GLOBAL MONETARY PROBLEMS

The US Dollar and the Euro are actually not international currencies, but local currency and regions adopted into international currencies. US Dollar and Euro are adopted as an international currencies because the world has not had an international currency yet. The adoption of these currencies causes very expensive costs for the global economic system. These costs are charged to all countries in the world.

Any currency when used outside its territory will turn into a tyrannical currency. It is called tyranny because it is like tyranny, which sucks up the wealth of the surrounding countries, and causes many other costs.

Below is a list of the costs of the global monetary system, caused by adopting local or regional currency as an international currency:

1.     Buy Paper with Gold

To make international trade, a country must have an international currency. And this international currency is not free, but must be purchased with real goods and services. So before entering into international trade, they must buy international currency first. After that, they can make transactions with other countries.

Conversely, the countries that issue international currencies (United States with US Dollars and European with Euros) do not need to sell anything to make international trade. They only sell pieces of paper with numbers on them and get oil, gold, mining materials, raw materials, machinery, and all other world products.

The United States and the European Union buy gold with paper. And on the contrary, all countries in the world buy paper with gold.

Buying paper with gold is one of the costs of the tyrannical global monetary system.

2.    Wasteful Foreign Exchange Reserves

The international currency collected by all countries every year from international trade surplus is called foreign exchange reserves. Foreign exchange reserves are liquid (easily liquidated) international assets such as international currencies and gold.

International trade increases every year. Then the foreign exchange reserves have to increase every year. If international trade increases while foreign exchange reserves do not increase, monetary security will weaken.

Foreign exchange reserves are non-productive assets. The greater the foreign exchange reserves owned by a country the greater the non-productive assets they have. And these non-productive assets cannot be eliminated because their monetary security will be weak without.

Figure 1. Distribution of foreign exchange reserves of all countries in the world. Image source from visualcapitalist.com

So all countries in the world are competing each other to accumulate unproductive assets to support international trade and fortify their monetary system. From IMF data, the total foreign exchange reserves of all countries in the world to fortify monetary security per 2018 have reached more than 10.5 trillion US Dollar.

Foreign exchange reserves are the monetary fortress. It work as a fort and defense forces in an empire. The fort and defense forces on the other hand pose a threat to other kingdoms. In terms of economy, the construction of fortresses and defense forces that threaten each other in all kingdoms is a form of inefficiency and total loss. Many resources are used to build something that does not add any value at all.

The accumulation of nonproductive foreign exchange reserves is one of the costs of the tyrannical global monetary system.

3.    The Foreign Debt Trap

To accommodate the always-growing international trade, all countries have to make surplus in international trade at all costs. The problem is that not all countries can be fortunate making surplus at any time. Because international trade is a reciprocal activity. Every sale of 1 billion there must be a purchase of 1 billion on other side. So it is impossible for all countries to be surplus.

Below is a map of the international trade balance of countries in the world summarized from IMF data in 2009.

Figure 2. Cumulative balance of payments maps of all countries in the world. Image source from wikipedia.com

More than half of the countries in the world are unable to achieve minimum surplus to sustain the growth of their international trade. Even most of them are deficit.

The final solution is foreign debt. More than half of the world’s countries are trapped in foreign debt because of international trade deficits. While the foreign exchange reserves must increase.

All debts bear interest expenses. Foreign debt interest will reduce foreign exchange reserves in the future. If the foreign debt interest expenses are greater than the trade surplus, then the country was trapped in foreign debt that cannot be resolved.

If interest expense is equal to the international trade surplus, or even greater, then the foreign exchange reserves no longer have sufficient organic sources. Without changing conditions, the country will depend on debt forever, which someday will be saturated before finally collapse. More than half of the world’s countries are trapped in foreign debt that cannot be paid.

The large number of countries trapped in unpaid foreign debt is one of the costs of the tyrannical global monetary system.

