that existed in US during presidency of Dwight Eisenhower with 92% tax rate on richest Americans.

However, if taxes have to be reduced on all Americans, then economy needs to undergo wholesome decentralization. Such a decentralized economy would reduce tax burden as majority of local taxes would go towards local economic development rather than going to center and letting the center allocate the funds to states. As we have observed that budget deficits arise from income disparity and trade deficits add to the income disparity, having an economic democracy would lead to rational distribution of wages in proportion to productivity. This system will still preserve incentive for hard work and lead to sustainable growth without running any deficits. Such an economic system that is based on economic democracy whereby supply and demand rise and fall in proportion and there is wholesome decentralization to minimize taxes on all citizens, is based on Progressive Utilization Theory (PROUT) [17]. PROUT was put forth in 1959 by Indian scholar Mr. Prabhat Ranjan Sarkar.

When economic reforms based on PROUT are implemented, the USD will have to reform its economy to restore Gold standard so that Government is not able to run any deficits. When a country’s currency is tied to Gold standard, that country cannot print its currency in order to sustain its deficits and every time there is a gap between supply and demand, local economic reforms would push the government to balance the supply with demand. Trade deficits could be eliminated by imposing import duty of cheap goods coming into US from countries with lower value of currency by installing fair trade instead of free trade. At the same time, there would be no import duty for trade with a country which has near equal value of its monetary currency. This would preserve domestic manufacturing jobs from being off-shored.

Additionally, countries which have their monetary currency tied to Gold standard would experience a very high demand for their currencies in foreign exchange markets. Hence, all other countries would want to do fair trade with US to accumulate USD as FOREX. Since there is limited amount of physical Gold present in this world, the only way to create infinite wealth is with shared growth and prosperity.

A PROUT based economy shall not just ensure a shared growth and prosperity but it would also preserve the incentive to work hard. As wages catch up with productivity, the consumer purchasing capacity would be very high. Hence, such a progressive economic model would not just boost macro-economy but it would elevate the masses from poverty through micro-economic growth.

Economic decentralization is very important aspect of PROUT based economy. With economic decentralization, there would be economic liberation of the masses. It would enable local people to elect local government which looks after the local needs and welfare of masses. The tax paying dollars of local residents would go towards the setting up infrastructure and creating employment and bettering lives of local people.

As local people are more aware of their local problems and can do much better budgeting for their local communities, economic democracy would minimize corruption at local level as there would be more vigilance at local level. This would not just minimize the size of local government but also reduce the taxes on each and every citizen of the country. It would go a long way in preserving the local customs and traditions and let 99% Americans live a fulfilling life with dignity restoring an All American Dream economy. This would be a balanced economy and would not undergo stagflation inspite of having a Gold standard. Only a PROUT based economy would lead to infinite money supply in economy and still restore gold standard. In fact, Gold standard would force balancing the supply of goods with their demand thereby leading to auto-rebalancing of the economy.

References
1. Shell Adam, 2013. Calls for correction can’t derail mighty bull market. USA Today.org (May 15).
2. Wikipedia, the free encyclopedia. Keynesian economics
3. Mulay Apek and Ghista Dhanjoo, 2013. Restoring US Manufacturing Supply Chain. Electronica.ca research network. (July 16)
4. Mulay Apek, 2013. A Failure Analysis of the U.S. Economy. Truth-out.org (March 2).
5. Wikipedia, the free encyclopedia. Supply-side economics
6. Wikipedia, the free encyclopedia. Gold reserve
7. Matt Shipley, 2013. Far worse was done to Americans in 1933 and it could happen again (April 4)
8. M.J. Stephey, 2008. A brief history of Bretton Woods System (October 21)
9. Mulay Apek and Ghista Dhanjoo, 2013. Globalization of Semiconductor Manufacturing Industry: From Deception to Reformation Towards Recovering US Macro-Micro Economic Losses. Electronica.ca research network. (June 24)
10. Wikipedia, the free encyclopedia. Trade policy of Japan
11. Kyle Hall, 2011. The University of North Carolina at Chapel Hill, Dept. of Political Science – The Revenue Act of 1964- Johnson’s Success, Kennedy’s Failure (December 2011)
12. Wikipedia, the free encyclopedia. Balance of payments
13. Wikipedia, the free encyclopedia. Stagflation
14. Batra Ravi, 2009. Reagan: The Great American Socialist (March 20)
15. Wikipedia, the free encyclopedia. Budget sequestration in 2013
16. Butcher Sarah, 2012. 2012 bank-by-bank analyst bonuses, courtesy of Dartmouth Partners. Morgan Stanley and Barclays look like the best payers (3 September)
17. Sarkar P.R., PROUT in a Nutshell, Ananda Marga Publications (1959)

About the Author
Apek Mulay works as a senior analyst in US semiconductor industry. He pursued undergraduate studies in electronics engineering at the University of Mumbai, India and completed master’s degree at Texas Tech University, Lubbock. He is sole author of patent “Surface Imaging with Materials Identified by Colors” and has chaired technical sessions of the International Symposium for Testing and Failure Analysis. He is also a contributor to the EDFAS international journal and has authored several articles on US Economy, Economic Policy Analysis, Supply Chain, Trade Deficits, Budget Deficits, Sustainable Economy and Mass Capitalism. He is also a Freelance writer and blogger for United Business Media LLC. and a contributing member of recognized publications such as Semiwiki, Truth-out.org and electronics.ca research network. www.apekmulay.com

A Failure Analysis of the US Economy

By Apekshit Mulay (Apek), Microtech Analytical Labs
engmulay@gmail.com

Introduction

As failure analysis engineers for companies, our job is to find the root cause of failure and recommend changes in design, process, tests, etc. to fix the problem. This type of analysis has become an important part of semiconductor mass production, which makes electronics cheaper and affordable for consumers. At the same time, mass production helps the manufacturer / producer of parts by increasing their profits.

“Workers should be able to work
for fewer hours to achieve their
production target. They could use
their spare time to pursue higher
education, leisure, hobbies,
vocational training, etc.”

What we need to recognize is that both producers and consumers are vital for the semiconductor industry. Without a healthy demand for the latest electronic gadgets such as smartphones, tablet PCs, hybrid cars, etc. there would be no incentive for global semiconductor firms to keep investing in the research and development of new technologies that improve the quality of life. While we make a living through the failure analysis of modern-day electronics and keep our jobs, pay for mortgages, groceries, utilities, cars, etc., we also contribute to the demand for other goods by spending our wages. We are workers on one side and consumers on the other. Consumer spending helps create jobs for other services and 70% of the US economy depends on consumer spending [1]. It is the consumer’s purchasing capacity that is the best metric of economic performance.

Common Sense Macroeconomics

Producers and Consumers are like two wings of a bird. If either of the wings gets hurt, the bird will no longer be able to fly. If that bird is not nursed quickly and properly, it would be disabled and either die from hunger or fall prey to a predator. With the same analogy, both producers and consumers have to prosper for a robust economy.

Before we get into more details of macro-economics, let us see where the economic profession stands at this juncture. In a recent article in The New York Times, Professor Robert J. Shiller of Yale University and a best-selling author argues that even now we don’t understand what really causes a recession and layoffs [2]. But another best-selling economist, Professor Ravi Batra, seems to have solved the puzzle of recessions by offering a new theory of unemployment. His theory relies on common sense as he argues that recessions and depressions occur when worker productivity keeps rising faster than the economy’s average real wage. He demonstrates that this happened in the 1920s, which were followed by a depression. The same thing also occurred during the 2000s and the world has been in The Great Recession since 2007.

