MS 30th Anniversary XXX

Currency manipulation can work both ways

Part II

The promoters of flexible exchange rate advocated the policy of allowing the currency to float based on the value of the dollar after the US devolved it from the gold standard. They believe that universalizing the system of exchange rate would spur business that has been regularly ravaged by the cycle of economic depression characterized by recession and stagnation. They anticipated the system to open a new era in business revolving on currency trading, thereby promoting speculative trading of collateralized debt obligations including stocks which saw the rapid growth of investment houses where hedge funds managers becoming billionaires.

The promoters never reacted negatively to the residual effect of inflation after the value of the currency was deregulated. Rather, they welcomed it because inflation is the life-blood that promotes business. All transactions, particularly in international trade, saw it as an opportunity to hasten international finance much that surplus capital kept in banks could now be tapped and put to use.

To ensure the smooth flow of the new system, the monetarists, recommended the following: 1) Since the US dollar is now free to peg its own value, it is wise to abrogate all existing usury laws; 2) The Clinton administration further deregulated the financial system by allowing once again banks to engage in investment abrogating the landmark Glass-Steagall Law. 3) Being the biggest economy, the US dollar would automatically become the universal currency where most countries would measure the value of their own currency.

The setting up of this mechanism was made integral, and the monetarists attributed it as the single greatest factor that made globalization “successful.” The abrogation of all usury laws resulted in the soaring of prices traded in the market. The government had to impose value-added tax on everything that fall within the purview of transactional payment. From then on, people began to accept the VAT as an added burden forgetting it is a pass-on tax on the end-users. In that, provisions for public service and welfare in exchange for the taxes they pay were erased.

The government was in a placed bind much that the VAT was not enough to cover up the losses caused by the drastic reduction in tariff to facilitate free trade. We practically made a suicidal dive into the abyss, for aside from the loss of customs revenue caused by the reduction of tariff, we allowed our currency to decay by the unrestrained system of currency devaluation. Inflation became necessary to keep alive the system of usury, and that gave birth to the casino economy.

Since astronomic earnings derived from soaring interest rates were raking in much profit, money lending gradually substituted production and manufacturing. The system of trading money for money, stocks for money, and anticipated earnings on commodity trading were accepted as business practice. Capital was unlocked, and it resulted in the rapid increase in the prices of goods and services. On the whole, it means easy money.

Manufacturing and production was gradually overtaken by the system of trading and speculation. This was seen by the increase in portfolio investment over direct investment. The casino economy was wholly advantageous much that it was not affected by force majeure, labor unrest, calamities such as fire, etc. Inflation continually pushed upward the prices of goods. The only danger is when the debtor makes a default in his payment. But again, this gave rise to the more lucrative business of second and third mortgage, reinsurance, hedge funds, mortgage of collateralized debt obligations.

The single most devastating effect of this new system is the continued depreciation of the currencies of countries tied to the US dollar. They were mostly dependent on the export of few commodities. Their currencies were soon afflicted with some kind of financial leprosy because their value continues to erode even without them having to devalue their currency. The US, its allies in the European Union and Japan that control the various international financial institutions were all delighted. That means the mechanism of devaluation and revaluation was a device that would always favor the casino banker/dealer.

Rich exporting countries of manufactured goods suddenly amassed so much capital surplus. They wanted everything deregulated including wage, the abolition of all forms of subsidy, and the uniform pricing of export commodities. They also set up regional free trade zones. All these were designed to put in place an international cartel on the price of certain commodities. The early symptoms were ignored because of the need to finance and promote trade.

Thus, while export from the less-developed countries relatively increased in volume, their value continues to decline resulting in massive trade deficit. The developed countries did not mind that because they focus their attention on the profit of trading money for money. They even offered interest-free loans because they anticipated the fall in the value of the currencies of debtor countries, and that was enough guarantee to ensure profit.

Not contented, the US and its allies in the financial cartel strongly advocated the privatization of state-owned industries to prevent them from fixing the price of their exports. The export price was monitored by the WTO; that they must sell those goods in the international market at a fixed price or face trade and economic sanctions.

The gap in the value of the local currency became so wide that even those that advocated the idea of “import substitution” in the early 60’s were discouraged because importing them became cheaper than in producing them locally. The system of flexible exchange rate was expanded to all loan obligations. That means, aside from the interest debtor countries will pay, they were required to pay the loan based on the current exchange rate. They were made to pay to the last centavo on the basis how the dollar was traded that day.

The financial mechanism called CERA or currency exchange rate is most distinct in all loans entered into by public utilities like water, electricity and toll fees for the expressways users. CERA is attached to all loans involving payment of foreign currency. This was made possible because laws on franchise or tax on privilege which was imposed to protect investors in monopoly corporations was repealed. Franchise tax was converted to one of pass-on tax like VAT, which reason why today’s franchise holders of public utilities are behaving like demigods in making a mockery to our democratic system. 


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Topics: Rod Kapunan , Currency manipulation
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