4.    Global Depreciation Costs

All currencies in the world are depreciating. This is because the currency of each country sticks to the government budget. All governments in the world make budget deficits to increase economic growth. This budget deficit paid by debt and printing new money. Debt and printing new money causes inflation. Inflation causes the currency to depreciate.

The public does not mind depreciation or inflation because they get compensation for economic growth.

The problem is when people who bear depreciation costs are different from who benefits from economic growth. This happens with international currencies.

Depreciation costs of the US Dollar and Euro are charged to all countries in the world. While the benefits of economic growth are only be utilized by the United States and the European Union citizens.

Two thirds of the US Dollars circulates outside the United States. Only one third is circulating in the United States. This means that two-thirds of the United States government budget deficit is charged to the entire world and only one-third is charged to the US citizens. So all countries in the world subsidize the United States and the European Union.

From IMF data, the total international currency circulating outside its territory (US Dollars outside the United States, Euros outside Europe, and other currencies outside the country) per 2018 reaches 10.5 trillion US Dollars. This means that the total depreciation charged to the whole world and flows to the country issuing the tyrannical currency reaches almost 200 billion dollars per year. Depreciation of the US Dollar currency and the Euro is one form of tribute that flows from the entire world to the country that owns the tyrannical currency.

5.    Never-End Trade War

Countries need international currencies to make international trade. Since international trade generally increases in every country every year, the need for international currencies increases. If trade increase is not offset by an increase in the international currencies, monetary security will weaken. So increasing international currency or foreign exchange reserves is a must. Thus, a surplus in international trade is also a must.

Herein lies the problem. International trade is a perfect reciprocal activity. Every 1 billion US Dollars sales, there must be a purchase of 1 billion. Each surplus of 1 billion US Dollar in a state, there must be another state with a deficit of 1 billion US Dollar. So it is impossible for all countries to be surplus.

In the world there are 200 countries and several regions. Only 1 country and 1 region could be deficit. Others must be surplus. Pursuit of surplus makes all countries in the world trapped in a never-end trade war which harm all parties.

A trade war is one of the costs of the global tyrannical monetary system.

6.    International Imbalances

Ideally, international currencies owners (the United States and Europe) have large amounts of trade deficit to make room for other countries to make surplus. USA’s and Europe’s deficit can be shared equally among all countries in the world so that they can all make surplus. If international trade competition is perfectly balanced, such condition could be met.

But such condition is too good to be true and never happen. World trade competition is never be balanced. Some powerhouse countries such as China, Japan, Switzerland, and Germany have very large export power and consume all surplus space provided by international currencies owners. All of the surplus quota is drained by the powerhouse countries. Finally, other countries have to fight for scraps. Many countries sell everything to increase exports. The international trade war was finally just like a war in ancient civilization. Many kingdoms survive by destroying other kingdoms. Many kingdoms had to build fortresses from army corpses and other kingdom fortress debris.

An unbalanced trade war gives birth to international imbalances.

In the economy, anything not sustainable or cannot occur continuously is called imbalance. Countries that encounter continuous deficits without any changes while other countries experience continuous surpluses, is counted as imbalance. Imbalance will definitely reach a saturation point and eventually be corrected in various ways.

Figure 3. International imbalance charts. Image source from wikipedia.com

In the picture above, countries colored bright blue and gray, are the countries that suffer most in international trade. They are international currencies users who should have surplus, but suffer a deficit. These countries are all trapped in an insolvent cycle of foreign debt.

Global imbalances always grow and get bigger every year, because the states competitiveness in the world is indeed unbalanced. Meanwhile, the current international monetary system never respond at all to this imbalance.

Economists consider the monetary crisis that occurs routinely in the world is part of the correction of imbalances.

The current global monetary system poses international imbalances which are a potential monetary crisis at any time.