Batra argues that worker productivity is the main source of supply while wages are the main source of demand. If productivity rises faster than wages, then supply rises faster than demand. This results in overproduction and forces the manufacturer to fire workers. Producers are the suppliers of goods, and consumers generate the demand for these goods. Consumer demand, being dependent on wages, is sustainable only if the consumers as workers earn higher salaries. If the wages of consumers do not catch up with increased supply of goods, the supplier of goods is unable to sell all that he/she has manufactured.
Let us take an example of the semiconductor industry where the semiconductor wafer foundries manufacture tens of thousands of wafers per month. These facilities supply silicon for the semiconductor industry. For a wafer fabrication facility to be profitable, it has to be able to produce as many wafers as possible that meet the Statistical Process Control (SPC) stability metrics and customers’ quality requirements when it comes to DPPM (Defective Parts per Million). This ability to mass produce is measured by the productivity of the work force. A wafer foundry, like every other company, wants its employees to be highly productive to maintain a high supply of wafers for its customers. The wafer fab management pays incentives based on productivity.

Now, where does the need come for wafer fab to hire more workers? This occurs only if wafer fab customers demand more goods. Where does the customer demand come from? It comes from the wages of the people. When we have an economy where employed people have high wages or high purchasing capacity, they are able to generate a high demand for goods. Hence, the wages of the workers have to catch up with their productivity. If employees are very productive, that is they work hard and efficiently, they are able to increase the supply of goods into economy with their productivity. Now, what happens if the wages of the productive workers fail to catch up with their productivity? As a result of the growing gap between wages and productivity, eventually the purchasing capacity of the workers is not able to catch up with the amount of goods that are being manufactured by them. Hence this correlates to a gap between the supply of goods and the sustainable demand for them. In other words, the wage-productivity gap causes a supply-demand gap.

In my previous analogy, this hurts one of the two wings of a bird. In other words, the imbalance between oversupply of goods and weak demand for them leads to layoffs at the wafer fabrication facility. This is how an economy is so closely connected to maintaining a sustainable supply and demand of goods. Thus layoffs occur when people’s purchasing capacity falls short of the goods that workers produce due to their high productivity.

Consumer and National Debt

Some brilliant minds have devised a way to keep the wages of workers to remain the same or even fall, i.e. not letting wages catch up with their high productivity, but still maintain a high consumer demand. They do this by creating ‘consumer debt’. When a consumer is unable to buy much out of their real salary or wage, he/she can buy it using a credit card or by going into debt with a loan from financial institutions. While relatively stable consumer debt is good for the economy as long as the borrower is able to repay his/her debt within the allotted time frame with interest, what can consumers do when they lose their jobs in a recession, and are not able to find other employment soon? If the consumer is not able to repay his/her debt in time, the increase in interest on the credit card loan wipes out his/her savings, thereby resulting in bankruptcy.

It should be clear that when wages trail productivity, the overall economy suffers because of the reduced purchasing capacity of unemployed workers. If you follow this logic, then it is evident that consumer’s purchasing capacity is critical for sustainable demand. Hence, I consider a strong consumer purchasing capacity to be the chief source of high consumer demand, which acts as an engine for economic growth. Thus, the real job creators in a free market economy are not only the producers of goods but also the consumers of goods. Every company estimates its consumer base prior to manufacturing in order to avoid the over-production of goods. Hence, if consumer demand keeps on weakening, then the economy goes into a recession. In that case to avoid a depression, the government has to step in and increase its own spending that makes up for the loss in demand due to lost wages of the laid off workers. The government may also cut tax rates to boost consumer demand. In either case, the budget deficit rises, and may rise very sharply if the wage-productivity gap and hence the supply-demand gap are very high. This is the main reason why the budget deficit rocketed after 2007, so much so that it almost tripled from about $500 billion in 2007 to $1.3 trillion in 2011.

Now, if government spending creates jobs, then these workers can jump start the engine of economic growth by paying off their debts and boosting consumer demand through their real wages. The higher the wages of these workers, the higher will be their purchasing capacity and the higher the consumer demand. This would act as an incentive to the producers/manufacturers to make further investments.

However, if increased government spending does not boost consumer demand and instead goes into the pockets of manufacturers, the manufacturing sector may hire a few more workers because of the extra money it receives from the government stimulus, but that growth will not be sustainable. In fact, a case can be made that the high budget deficit of recent years has mainly helped the manufacturer. For instance, in 2011 the economy generated 1 million new jobs with the help of a budget deficit of $1.3 trillion. If you divide 1.3 trillion with 1 million, you get 1.3 million. In other words, the government spent an extra $1.3 million to create one job in the economy. Is this not absurd, given the fact that the average wage is only $50,000 per year? Thus, the government deficit is now mainly helping the manufacturers, who must be getting the difference between $1.3 million and $50,000 for each person they hire.

As Batra shows, this is what the continued rise in the wage-productivity gap does to an economy. Just 15 years ago, in 1999, we had a budget surplus along with an unemployment rate of less than 5 percent. Today, we have a trillion dollar deficit along with an unemployment rate close to 8 percent.

Free Trade vs Fair Trade

An economy is sustainable when it is able to balance its trade and budget. If any country has a trade deficit (where imports are larger than exports), it leads to a fall in the country’s FOREX (FOREign eXchange) reserves (which eventually depreciates its currency). The value of a country’s currency is a deciding factor in the standard of living. Hence, a country cannot run year-over-year trade deficits if it wishes to maintain the standard of living of its citizens. Also, high trade deficits result in loss of FOREX reserves, which are important as they determine the buying power of the country’s currency.

Let us take an example of a country ‘A’ where its population has sufficient purchasing power and can buy everything produced in the nation. But there are some products that are not produced at home and have to be imported from another country ‘B’. Hence country ‘A’ has to pay money [its currency] to buy country B’s goods. Either country ‘A’ has to balance its trade by getting country ‘B’ currency from a third country ‘C’, or go on printing its own currency. But there is a limit that country ‘B’ will accept country ‘A”s money. After that country ‘A’ will have to produce the items within the country, causing huge inflation due to depreciated value of its currency resulting from excess money printing. It is possible to avoid trade deficits through balanced trade policies. Fair trade is more important than Free trade. Free trade implies no import duties imposed by a country on its imported goods. While Free trade works great when trading with countries having nearly similar value of their monetary currencies, it results in high trade deficits when multinational corporations (MNCs) from a rich country make goods for cheap in another country with a significantly lower value of its currency. The MNCs in the United States prefer to manufacture things in low wage countries with cheap currencies, as it is highly profitable. However, in addition to increasing trade deficits, this practice also leads to massive job losses in the home country, especially when jobs are also outsourced.

As a result of this free trade policy, the U.S. economy has been running over half a trillion dollar trade deficit for the past four years [3].While such a deficit results in higher corporate profits for MNCs in the United States, it results in depreciating FOREX reserves. This threatens the economic independence of the U.S. as a country.

