How Uncle Sam has been fooling all of us all this while !!!

No much economic or tech jargon, simple to understand ..

The dollar delusion

Jug Suraiya Oct 4, 2011, TOI.

Imagine a village in which almost all the people are more or less equally poor and lead frugal lives. The only exception is a person, let's call him Mr Diwana, who flaunts an extravagant lifestyle, daily feasting on the most expensive of delicacies, wearing the most flamboyant turban and driving around in the biggest bullock cart in the village.

How does Mr Diwana manage to maintain his costly way of living when all his fellow villagers are so hard up? He borrows money, or goods, from all of them. The villagers give him whatever he asks for. After all, he is the richest person in the village. If the money or goods that they lend to him aren't safe with him then who could they possibly be safe with?

That imaginary village is a scaled-down model of today's world, and Mr Diwana is what is called the rich 'West', which primarily means the US and other 'developed' economies as opposed to the poor 'East', which generally refers to Asia and other 'developing' economies. Ever since the industrial revolution took place some 200 years ago, the industrialised 'West' established increasing hegemony over the agricultural 'East'. In many cases, this process was facilitated by colonisation. All the resources of the colonised country were 'borrowed' on a non-returnable basis by the colonising country.

However, the most subtle form of colonisation was not physical but psychological and it was perfected by the US. Though the US has technically never been a colonial power - indeed it fought a revolutionary war to free itself from Britain - in fact it has colonised practically the whole world by making the world believe that it is the richest nation on earth and that its currency, the US dollar, is the safest one to invest in.

After the end of World War II, the dollar established itself as the basis of all international trade. If two countries wanted to do business with each other - say Paraguay and Tonga - they had to do it in US dollars. This ensured that the US dollar became the most sought-after currency in the world. The dollar's 'strength' didn't depend on the strength of the US economy; its strength was derived from the borrowed wealth of other countries which invested in dollars to trade with each other and with the US.

For a brief while, the euro appeared as a challenger to the dollar's supremacy. But hopes that the euro could provide an alternative global currency proved short-lived. The ongoing crisis in the eurozone, where Greece is on the verge of bankruptcy, has put an ominous question mark over the future of the euro. The euro crisis has created an even greater demand for the dollar with its specious promise of being the world's 'safest' currency. So, even as America teeters on the brink of a double-dip recession, even as unemployment and poverty levels are at an all-time high in the US, the dollar today is more sought after than it has ever been.

With the whole world buying up dollars, the price of the greenback has gone up sharply. If you were planning to study abroad or go on a foreign trip, the exercise will cost you some 10% more in dollar terms than it would have a few weeks ago. In other words, the US has 'borrowed' 10% more of your wealth on a non-refundable basis.

Uncle Sam is the Mr Diwana of the global village. Frightening thought. An even scarier thought is: what happens if - or should that be when? - Mr Diwana officially declares bankruptcy and becomes Mr Diwala? Who then picks up the IOUs, the dollars that aren't worth the paper they're printed on? Mr Diwana is living not only on borrowed money but also on borrowed time. And, thanks to him, so are we all.

ge..