7.     Middle Income Trap

The middle income trap (MIT) is a condition where the country has reached a middle income level (with per capita income of around 10,000-12,000 USD), its growth is slowing down so that it is difficult to reach high income countries (developed countries). From the World Bank report, it was stated that of the 101 countries that had middle income in 1960, only 13 countries had grown to high-income range in 2008. The rest, or 88 countries, had been trapped in middle-income boundary for a very long time (Wikipedia).

Various studies stated that the cause of MIT was the slow pace of government to transform the economic structure of a production system that relied on cheap labor wages to systems that relied on high expertise. Another study also stated the causes of the middle income trap are the low capacity and reliability of infrastructure, the slow adoption of technology, and the bureaucratic system that still cannot adapt. In addition, various studies made in each country also show different causes and conditions.

Of the many causes mentioned by economists there is one dominant factor that has been overlooked, namely the global monetary system itself.

Countries trapped in the middle income trap generally encounter a slow transformation. The demands of workers to raise minimum wages make the government increase wages. While their productivity has not changed. Wage rates rise faster than productivity. This causes the cost of producing goods and services in the country to be more expensive every year. Income levels increase but competitiveness remains or even worse because it cannot maintain efficiency.

On the other hand, highly efficient countries are able to maintain production efficiency when their income increases.

In the global market all goods and services compete in head to head. More efficient products can penetrate state markets that are not able to maintain efficiency.

This is where the problem begins. Countries that are unable to maintain the efficiency of labor costs (which in developing countries are still the dominant factor in production costs) will be unable to compete with countries that are able to maintain efficiency and even improve. The country’s domestic market which is unable to maintain efficiency is flooded with imported products, from efficient countries.

The economic value added of goods and services lies on the production process. If the domestic market is filled with imported products then value added flows out. Economic value added flows to exporting countries.

If economic value added flows out, the country will lose energy to grow. The domestic market is a large energy source for economic growth. When this domestic market is taken by other countries that are more efficient, the growth energy of the country is taken.

Countries that have high production and efficiency can easily penetrate and control the less efficient country’s domestic market. The efficient country is getting more capital credit which is giving them more energy to move into a prosperous country. While the country whose domestic market is taken by the efficient country, does not have the energy to grow.

So the tyrannical global monetary system does not allow all countries to escape the income trap. For every country that takes off, there must be another country remains on the runway and becomes a foothold for the country taking off.

The 13 countries that have passed the middle income trap, most of them are powerhouse countries whose export capabilities penetrate other countries. Without market assistance from a failed country, the 13 countries will not escape the trap easily. And the rest are countries that are markets of the powerhouse countries or other rich countries. They are trapped on the runway. They never took off.

8.   The Monetary Crisis

The monetary crisis is the accumulation of all the costs of the tyrannical global monetary system above which at a certain time the monetary security system was unable to hold it back. The monetary defense system is broken and finally forms a new balance. The monetary crisis is the culmination of the global monetary costs above, which have not been able to be held back by the local monetary system.

In the Asian monetary crisis 1998, beside imbalances already existed in regional monetary, there were external factors which were quite dominant which triggered a crisis, namely the power of speculation.

According to John Maynard Keynes speculation is knowing the market better than the market itself. Economists are still the pros and cons of the benefits of speculation for market balance. Proponents of speculation believe that speculation can make the market more efficient because various distortions or obstacles can be penetrated by this speculative action. While the speculators reject that speculation is an activity that does not provide any value added except only fluctuations.

Regardless of the pros and cons above, speculation is a real activity and has an effect on our economy, including the money market or FX market (Foreign Exchange Market). FX market is the biggest market of speculation. Today, daily transactions in FX market reach 5 trillion USD. The power of speculation is very large because currently it does not only involve private funds, but involves mutual funds and hedge funds. According to the Investment Company Institute (ICI) the number of mutual funds at the end of 2016 has reached 40.4 trillion US Dollars, and around 5.9 trillion US Dollars is in the money market (FX market). There is not a single country in the world capable of holding back speculation with such a large amount of funds, if there is a monetary imbalance in that country.