Figure 1 below shows the FOREX reserves of BRIC (Brazil, Russia, India and China) in USD over ten years. According to Dr. Richard Haas, Chairman of the Council of Foreign Relations, China’s ownership of trillions in FOREX is a great threat to the United States, as China, with vast FOREX reserves, is in a position to influence US foreign policies through its control over the value of US currency [4].This is similar to the way the United States was able to dominate the foreign policies of Britain and France after World War II and forced their troop withdrawal during the Suez crisis purely because of its ownership of British and French debt[5].

Figure 1: World Forex reserves in billions of USD as per International Monetary Fund (IMF), April 2009 [6]

During the Reagan years, the trade deficit started to increase at a rate not seen in the last 60-70 years [7]. The Reagan administration then had to pressure Japan to sign the 1985 Plaza Accord to devalue the U.S. dollar at the expense of the Japanese yen in order to increase U.S. exports[8]. As a result of yen’s appreciation, Japan experienced an economic crash and lost a decade of growth. The Nikkei average went up to about 39,000 in December 1989, but after the crash it hovered around 15,000 during the lost decade of the 1990s. In the last several years it has dropped even more, hovering around 10,000 [9].
Looking at the fate of what happened to Japan as a result of the yen appreciation; China has refused to appreciate its currency significantly in spite of the pressure by the Obama administration, which hopes to boost U.S. exports to China [10]. This should be a great concern for the United States because it would not be able to export significant amount of goods to China to balance its trade.

Counterfeit Electronics as a Threat to US National Security

In addition to nearly 600 billion dollars in trade deficit due to free trade policies, the counterfeit electronics from China entering into the U.S. supply chain have become a national security threat [11]. Initially, the United States manufactured all defense-related products at home. However, consumer electronics were being built in China due to its low cost of labor. As technology progressed to advanced transistor technology, it required a large investment from defense contractors, who work for profit, to manufacture semiconductor wafers in the United States. Hence, several defense contractors started to use Chinese built ICs for military weapons like missiles and machine guns. Along with the state-of-the-art infrastructure, the technical know-how to make advanced technology products has also been transferred to China.

So now China is flooding the U.S. defense supply chain with counterfeit ICs [12]. It has become very costly to prevent this, which is also eating away profits of U.S. defense contractors. The free trade policies of the United States are creating a perfect storm for its semiconductor industry. According to Professor Ravi Batra, “Free trade has done to the United States what Hitler and Imperial Japan could not do during the war.” He characterizes free trade as the ‘Agrification syndrome’ by which Americans continue to lose manufacturing jobs, and continue to work harder at the jobs they do have, but suffer declining wages, despite increases to their productivity[13].

If the United States had adopted fair trade instead of free trade, it would have imposed tariffs on the cheap goods that are dumped in this country by China. As people prefer to get the best value for their money, U.S. consumers would have preferred to buy U.S. made goods as tariffs would make them competitive with Chinese goods. This way manufacturing jobs would have been preserved. Simple math shows that by just eliminating the 600 billion dollar annual trade deficit would create 6 million jobs paying a $100,000 salary every year. This is a simple job creation strategy, as the country faces the highest unemployment rate since the Great Depression.

Figure 2: BLS, BEA Census- Productivity and real income index from 1964-2008 relative to 1970 (Source: David Ruccio: Graph of the week: USA productivity and real hourly wages 1964-2008 [14])

Economic Reforms

If you observe Fig. 2 above, real wages have failed to keep up with productivity since the 1970s. The productivity of American workers has been consistently increasing. However, the average household median income has not increased at the rate at which productivity has increased. The real hourly wages have remained fairly constant. The United States needs to reform its current economic model so that wages keep track with the productivity of workers [15]. Professor Batra argues that this can happen only in a free market system, where companies are small and unable to control prices. In such a system, there would be no need for the government budget deficit, and it would raise the living standard for every individual in society.

Under this system, the majority of shares of corporations would be owned by its employees rather than by a few investors on Wall Street. When workers become majority shareholders, they know that they are part owners of the company and will be fairly rewarded for hard work. By being highly productive, these workers would receive a fair share of corporate profits.

The system would still preserve the incentive for growth because hard work would bring higher incomes. At the same time, it would avoid severe recessions and depressions caused by poor consumer demand (due to a huge gap between wages and productivity resulting in poor purchasing capacity of the majority of consumers). Also, in economic downturns, it will be possible to cut back the working hours of the workers and reduce their wages across the board rather than lay off some workers. This would minimize, if not eliminate, the problem of high unemployment [16].

Modern economic thinkers blame automation as a major cause of job losses. Technology could be productively utilized in such a way that the manufacturing sector could cut back on work hours while paying workers a high wage due to their high productivity. This is because automation enables a worker to be very productive through use of machines to manufacture products. High worker productivity significantly increases the supply of goods in an economy. As a result workers would be able to work for fewer hours to achieve their production target. They could use their spare time to pursue higher education, leisure, hobbies, vocational training, etc. This way it is also possible to minimize, if not eliminate, the problem of high unemployment resulting from automation while still keeping the supply of goods proportionate to consumer demand.

Employee guided firms will also be able provide health insurance and pension benefits to workers and the government would not need to spend money for this purpose. This way the budget deficit would fall to zero and the national debt could be retired over time.
Additionally, it would also avoid undue pressure from Wall Street to ship jobs overseas under pressure of delivering maximum profits to Wall Street investors. This would minimize speculation, malpractices and economic bubbles through economic self-regulation with minimal government interference.

References

1. http://en.wikipedia.org/wiki/Consumer_spending
2. Robert J. Shiller : “The Mystery of Economic Recessions”, New York Times, 4 February 2001. p. 17 http://cowles.econ.yale.edu/news/shiller/rjs_01-02-01_nyt_mystery.htm
3. Martin Crutsinger : “US deficit tops $1 trillion for fourth year,” Associated Press, 12 October 2012. http://finance.yahoo.com/news/us-deficit-tops-1-trillion-fourth-011445884–finance.html
4. Justin Webb, “Don’t be distracted by Greece : Americans must also face financial facts, ” Telegraph (UK), 25 June 2011. http://www.telegraph.co.uk/news/worldnews/us-politics/8598451/Dont-be-distracted-by-Greece-Americans-must-also-face-financial-facts.html
5. Laurie Milner, The Suez Crisis, 03 March 2011. http://www.bbc.co.uk/history/british/modern/suez_01.shtml
6. http://en.wikipedia.org/wiki/Foreign-exchange_reserves
7. Alex Seitz-Wald : 10 Things Conservatives Don’t Want You To Know About Ronald Reagan, 5 February 2011. http://thinkprogress.org/politics/2011/02/05/142288/reagan-centennial/?mobile=nc
8. http://en.wikipedia.org/wiki/Plaza_Accord
9. http://en.wikipedia.org/wiki/Lost_Decade_(Japan)
10. China seeks to learn from mistakes of 1985 Plaza Accord, The Japan Times, 9 September 2006. http://www.japantimes.co.jp/text/nb20060909a3.html
11. Richard Dudley : Counterfeit Electronics in DoD are Widespread and Threaten National Security, 3 June 2012. http://defense-update.com/20120603_counterfeit-electronics-in-dod-are-widespread-and-threaten-national-security.html
12. Joseph Farah: Fake Chinese electronics threaten U.S. Defense. 29 May 2012. http://www.wnd.com/2012/05/fake-electronics-feared-undermining-u-s-defense/
13. Sean Fenley : Barack Obama, What’s Wrong with Protectionism?, 21 September 2008. http://www.opednews.com/articles/Barack-Obama-What-s-Wrong-by-Sean-Fenley-080918-200.html
14. David Ruccio : Graph of the week: USA productivity and real hourly wages 1964-2008. http://rwer.wordpress.com/2010/11/20/graph-of-the-week-usa-productivity-and-real-hourly-wages-1964-2008/
15. Ravi Batra : The New Golden Age : The Coming Revolution against Political Corruption and Economic Chaos, New York, Palgrave Macmillan, 2007. Also see ravibatra.com for Batra’s other writings.
16. P.R.Sarkar : PROUT in a Nutshell, AMPS.

