Like any of you, I too hate wars. I have never seen one, other than those on TV or in other media. And the horrific things that go on with any war, against human lives, be it with the military or from civilian population, is so much repulsive that no human being from any modern society can support any war, whatever be the reason. It is the believe that whatever unjust a dispute may be, discussions and negotiation can help in finding a solution, or worse still, a compromised solution.

However I am not sure whether our present world leaders have any potential of finding a solution to the  problems that arise all because of the position of dollar in global monetary and trade systems. I am not young and naive enough to be polyannish that an eventual sustainable solution to the ongoing currency problems can be possible diplomatically.

The 2nd World War, now 65 years old, was the last earth shattering event that led to the present form of the world. The United Nations and its permamnet members, who happen to be more equal than the rest, the World Bank & the IMF, and the respective position of each nation in these bodies were decided by who happened to be on the winning side of the WWII. Out of the winners again, the United States, due to its strengths of not being affected in the war like its other winner allies, gained the most – militarily and economically. European nations like France and Britain could identify their ideologies to be more similar with those of the U.S. than those of China or the the former U.S.S.R, resulting in dollar being accepted as the global currency with a gold peg, leading to the Bretton Woods system.  

And in 1971, Nixon unilaterally withdrew from that peg by closing the gold window. Not an earth shattering event at that time, however its implications are felt more widely today.

The end of the cold war could have been another earth shattering event, however its ripples, probably was not felt around the world as much as it was felt in Europe, in the former U.S.S.R. and in the U.S. The reason could be that it was managed quite well. The massive disruption of the end of the cold war probably affected citizens of the East European Nations and Russians, but in no way it did affect the topology of the world or the bargaining power of most nations (other than of course that of the U.S. and that of present day Russia). One may disagree that rise of present day EU is a direct result of the end of the cold war, which happens to be true. However I say it was not earth shattering, as EU formation happened over years and not overnight.

The gold-peg of the dollar and the former U.S.S.R – both happened to disintegrat from within (was it due to unsustainability of both?), without an external war, economic or physical. Question now is, can it happen with the dollar also, because there is no denying that its present role and scale of it in global monetary system, trade settlements and also as a reserve currency are not sustainable? To put it more aptly, dollar probably has already failed its sustainability test quite badly; however the world has been keeping it sustainable under life support system as there’s been no other alternative to it, just like the U.S. kept sustainable its form of capitalism back in 2008.

There may be many who may argue against this fundamental assumption of sustainability of dollar in its present role. That’s why I included role and scale of it, together they probably define better why dollar’s present role and scale isn’t sustainable.

The big question that’s been going round in many of the business TV channels over last few days, and elsewhere in online media is, how to address this unsustainability. People from the Wall Street believe this to be less of a concern, as they truly understand what tremendous role dollar plays in global financial system, the big stakes involved in letting it continue for proably all the stakeholders’ benefits, and to ensure no major disruption happen in their own profession inside the Wall Street. Because no Wall Street Professional or economist can probably think of the scenario where dollars role and scale of it has to reduce by half or 2/3rd of its present role, within a short period of time.

The other reason for the reluctance of the Wall Street in accepting a much lower role of the dollar is in its incrementalism approach when it comes to its trend-lines that can affect it negatively. The Wall Street will never be open to the debate that a disruptive change that may affect it in the negative side is lurking somewhere near, and can strike real soon. Therefore most Wall Street professional would prefer an incremental approach in adjusting this unsustainability, giving it decades to come down incrementally (and yuan to rise incrementally) or even by denying that dollar’s present role is unsustainble.

However Black Swan events or Disruptive Events happen. As it happened in 2008. The unsustainability of the dollar looks to be worsening than the unsustainabilities of those esoteric derivatives that led to the unexpected in the Wall Street back in 2008.

But the dollar survives simply because there’s no agreeable alternative. And the problem worsens.