Initially speculation was only a trigger power. Then, if the effects of this speculation were out of control and public trust collapsed, there were two major forces working after, namely FOMO and FUD. FOMO is fear of missing out. FUD is fear, uncertainty, and doubt.

Downward Pressure by People Who Want To Take Advantage.

FOMO is fear of missing out. When the market is corrected by the speculation action above, a FOMO will emerge. Public will see the increase in foreign currencies as an opportunity to gain profits. In large numbers, the FOMO will push the local currency to fall deeper. More and more people are afraid of losing opportunities. And the local currency fall deeper.

Pull Down By People Who Are Afraid of Losses

On the other hand, a considerable correction can lead to fears the value of money will shrink further. In this situation everyone panics. There is no certainty. And no one knows what will happen next. Driven by fear, uncertainty and doubt, finally many people exchanged local currency in panic. This massive amount of panic will attract the local currency rate to fall even deeper.

With the combination of the two mass forces above, the downward pressure of the people who want to profit or FOMO, and the pull down by the people who are afraid of loss or FUD, no matter how strong the monetary defense of a country, it will collapse. Because to be invulnerable from full scale FOMO and full scale FUD the country must have 100% foreign exchange reserves of total money supply and public savings. And there is no country in the world that has 100% foreign exchange reserves of money supply and public savings (M2).

Total money supply and savings (M2) in Indonesia is currently around 5,666 trillion rupiah. If all are exchanged to US $ at a rate of 15,000, Indonesia needs 378 billion US Dollars. While national foreign exchange reserves only 120 billion dollars or 32% of the total M2. At present, the country that has the largest foreign exchange reserves in the world is China with a total of around 3.14 trillion US Dollars with the amount of M2 around 25 trillion US Dollars. China has a ratio of foreign exchange reserves of 12% .

No country has a ratio of foreign reserves 100% of M2. There is no country that is 100% immune to the influence of the monetary crisis reaches the full scale FOMO and FUD.

Many economists predict that global pressure in 2018 is only the beginning and will continue for the next one or two years. Any possibilities could be happen in the future.

The countries in red in figure 2, besides the USA and Europe, are in principle more vulnerable than Indonesia to the monetary crisis in the near future. Their cumulative trading balance is negative or deficit. The number is more than half of the countries in the world.

That means more than half of the world’s countries are still facing uncertainty this year to one or two years ahead. If the uncertainty continues and causes a monetary crisis, many countries will encounter sudden stop. The world economy will lose economic activity worth hundreds of billions to trillions US dollars. Economic growth that was built for decades with all efforts can be erased in just a matter of days and it takes years to a dozen of years for recovery. Some big companies may be never recover again. This kind of crisis continues to recur in a span of about a decade. And there are no signs that the world has found a way out.

9.    Summary

The tyrannical global monetary system causes enormous costs to all countries in the world. These costs are:

Every country that will make international trade must buy international currency with real goods and services first.

Each country must build a huge and wasteful fortress of foreign reserves, between tens of billions and trillions of US Dollars to fortify their monetary system.

Not all countries lucky to have succeeded in surplus in every international trade so they have to collect foreign debt to build the fortress of foreign exchange reserves. Most of these countries are trapped in foreign debt circles without a way out.

The foreign exchange reserves that must be collected by selling real goods and services collected for decades have been decreased (depreciated) over time.

All countries in the world are struggle in stressful international trade, and even some never-end trade wars.

The lack of control in the tyrannical monetary system has led to global imbalances that continue to grow over time and can be a potential for monetary crisis.

The success of a small number of countries to reach high-income countries causes most other countries to be trapped in the middle income because their markets are captured by these winning countries.

All countries in the world, especially those with foreign exchange reserves from foreign debt, are always haunted by a monetary crisis that comes periodically.

The eight costs of tyrannical global monetary system, two of them are zero sum games which cause inefficiencies in capital flows and the remainder is total loss. The loss size of the global monetary system is very large because in the scale of the world economy which reaches 80 trillion USD.