About the Author

Apek Mulay is a Sr. Failure Analyst at Microtech Analytical Laboratories in Plano, TX. His studies started at University of Mumbai, India where he pursued his undergraduate studies in Electronics Engineering. He completed his graduate studies with M.S. thesis from Texas Tech University, Lubbock, TX. After graduating he has worked as Failure Analysis engineer in US corporations like Qualcomm Inc. and Texas Instruments Inc. Prior to joining Microtech, Apek was working on 28nm technology development in Advanced CMOS technology development team at Texas Instruments Inc. Apek is also an author of one Patent while employed at Texas Instruments Inc. He has been actively involved in ISTFA by chairing technical sessions at symposium.

The US ‘will return to gold standard within two years’

(PROUT Globe, September 2012) – A major US investor warns that further rounds of quantitative easing will be disastrous, and predicts the world’s leading economy will return to the gold standard.

“QE3 is coming. You know we’ve got a phony recovery, so it’s going to fail,” Euro Pacific Capital chief Peter Schiff argues. “We are headed for a currency crisis, and the only way we’re going to stop it is by putting real value back into the paper dollar. So we have to tie it to gold. The sooner we do it the better because the sooner we start to repair the problems the easier it is,” he said.

Inflation

The Fed are gambling on supplying inordinate amounts of fresh capital to the defunct capitalist system. They seem to pin their hope on the idea that economic stabilization will precede a veritable tsunami of inflation. According to PROUT, it is a losing game. PROUT founder P.R. Sarkar offered:

“It must be borne in mind that both inflation and depression result from the ailments of staticity. Suppose the production in a country is abundant and the gold bullion reserves are in proportion to the country’s economic position, there is no possibility of inflation.

“However, if the circulation of the capital decreases as a result of staticity and the quantum of production also goes down, inflation is bound to take place. If a country has a constant deficit in foreign trade, in that case also there is the possibility of inflation.

“In addition, if foreign trade is not conducted on a barter basis and if the country has to import foodstuffs and export raw materials, inflation will certainly occur. On the other hand, if there is sufficient production and adequate supply, but suddenly the quantum of demand falls, then the value of money suddenly increases for the buyer. This is called negative inflation or deflation.”[1]

Stagnation

Stagnation is sure to come wherever some are allowed to accumulate capital infinitely. The results of such concentration of capital are particularly bad in a global market characterized by doubt and low confidence. Such insecurity is bound to crop up when there is unbridled competition for raw materials, consumer markets, etc. among vested interests.

PROUT holds that concentration of wealth and the resulting lack of circulation of money are the two main causes of economic depressions, and that such types of economic stagnation and depression occur only under capitalism.

Proutist writer Susmit Kumar has documented the causes of the imminent global economic collapse.[2] According to him, the US has already dug its own grave by printing dollars to pay its bills continuously for decades:

“Until the 2008 economic downturn, the administration was able to finance the twin deficits, i.e. budget and trade deficits, by printing dollars, taking the advantage of the dollar being the global currency. During the 1980s and early 1990s, it was mainly Japan who financed the [US] deficits and during the 2000s it is mainly China who is financing the deficits. Now the debt has grown to an unsustainable level.”[3]

The Gold Standard

PROUT supports a return to gold as a standard of the financial system. PROUT's gold standard is not a pillar of international monetary trade and economic speculation. By establishing gold as a standard of the financial system, PROUT secures the people's economy and other parts of the economy. The present exploitative system cannot be saved by returning to an earlier mode of exploitation, say the pre-WW2 financial system where currencies were pegged to gold. Gold as a finaicial standard will only work well in economic democracies focused on local needs and guided by sound ethics and not by vested interests:

"In capitalist economies, production is for the profit of the capitalist and the profit goes to individuals, groups and the state exchequer … whenever fresh financial investment is required, inflation takes place.

"In a Proutistic economy, production will be solely for consumption. As there will not be any profit motive, there cannot be any fresh inflation, and the existing inflation will gradually die out.

"In Proutistic production or consumption, in the first phase the money value remains constant and full-fledged purchasing capacity will be guaranteed to the people. In the second phase, when production increases in the revised economic order, money will get back its natural market value.

"Finally, after consumption, money will get back its actual value. Inflation will be checked and purchasing capacity and the minimum requirements of life will be guaranteed to the people. The second phase will continue for ten to fifteen years.

"After the expiry of this period, that is, in the third phase, minimum requirements of life will increase and people will acquire more purchasing power. This power will increase at an accelerating rate.

"The printing and issuing of monetary notes having no bullion value must stop immediately, and new notes having bullion value should be issued in new colors and shapes. No monetary notes should be issued by the government from then on without a clear assurance that it is prepared to pay the requisite amount of money in gold coins. This can only be implemented by a Proutistic government."[4]

Notes

1  www.proutglobe.org/2011/05/economic-dynamics
2  www.susmitkumar.net
3  "Stop Blaming China – It is the Structural Failure of the Global Trade System", Dr. Susmit Kumar, 1 July 2010.
4  www.proutglobe.org/2011/05/economic-dynamics

Related material:
Gold and Motivation
US Dollar “Print on Demand” Era About to Close
PROUT's Rational Banking System

PROUT’s Rational Banking System

By Trond Overland

Modern banking emerged during the Italian Renaissance. The idea behind it was ancient:
To make money out of lending money.

prout banks
(Click image for larger image)

The present situation

Today the money lender has become the master of all trades; giant banks control everything under the sun. Do they work in the interests of the people? The answer is a resounding No.

The main reason for the continuing recessions and depressions all over the world today is that vast deposits of money are not being released to those who require resources. In the words of P.R. Sarkar, “the intrinsic demonic greed of banks has been allowed to jeopardize the life of common people.”(1)

“Banks must not allow unwise administrators or governments to print monetary notes indiscriminately without reserving the proportionate amount of bullion in their treasuries. It destroys the very life of society. It leads to widespread inflation, which in turn jeopardizes internal trade and commerce as well as foreign trade and barter. Even if there is abundant production in a country, the common people do not benefit from it. The rich become richer and get more scope to continue their merciless exploitation.”(2)

PROUT’s proposals

Basically, money is a means of exchange. For instance, if you have got something that I require I may spend money in order to get it from you.

I could also offer you something other than money that may be of interest to you. Exchange of something other than money, such as goods and services, is called barter trade.

A micro-economic example of barter trade:
I paint your house, you do my accounts.
A macro-economic example: Bangladesh exchanges jute and hide exports for food imports.

