Atanu Dey On India's Development

False bottom suitcases and $134 billion

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134billion

It is hard to believe that anyone can be caught with $134 billion worth of bonds in a false-bottomed suitcase. I did a search for “134 billion” and even Google couldn’t believe it.

Here’s Keith Hudson’s take on the story.

There’s a riveting story in today’s Sunday Telegraph about two Japanese gentlemen carrying $134 billion of US state bonds from Italy into Switzerland in a false-bottomed suitcase. This is, of course, a gargantuan amount of money. However, border guards at Chiasso saw the clever trick and apprehended the smugglers.

Pretty promptly, American officials “confirmed” one theory — that the bonds were forgeries. This, of course, is nonsense. They could only be genuine. If any Swiss bank were presented with such documents it would have to be entirely convinced that they were genuine. It would do this quite simply either by checking the numbers directly with the US Fed or there’d have to be a covering letter from a high official of the Japanese government that they were genuine US Fed bonds and that the deposit had to be treated confidentially.

The bank wouldn’t need to be told why the matter had to be confidential. It would know that, from then onwards, the Japanese government would be selling the bonds — under the anonymity of the Swiss bank — probably in small aliquots (US$5 billion each time?) in order to prevent the value of the US dollar dropping too sharply.

Which, of course, is the reason why the Japanese government wants to sell the dollar bonds. It holds large quantities of American government debt and, if the dollar carries on sliding as it has been doing, Japan faces financial disaster because its own government debt (in yen) is already overwhelming. Since 2002, the value of the dollar compared with the other main currency has fallen over 20%. The whole world of finance is now approaching a state of panic that the value of tghe dollar could fall a great deal further — and swiftly, too. Even the Chinese government — an even larger owner of American government debt than the Japanese — has been saying recently that they are worried about the falling value of the American dollar.

(But, briefly, let’s inspect the official assertion that the apprehended bonds were forgeries. Any criminal gang that is clever enough to buy genuine bonds and then copy-print perfect forgeries would know that the forgeries would still have to pass muster with a Swiss bank when presenting them. A gang as clever as this wouldn’t be so stupid as to think that it could get away with it. North Korea gets away with perfect counterfeiting — albeit of US$100 bills, it is said — but even these can only be dissipated in modest quantities via embassies and so forth.)

Back to the dollar. It’s in deep trouble. The American economy is in deep trouble. The credit-crunch has meant that even the “viable” handful of major American banks (and UK ones) are still not lending money to business as they used to. They still have massive outstanding loans on their books which they cannot call in when due because they’re based on property values which would immediately start falling further — follow by general economic collapse. So far, almost all of the additional money which the US and UK governments have been printing — and continuing to do so — is being held back as reserves within the banks.

Very few people understand what printing money is all about. Even some financial journalists don’t understand. I noticed that even the economic editor of an eminent newspaper was confused a week or two ago. Apart from dropping money by helicopter or paying government workers in crisp newly printed bank-notes, the only method a government has of distributing extra money is by means of its central bank buying government bonds from the banks (held as reserves) or from private owners of government bonds (or other bonds issued by major businesses).

But, like all banks, a central bank has to abide by double-entry book-keeping. When it creates credits (by holding bonds) it has to enter the same amount in its liabilities account for the banknotes it has issued (in actuality this is in the form of electronic transfers). So, for every bond deposited, the central bank has a liability for the capital value of the bond, but also has to pay interest on the bond itself to the government or the original bond issuer. But it can’t do this because a central bank is not a profit-making business and doesn’t naturally make money. It could — and does, of course — print even more money to pay the original bond issuers — and therein lies the impetus behind inflation than can, if continued for more than a brief period, lead to hyperinflation.

So what are the prospects for the US and the UK? Sooner or later, the great dollops of printed money will overflow the commercial banks’ reserves and will start to be lent to businesses again. Mortgages will become easier, too. The economy will revive. But the additional money in the market will now start to be producing inflation — in shop prices and thus in wages. The governments will then hasten to instruct its central banks raise the basic interest rate to choke all this off. They may succeed in establishing interest rates at exactly the right level. Or they may not. Or interest rates may see-saw for year or two. Whatever happens, the governments have got to recoup all the additional money via taxation from those in jobs

So what is the truth behind the attempted smuggling operation? And how was it that the two smugglers were caught red-handed so easily? (And how many previous attempts has been successful I wonder? — itself accounting for part of the dollar’s slide?) We can only blame it on something which is becoming an increasing phenomenon in all central governments and their civil service administrations — leaks. Someone high up in the Japanese financial world decided that this policy was far too potentially dangerous and gave the wink to the Italian authorities.

If the smuggling operation had been successful (particularly if previous ones had been) but then revealed at some later stage, then the American government would have to drop on Japan like a ton of bricks in order to retain any credibility with its electorate and business. And so would China, because the renminbi (yuan) is still tied to the value of the American dollar. Someone in Japan, much wiser than the finance ministry (or whoever) decided that it must be stopped before it became dangerous.

Essentially, money is no different from any other economic good that is traded. Its value follows the normal operation of supply and demand. It has always been the case for thousands of years that it had intrinsic value — until approximately a century ago when governments decided to nationalize money so they could print as much as they needed for current warfare. It’s as simple as that, and the vast majority of the general public, credulous as always, bought the switch. Almost everybody now thinks that only governments can issue money. Fortunately, enough economists have read and considered the work of Frederick Hayek and, sometime soon — unless the whole world goes into currency mayhem — and world trade with it — then currencies will have to be backed-up once again with real value.

  • sundaraz

    I remember Greenspan talking about how the Japanese purchase of $150 billion and abruptly stopping it had smaller impact on the dollar exchange rate and other dollar denominated goods.

    “The depth of these markets became readily apparent in March 2004, when Japanese monetary authorities abruptly ceased intervention in support of the U.S. dollar after accumulating more than $150 billion of foreign exchange in the preceding three months. Beyond a few days of gyrations following the halt in purchases, nothing of lasting significance appears to have happened. Even the then seemingly massive Japanese purchases of foreign exchange barely budged the prices of the vast global pool of tradable securities.”

    http://www.opinionjournal.com/editorial/feature.html?id=110010981

  • ghost_writer

    One of the reasons that I – a free-market, free-trade Hayek libertarian – am sceptical of the current trade configuration is exactly this. what is the real status of the only internaltional reserve currency in the world i.e. the US dollar? (that and the obscene agri-subsidies in the west). The only thing working for the dollar is the TINA factor (There is no alternative)
    Incidentally, this has become subject to a huge anti-semitic whisper campaign in China; culminating in a book called Currency Wars . Our own autarkists – i.e. the Swadeshi Jagran Manch are happy to beleive it. I spoke to an SJM-type who is a complete convert. This worried me – I dont want Jew-hatred to be part of any type of modern indian movement.
    I hope the Fed and Treasury can get it right, but I am very sceptical of the value of the mighty USD

  • alokjain

    Hi Atanu…
    I recently watched the movie Zeitgeist. It claims that FED is a private entity controlled by few peoples and government has no control over it. They lend money to government. Also there is no law in American constitution which make mandatory for every person to pay tax. Is it true?… if it is then whole process of printing money and distributing to ppl would be benefiting few peoples in this world since money comes with attached debt with it….

    Alok Jain