The world simply isn’t ready to operate without the role and scale of the role that dollar plays as the lubricating oil in the global spinning mill – that’s the verdict from the Wall Street, the IMF, the G20. Probably the Chinese also believe in this hypothesis, otherwise one can’t explain their actions that resemble that of the U.S. Federal Reserves (or US Treasury). The Fed. has been trying to solve the problems that successive liquidities created with even more liquidities (and Treasury by creating more deficits); China has been trying to solve the imbalances of the U.S. economy by trying to balance it more by buying more of its debt which is the root cause of the imbalances, barring one or two exceptional periods so far (when China might have sold a bit of that huge balancing U.S. assets).

That’s why it would be wise to include the Chinese into the same club of people at whose interest the dollar dominance must continue as the world economy goes through the process of even more globalization and dollarization.

At the same time, and in-spite of the win-win scenario (better to call it as ‘not a lose-lose scenario’ than ‘a win-win one’ because realistically present role of dollar is truly not a win-win picture for both the U.S. and China), the imbalances are growing stronger and stronger, and practically are getting out of control.

There’s no possibility of war in the horizon, however media has been talking about currency war as a prelude in addressing this unsustainability. Irrespective of the usual media hype, currency war this time happens to be real.

My knowledge of history is poor. However as an Indian, I know there are times when war is not all that bad, it rather becomes inevitable – as it was in the Ramayana or in the Mahabharata. The 2nd World War was also not all that bad if the atrocities of the Nazi-regime is taken into consideration. However many of these decisive wars were painful, horrific – however unavoidable as otherwise the wrongs would have continued longer.

And bigger changes are unavoidable without a decisive war. Because the constituent of any power, more so which isn’t sustainable, are never willing to let it go. The present structure of the United Nations Security Council and its unwillingness to reform itself is a well-known case in example. There’s no denying that it needs to reform, however how the reform has to be carried is the big question mark that further acts as a hurdle to that much needed reform process itself.

The example of UNSC is dangerously similar to the question of sustainability of dollar in its role (and scale of it) in global financial system.

One isn’t sustainable, at the same time there’s no other agreeable alternative to it. The unsustainability of the dollar in its present role therefore further aggravates, as the irrelevance of the UNSC, the IMF or the WB becomes more prominent.

A matured world with matured leaders who are ready to put the bigger interest of the world and its nearly seven-billion people ahead of their national interests in a global society can probably address these unsustainabilities without a war.

However the ongoing scenario with the worsening currency wars and the routine G20 communique, not worthy enough of the paper on which it gets printed, do not hold out much hope. The ground situation does not support the assumption of a matured world with matured leaders.

I hate wars. However I also hate an unsustainable situation simply being continued because there happen to be no agreeable alternative to it; not that there aren’t truly any. The situation is not as worse as global warming, where the agreeable alternative means a hell lot of sacrifices in the short run.

Unlike the example of the global warming and agreeable solution to it, the solution to the unsustainable dollar is realistically possible, provided all parties that supported that build-up of this unsustanable act (primarily the U.S. and China) are ready to own up their own responsibilities, and desist from doing it any further. U.S. must ensure to live within its means, and China must ensure no further destination in the U.S. treasuries for its export surpluses.

Real developments however show that possibilities of changing the unsustainable global order of the dollar without a war, be it even in the form of a currency war, looks to be remote. Decisive wars, in-spite of being horrific in the short-run, at times are inevitable to bring the much needed, much awaited, and much desired change.

The present round of currency war can be decisive in bringing that change, or else it can remain as an ongoing dispute without being decisive for ages.

A decisive currency war is a better alternative than long-lasting and undecisive frictions of currency and trade disputes.

I invite you to visit my blog, Wondering Man (or take a look at my book, Wondering Man, Money & Go(l)d that rightly predicted the housing-led economic crisis of 2008, rise of gold prices to the currency war being played now). You are also invited to join me on Twitter.

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