It may be noted that barter trade excels under certain conditions. On one hand, barter between countries works best at present between industrially underdeveloped – financially poor – countries with a large surplus of raw materials. As they have no means to invest in refining industries under the present global exploitative regime, they should exchange raw materials in order to procure minimum necessities.

On the other hand, the exchange of services between private persons would work very well where no government tax is levied on private income. The abolition of income tax will to a great extent remove the problem of black money and bring about a welcome moral change in the population.

Global capitalism does not encourage barter trade but wants to retain all trade within its exploitative speculative dollar-based paradigm. PROUT encourages both types of purchase – using money or by barter – wherever they may serve people’s needs.(3)

Money value increases with mobility

Money is not meant for piling up purchasing capacity but for paying expenses. Spending money is the natural thing to do; accumulation is unnatural to the point where it becomes a mental disease. Macro-economically, the accumulation of money is a dangerous socio-economic course to the point where it leads to large-scale depression; where we are today.

The more money changes hands, the greater is its economic value. The value of money increases with its mobility. The motivation of PROUT’s banking system is therefore to keep money rolling.

Apart from seeing to it that money is kept in circulation, banks should not act on their own behalf and turn into huge profit-making machines. They should instead serve their community and remain directly associated with particular productive local endeavors.

An economy of the people, not of banks

This is a natural idea: Whenever people join in some productive effort they will soon need somewhere to deposit their earnings, a place where they can administer their common economy. If no suitable means for deposit exists, the natural thing for them to do would be to form a cooperative bank themselves.

People may need to borrow, as well, for both individual and collective needs. PROUT’s cooperative banks will serve as both savings and lending institutions. A cooperative bank may take a large loan from another bank or the government to purchase modern equipment and construct dams, barrages and shift or lift irrigation facilities to increase production, etc.(4)

Under PROUT the banking system will have to be managed by cooperatives.(5) Only the government-controlled central or federal bank should have a greater reach by way of guaranteeing the currency.

In conclusion, the mission of banks under PROUT is to keep money in motion and not become stagnant pools of personal wealth. PROUT’s banks are non-profit cooperative organizations where ideally the balance is zero after all expenses are met.

The Gold Standard

Financial circumstances are changing fast. For instance, the last vestiges of the gold standard were thrown out by the Nixon administration some 40 years ago, and the gold standard has been ridiculed ever since. One reason for this mudslinging is that pinning currencies to gold (“gold standard”) does not allow for free speculation.

Today, as the global speculative system is in chaos and about to end in catastrophe, the gold standard may be staged to make a return. The price of gold usually rise phenomenally during times of economic upheaval and financial crisis. This proves that people in general accept gold as a basic guarantee for financial stability.

PROUT supports a form of gold standard. According to PROUT, a main work of the central bank would be to guarantee the currency in measures of physical gold held by that bank. Central banks must be ready to pay citizens the amount of gold represented by the currency. This is the proper hedge against large-scale inflation. The gold-standard protects against speculative bubbles.

Psychology

The gold standard is more a question of psychology than physicality. People view gold as the most precious commonly available thing.

In the same way, the entire field of socio-economy is about physicality as well as psychology. For instance, the present financial system is ridden by greed. From a collective perspective the problem of unbridled greed is first a physical one, then a psychological one.

First society has to find ways and means to stop and control the disease in a physical way. Thereafter, when no one suffers anymore at the hands of greedy exploiters, society will be free to think about how to cure their mental disease.

No one should be oppressed or suppressed. Everybody should be allowed to realize their potentialities and attain their goals in life and thereby learn to utilize all sorts of resources to a maximum.

At present the world of banking is dominated by all-devouring colossuses that crave to be fed by public money first thing in the morning (by way of “quantitative easing”) in order to continue their existence as masters of global trade.

In contrast, PROUT’s banking system presents a rational human approach to supplying money wherever and whenever it is needed and required.

The mission of PROUT as a whole is to pave the way for a society where people can express their true self. Only a socio-economic system that allows and supports people’s all-round needs, interests and dreams can be termed as truly progressive.

Notes

(1) “Keep Money Rolling – Excerpt B”, P.R. Sarkar, 1986. Published in PROUT in a Nutshell Volume 3, and in Proutist Economics. Ananda Marga Publications. Web: proutglobe.org/2011/05/quadri-dimensional-economy
(2) “Economic Dynamics”, P.R. Sarkar. Published in A Few Problems Solved Part 9, in PROUT in a Nutshell Part 13, and in Proutist Economics. Ananda Marga Publications. Web: proutglobe.org/2011/05/economic-dynamics
(3) “Trade for Regional Self-Reliance”, Dr. Michael Towsey. Web: proutglobe.org/2011/09/trade-for-regional-self-reliance
“Cooperative Production – Excerpt B”, P.R. Sarkar. Published in PROUT in a Nutshell Part 14 and in Proutist Economics.
(4) “Some Specialities of PROUT's Economic System”, P.R. Sarkar. Published in A Few Problems Solved Part 9, PROUT in a Nutshell Volume 3, and in Proutist Economics. Ananda Marga Publications. Web: proutglobe.org/2011/06/some-specialities-of-prouts-economic-system
(5) “Economic Dynamics”, op.cit.

Copyright The author 2012

Developmental Programs

P.R. Sarkar

(17 April 1988, Calcutta) – In ancient times bullion was used as the medium of political and commercial transactions. In most countries gold was the preferred bullion, but in some countries silver bullion was also used. Of the countries which used gold bullion, some recognized silver bullion and some did not. If a country which used gold bullion refused to recognize silver bullion, commercial bullion transactions between the countries were not possible because of the bullion differences. Such countries engaged in barter trade.

Kuranga badale lavanga nibo kumkum badale chuyá
Gáchphal badale jáiphal pábo baherar badale guyá.
“We shall accept cloves in exchange for stag. We shall accept
paste for pollen.
We will accept hot spices in exchange for fruit. We shall accept
medicinal fruit in exchange for nuts.”

In olden days Bengal used to conduct barter trade with countries such as Sri Lanka and Burma. Much of the commercial trade in rural Bengal was conducted through barter and only a negligible portion through the exchange of bullion. Farmers used to buy commodities from people of different vocations in exchange for their agricultural merchandise. Even 150 years ago there was hardly any exchange of bullion in the Birbhum district of Ráŕh. Peasants used to buy mangoes, lambs, lamps, dhotis and saris in exchange for rice. Carpenters used to buy cutters and knives in exchange for wooden articles or beaten rice. The village people of Bengal called this system “barter trade”. Where there was a difference in the standard of bullion, commodities were not sold through gold or silver bullion.

The rulers (monarchy was the system in those days) used to deposit gold or silver bullion in the public exchequer. Some portion was spent on the salaries of government employees and to meet the expenses of the government’s developmental programmes.

The place where the rulers produced bullion was called t́ankashálá – in English, “mint”. The words t́anká, tanká and tankha have come from the word t́anka. Even today in northern India, the word tankha is used in the sense of “salary” or “pension”. In the Shubhaunkarii [mathematical charts used for calculations], Shubhaunkara Dás, a káyastha from Bankura district in Ráŕh said, Mańprati yata tanká hoibek dar… That is, “For every mań [maund, thirty-seven kilos] the price in tanká will be…” The amount of money which the government releases for public use in the market is called gańatanka.

Though it is a slight digression, I would like to add the following. The clay modelling and temple construction industries have left many beautiful relics of subtle art which demonstrate the finer sensibilities of the human mind. In ancient India, especially in southern India and Orissa, many kings used to spend bullion on building temples instead of spending it on developmental programmes. It is said that not even a penny of the total revenue collected over four years in the ancient kingdom of Utkal was spent on developmental programmes. The entire amount was spent on building the Konarka temple. As a monument and an architectural achievement, the Konarka temple is unique. Nevertheless, I hope that the present educated generation of Orissa will deeply analyse the extent to which it was justifiable to build this temple at the cost of food for the impoverished masses of Orissa.

The more that government revenue is spent on developmental programmes – not including the salaries of government employees – the better it is for the country’s economy. This policy will render great service to the masses and lead to increasing socio-economic development. As a result of the constant circulation of capital, national wealth will increase. While the government must think about the bare necessities of government employees, increasing the salaries of government employees by reducing the amount of money spent on public services can never be supported. The more that money is invested in developmental programmes, the better it is.

This policy will also indirectly lead to an increased standard of living for government employees. If any government increases the salaries of government employees without investing money in public services, the market will go out of control. Consequently, government employees, even if they are paid higher salaries, will not be benefited. If the market price of a commodity is five rupees and if the salaries of the government employees are doubled with the intention of providing them greater amenities, will the purchasing capacity of the government employees also be doubled? If they go to market with more money in their pockets they will find that everything costs more. Such an approach is like adding fuel to fire. If the market price of commodities goes sky-high the country will be thrown into the clutches of high inflation.

So, increasing the expenses of a government department at the cost of developmental programmes amounts to committing economic suicide. If production is increased through investment in developmental programmes instead, the purchasing capacity of the people can be increased without increasing their salaries. When purchasing capacity is increased, both government and non-government employees will benefit.

In pure economic terms developmental programmes are those programmes which directly increase national wealth and indirectly support this increase. Programmes which only increase national wealth indirectly, not directly, cannot be regarded as developmental programmes until the minimum requirements of the people are guaranteed.

Copyright Ananda Marga Publications 2012

Economic Dynamics

By P.R. Sarkar
(13 September, 1987) – Each and every movement in this universe is systaltic. Nothing ever moves in a straight line. Due to this systaltic motion, internal clash and cohesion takes place. The ups and downs of socio-economic life in different phases of the social order are sure to take place due to this systaltic principle. When the pause period is long, the society goes through the phase of extended staticity, and the society may even cease to exist or lose all its dynamic movement. In the phase of pause if there is lack of dynamic force, then the stage of dynamicity may not come in the subsequent phase.

"The contradictions in capitalism are due to the self-centred profit motivated psychology and the accumulation of wealth for the benefit of a few rather than for the welfare of all."

trianglehands

The downfall of both capitalism and communism is inevitable due to their inherent staticity. Both capitalism and communism are on the verge of extinction from this world. The external and internal spheres of capitalism have ordinary acceleration, but there is a contradiction between its internal and external spheres. The contradictions in capitalism are due to the self-centred profit motivated psychology and the accumulation of wealth for the benefit of a few rather than for the welfare of all. Hence, capitalism is not congenial to the integrated growth of human progress. A day is therefore sure to come when capitalism will burst like a firecracker.

Marxism too, is a transitory phenomenon. In the external sphere of Marxism, there is only ordinary acceleration and in the internal sphere, there is staticity. The result is negative dynamicity. That is why Marxism also will never be a success. Marxism is just like a comet on a parabolic path–it is not of a hyperbolic order. Marxism can only bring society to an omni- static state, that is, the state of nihilism or cynicism–a sort of negation.

Economic depressions — the result of staticity

In the economic sphere, depressions are inevitable in both capitalist and communist countries due to this very inherent, intensive and innate staticity. Economic depressions are actually the net result of suppression, oppression and repression, that is, exploitation. When exploitation reaches the culminating point, the mobility and the speed of the society becomes virtually nil. In such a stage, that is, in this culminating point, a natural explosion takes place. In the case of the material world, the explosion is of a material nature, and in the psychic sphere, the explosion is of psychic order and so on. Depressions may happen in any of the four ages—proletarian (shu’dra), warrior (ks’attriya), intellectual (vipra) or capitalist (vaeshya) age.

Similar depressions may also take place in the cultural life of society due to the suppression, oppression and repression. As a result, the cultural life becomes perverted. In fact, every aspect of cultural life becomes perverted. This is why we get perverted literature, music, dance, art, and architecture etc.

In both social and economic life, this depression becomes unbearable for one and all. Such a depression took place between 1929 and 1931. During this depression, in Bengal in Burdwan market, five seers or kilos of brinjal or eggplant were sold for 1 paisa and 40 kilos (1 mond) were sold for 2 annas or 8 paisa. There was no one to purchase these items. There were also big curtailments in salaries. People had to accept salary cuts of 10% or more. Today also, the stage has almost come for such a severe reaction.

This depression will occur in the industrial subsection of the commercial economy and will have wide spread and devastating consequences for humanity. An endeavour should be made to shorten the span of this economic depression. Before the final culminating point comes, it is possible to avert the disaster and accelerate the speed of social movement. We can do so by creating a socio-economic and cultural impact on the entire social structure through PROUT. This impact should best be created just after the manifestative pause or the crest of the wave in the process of systaltic movement. As the world is passing through a most critical phase, we should be more active and create an impact. If the impact we create coincides with the explosion, the effect will be excellent.

It must be borne in mind that both inflation and depression result from the ailments of staticity. Suppose the production in a country is abundant and the gold bullion reserves are in proportion to the country's economic position, there is no possibility of inflation. However, if the circulation of the capital decreases as a result of staticity in the quantum of production also goes down, the inflation is bound to take place. If a country has a constant deficit in foreign trade, in that case also there is the possibility of inflation. In addition, if the foreign trade is not conducted on a barter basis and if the country has to import foodstuffs and export raw materials, inflation will certainly occur. On the other hand, if there is sufficient production and adequate supply, but suddenly the quantum of demand falls, then the value of money suddenly increases for the buyer. This is called negative inflation or deflation.

The root causes of a depression

There are two main causes for economic depressions. First, the concentration of wealth and secondly, blockages in the rolling of money. If the capital is concentrated in the hands of a few individuals or state, the majority of people are exploited by a handful of people. As a result of this process of severe exploitation, a serious explosion takes place. This explosion is known as a depression in the economic world. The concentration of wealth and particularly the concentration in the value of wealth is the fundamental cause of a depression.

The second cause: when money that is in the possession of individual or state capitalists stops rolling. Money remains inert or unutilized because those capitalists think that if the money is allowed to roll freely then their profits will decrease, even though it will bring relief to the common masses. The very psychology of the capitalists is to make profit from the rolling of money. When they discover that the investment of money does not bring profit up to their expectations, then they stop rolling the money. This keeps the money immobile or inert in various ways. As the money does not roll, there is no investment, no production, no income and hence no purchasing power, and the situation becomes so dangerous that there are few buyers to buy the commodities.

If there is surplus labor and deficit production, the effect of depression is more acute. In India Bihar, Andhara Pradesh, Telangana, and Orissa are surplus labor areas, and during a depression these areas could face indiscriminate closure of business houses, layoffs etc. When wages fall, the people in the surplus labor areas who used to go to deficit labor areas for employment will be subjected to more hardships. This will aggravate the unemployment problem in surplus labor areas. In such situations, restrict the transfer of food amongst different socio-economic units could lead to an acute scarcity of food in the deficit production areas, and therefore, a cordon system should not be introduced. Countries with surplus production and deficit labor usually suffer less hardships during depression.

The effect of economic depressions

An economic depression in capitalist countries will not spare communist or so-called socialist countries, India and the Middle East. India exports many raw materials to industrially developed countries and their satellites. India also purchases raw materials like raw cotton from other countries although it used to export such materials in the past. Therefore, to the extent to which India is dependent on other countries for its exports or imports, it will be affected. India also has immense loans and these loans will put a strain on the Indian economy during the depression. The fire sparks of depression will not spare India. If the financial or monetary trade or say the trade that affects bullion is lessened, and barter trade is increased, then the effect of a depression on India will not be much. Therefore India should try to increase the range of its barter trade.

Bangladesh exports manufactured goods, raw jute and hide and imports foodstuffs and almost all other articles. If Bangladesh wants to keep itself away from a depression, it will have no alternative but to increase its barter trade.

In time the Arab countries — those selling oil — will be the most affected. Even the communist countries will not be spared from the onslaught of a depression. These countries have not been able to solve their food problems. Although they have huge buffer stocks, they depend on Canada, the U.S.A. and Australia for wheat. If these dollar-based countries suffer from a depression, the communist countries will certainly be affected by a depression, although not much. Depression is not a natural phenomenon. Pause is a natural phenomenon. In a Proutistic structure pause may occur but depression will not occur. To save society from depression, the approach of PROUT is to increase purchasing power by increasing production, reduce disparities in the value of wealth, and increase the circulation of money; that is, by keeping money rolling. Empty slogans will not do. Attention will have to be given to increasing the level of production. In capitalist and communist countries, the mode of production is defective. In capitalist countries, labor does not work in the interest of the management and management does not allow the rolling of money due to the concentration of wealth. In communist countries, labor does not feel one with the job and that is why there is sluggish production. The cooperative model of PROUT is free from both sets of defects. PROUT is well adjusted with human ideals and sentiments. Other socio-economic systems are ultravires to human existence and all-round elevation.

Bullion inflation

In capitalist economies, production is for the profit of the capitalist and the profit goes to individuals, groups and the state exchequer. In socialist economies or so-called communism, the profit goes to the state exchequer and a microscopic fraction of the profit goes to the actual producers. In both cases capitalism exists, and whenever fresh financial investment is required, inflation takes place. In a Proutistic economy, production will be solely for consumption. As there will not be any profit motive, there cannot be any fresh inflation, and the existing inflation will gradually die out. In Proutistic production or consumption, in the first phase the money value remains constant and full-fledged purchasing capacity will be guaranteed to the people. In the second phase, when production increases in the revised economic order, money will get back its natural market value. Finally, after consumption, money will get back its actual value. Inflation will be checked and purchasing capacity and the minimum requirements of life will be guaranteed to the people. The second phase will continue for ten to fifteen years. After the expiry of this period, that is, in the third phase, minimum requirements of life will increase and people will acquire more purchasing power. This power will increase at an accelerating rate. The printing and issuing of monetary notes having no bullion value must stop immediately, and new notes having bullion value should be issued in new colors and shapes. No monetary notes should be issued by the government from then on without a clear assurance that it is prepared to pay the requisite amount of money in gold coins. This can only be implemented by a Proutistic government.

Production inflation

The problem of production inflation cannot be ignored either. Production inflation may occur in two ways. First, owing to the application of scientific methods, the production of certain commodities may increase in excess of the demand or need in particular socio-economic regions. Then it becomes a problem how such excess production or overproduction can be marketed or consumed. Secondly, it may also happen that all of a sudden under certain circumstances the production of commodities increases, then it becomes difficult to find a market for such production. Now a question arises whether or not such production will increase purchasing power as well as elevate the standard of it. In general circumstances such production is not a big problem, not a chronic problem, but if no measure is taken to find a market for such overproduction, then it may take the form of an acute problem. This problem can be tackled by taking three measures.

First, there should be a free trade system so that other countries or other economic units can consume overproduction. In India, excepting the Punjab and Haryana, there is underproduction of milk. In other states, common people cannot get a sufficient amount of milk. But there are many countries, such as certain European countries, where there is overproduction of milk. In England, Germany and Sweden the authorities even give orders or encourage the public to kill cows. If in these circumstances free trade is allowed among different countries, the countries having overproduction or underproduction can make respective adjustments among themselves so that under-producing countries may consume the overproduction of commodities. In that case the concerned countries will be benefited. Here free trade means that there should not be any imposition of export or import duties, and thus the prices of these commodities will benefit the consumers when they reach the market for actual consumption.

Secondly, there should be proper arrangement everywhere for the preservation of products, which are in excess production. In Malda in Bengal there may be overproduction of mangoes, which are perishable commodities. As there is no system of preservation, the ordinary mango growers will have to sell their mangoes at throw away prices. But if they could sell the same products four months later they would get remunerative prices. Moreover, if processing factories are established, they can then produce dried mango, mango candy, mango juice, sauce, jam, etc., which can be preserved for a longer time. There are many countries in Europe or other parts of the world where there is no mango production. If a system of preservation were available, then mangoes could easily be sold in those European countries, and the mango growers could earn a good amount of money.

In many places in India abundant vegetables are produced in the winter season; for example, in Nadia district, at Ranaghat, Nagi, Bago, etc. In European countries at the same time there cannot be any vegetable production due to the excessive cold. If vegetable-processing factories could be installed in those places, then perishable vegetable products could be easily preserved by such processes as canning, and exported to other countries. From Calcutta it takes a maximum of twenty days for a ship to reach Europe, so preservation arrangements could be made for that period. Similar arrangements could be made for betel leaf. If this were done, then the poor growers at Tomluk, Mecheda, Bagnan, etc., would be able to live a well-to-do life.

Thirdly, new diversified styles of consumption should be invented. That is, consumption should be of a progressive nature and the style of consumption should be diversified. For example, there is only limited utilization of linseed at the moment in India. If the oil extracted from the linseed is deodorized, then it can be widely used as edible oil. Also linen thread can be manufactured from linseed plants, which generally go to waste. Okra is abundantly produced in India, but it is only used as a vegetable. Oil can be extracted from okra seeds, and this can be processed and marketed as edible oil. Also, fine thread can be manufactured from the okra plant, and good quality clothes can be prepared from that thread. In Bangladesh and West Bengal there is overproduction of jute, which is an acute problem today. This problem can be easily tackled by diversifying the methods of jute consumption. For example, we can get fine thread from raw jute to produce good quality clothes.

In the existing world structure geo-sentiment is an obstacle to the implementation of free trade. Neither the capitalist countries nor the communist countries like the free trade system because it is detrimental to their respective self-interests. But there are some free trade zones in the world which are very bright examples of the success of this sort of system. Singapore is one such example. There was a good proposal to declare Calcutta a free trade zone, but it was not implemented for many reasons, including the failure of the concerned leaders. Bengal could have been greatly benefited by such a system. In a revised economic structure — that is, Prout — there must not be any import or export duties on consumable commodities. If this is done, then this earth will be converted into a golden earth. The commune system suffers from the acute problem of chronic shortages of food products, so the communist countries always import food products from capitalist countries, in spite of all sorts of hue and cry raised by them regarding their "isms". Therefore, they oppose the free trade system.

In case there is overproduction of non-perishable goods or raw materials, one must not allow these raw materials to be exported to other countries. Instead, raw materials must be immediately converted into manufactured goods at the place where they are available. For example, Orissa, the western portion of Ra'r'h, certain portions of Madhya Pradesh, and certain portions of southern Bihar and Telengana are rich in different kinds of raw materials. These economically undeveloped places can easily be converted into advanced areas like the Rhine region of Germany. Poverty stricken people will live an affluent life if factories in these areas convert raw materials into manufactured goods. The export of raw materials is a sign of an unhealthy economy in a country. If overproduction is caused due to the scientific application of improved methods in industry and agriculture, such as good manuring, then consumption may be adjusted through different methods as suggested above. This will also increase the purchasing power of the people. In such a stage the bountifulness of nature will ultimately prove to be a boon for the common people. Hence, in a Proutistic structure production inflation would not be regarded as a problem.

The panacea

PROUT is the panacea for the integrated progress of human society. It aims to bring about equilibrium and equipoise in all aspects of socio-economic life through totally restructuring economics. Without PROUT, socio-economic emancipation will remain a utopian dream. Only PROUT can save the world from depression. Furthermore, only PROUT is free from the inherent and exherent staticity. In capitalism there is exherent and inherent staticity. In communism there is extensive and intensive innate staticity. People suffer from the ailments of staticity. These ailments will destroy all forms of "isms" in the very near future. Wise people should utilize this moment. We are near the last stage of the capitalist era. If an impact is created, it will help the suffering humanity. It is the most opportune moment for creating an all-round revolution. This is a new sub-theory under Proutistic theory and may be called gati vijina'na — the science of dynamics in PROUT.

From PROUT in a Nutshell 13.
Copyright Ananda Marga Publications 2011

 

 

 

 

 

 

 

 

Gold and Motivation

(November 2010) – World Bank President Robert Zoellick has said Gold is now the “yellow elephant in the room” that needs to be acknowledged by policy-makers of major economies and central banks as discussions of a new international monetary system move forward. His recent comments on the need to reintegrate gold into the core of the global financial system have seen the spot gold price continue to set new upward records.

PROUT seeks financial stability so that a people’s economy may evolve for all. A gold standard is recommended by PROUT in order to establish monetary value at a naturally acceptable psychological level. Gold’s fame stems from its decorative value. It is of little practical use in most other areas where metals are called for.

Robert Zoellick and the World Bank however may desire to perpetuate the present system and they see gold as a rescue device, perhaps interim, during a period when the US dollar-based system seriously falters. There is a dramatic difference between the motivation of PROUT for taking gold seriously and that of the World Bank.

Read: The US Will Return To Gold Standard Within Two Years

The Global Economy Desperately Needs Another Brilliant Keynes Idea

Dr. Susmit Kumar
Before the 1930s Great Depression, there were recessions in 1797-1800, 1807-1814, 1819-24, 1837-43, 1857-60, 1873-79, 1893-96, 1907-8 and 1918-21. The government did not intervene in any of these previous economic recessions and opted to let the economy find its own solution. Until 1930s Great Depression, economists thought that free markets would automatically provide full employment on their own without the intervention of government.

But the severity of the 1930s Great Depression showed the structural defects in the economy and for the first time the government had to intervene by providing massive Keynesian spending in the first half of 1930s to create employment.

Due to the stimulus packages, the Roosevelt government was able to reduce the unemployment from 25 percent in 1930 to only 15 percent in 1939 at the onset of the Second World War. These numbers were very high according to present standards as only one person in the family used to work in those days. The unemployment reduced to a normal level only after the out break of the World War II when the US economy started churning out arms and armaments initially for the European allies and later on for their own country also. World War II spending on arms and armaments worked as massive Keynesian spending projects.

Using this same Keynesian stimulus formula, majority of countries have come out of the 2008 Great Recession. Therefore these days, people talk about Keynesian stimulus. But very few are aware of his another wonderful idea which he proposed towards the end of World War II. Right now, countries like U.S., several among EU, India, Vietnam and South Africa, are suffering from cronic trade deficits. There are very few countries, like Germany and China, who are increasing their market shares of trade surpluses year after year.

Towards the end of World War II, there were two competing plans for the future of global economic order – Britain’s Keynes plan and US’s Harry Dexter White plan. Keynes was for a world currency to be called, say bancor, by a global bank and an International Clearing Union. The world currency would be exchangeable with national currencies at fixed rates of exchange. Under Keynes plan, both debtors and creditors had to change their policies. A country with a large trade deficit would have to pay interest on its account and would have to devalue its currency and to prevent the export of capital. On the other hand, a country with large trade surplus would have to increase the value of its currency and to permit the export of capital. A country with a bancor credit balance, more than half the size of its overdraft facility, would have to pay interest. He even proposed the severe penalty of confiscation of surplus if at the end of year the country’s credit balance exceeded the total value of its permitted overdraft.1 Under the White plan, the US was given veto power in the working of the IMF and IBRD (now World Bank). The IMF was based in Washington, DC and staffed by mainly US economists and US Treasury officials.

In 1940s when the future of the world trade was discussed and the Bretton Woods conference was planned, most of the Third World countries were under colonial rule and had no say in the discussion at all. All the discussion happened between the US and Britain, and at the Bretton Woods conference, all other countries were just invited for the formal signing in ceremony. During that period, the U.S. gross domestic product (GDP) was almost half of the world’s GDP. Its gold reserve was $20 billion, almost two-thirds of the world’s total of $33 billion.2 Because of two World Wars, all European countries were highly in debts and had transferred huge amounts of gold to the US. Also they needed money from the US for their post-war reconstruction. Therefore, the US was able to impose its will and its plan at the Bretton Woods conference.

Under the Bretton Woods agreement, a system of fixed exchange rates was announced using the U.S. dollar as a reserve currency. The U.S. committed to convert dollars into gold at $35 an ounce. At the conference, the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which is now part of the World Bank, were established.

Right now the US is in the same situation as the Europeans in 1940s, i.e. highly in debt and needs money for its economy to recover from the recession. Hence if there is an economic crisis and another Bretton Woods conference, countries like China can impose its will and countries like the US and India may be at the receiving end due to their massive debts. It is worth noting that countries like India, Vietnam and South Africa are becoming consumer countries like US and the trade deficits are increasing year after year. The FOREX of India and South Africa are dependent on foreign investments which can flee the country at the moment of crisis. Therefore it is better to negotiate some kind of tax on both trade surplus and trade deficit as proposed by Keynes when debts are manageable, otherwise China is going to rule the global economy.

Notes

1 Monbiot, George, “Clearing Up This Mess,” The Guardian, November 18, 2008.
2 Benjamin, M. Rowland and Brittain, W.H. (eds.), Balance of power or hegemony: The interwar monetary system, 1976, p. 220.

Copyright The author 2011