what is the number one export of the US to the world? Some of you would say sports car, some of you would say pharmaceutical, some of you would say financial industry services. All those answers are incorrect because the right answer is that US exports inflation to the world.
How does this impact you?
It impacts people like you and me quite a lot. Because if you are living in emerging economies like India, we would have a harder time dealing with inflation compared to the US which controls the reserve currency of the world, which is US dollar. The US dollar itself is losing value. And this can be checked by evaluating the buying power of the US. On year to year basis. other currencies, be it INR, be it British pound, be it any other currency, they are going down further compared to the US dollar.
All this has been started out by the US. understand how exactly is US exporting inflation to the world. What is it that countries like India, China, Russia are doing about it?
Third, and finally, understand whether this status quo or the current state of the world is going to change or not. To understand how exactly is the US exporting inflation to the world.
So, here is some quick data for you regarding the M1 money supply. Now, what exactly is M1 money supply?
Many of you would have a savings account, Fixed deposit, liquid money that you are keeping. Now, if that liquid money is kept at a national level by India, US, Germany, et cetera, that part of the money is called as M1 money supply. This is the most liquid form of money that is available to any country. Now, money printing becomes one of the prominent moves through which this M1 money supply can be increased. Because if a government has to increase the M1 money supply, it can simply go out and print more money. And guess what? US has done exactly the same.
So, if you check the numbers between 2020-21 you will find some very interesting data. For example, you will see this number used to be approximately 5.5k-6k M1 money supply and it went up all the way to 18-18.5k. So there was almost a 3X times increase in this M1 money supply in the US. Or in simple words, they printed a lot of money. But what about other countries? So for this, let us look at the data for UK and India. So for UK you would see that this number used to be around 2500 M1 here and it went up all the way to 3000 M1. So it's not as if that this number increased quite aggressively. What about India? The data shows that 30-40% M1 money supply increase in a country like India.
So, these numbers Points that US has printed the most amount of money but unfortunately, or fortunately, the strength of its currency has come down less compared to currencies like INR which has lost approximately 10% of its value this year compared to the US dollar or a British pound which has lost approximately 22% of its value compared to the US dollar.
So what exactly is happening? Because the simple macroeconomics tells us this fact that there is something called a supply curve and there is something called a demand curve. And as the supply of anything goes up, its value should come down. And here we have seen through data that the supply of US dollar is being increased. So theoretically the value of US dollar should have come down. But why is it that all the other currencies are getting hit very badly, but the US dollar is not getting hit equally badly in the same quantum? So, in order to understand that fact, you need to first and foremost understand how the debt game is played. Now, this is the current levels of debt in the world right now. And you will see that the debt in the world has been increasing year on year and it is increasing at a very, very rapid pace. Now, this debt is the world debt.
Let’s not talking about individual countries specific debt here. This debt has been taken over by the world. Majority of this debt is denominated in the US dollar, which is currently the reserve currency of the world. Are there any specific advantages when a country has a reserve currency? Well, the advantage is that it can make its own internal debt problem, the problem of the entire world. And that is precisely what the US is currently doing.
Now, in order to understand the complex game around debt that US plays, So let us take the example of systematically important banks. So there are a lot of systematically important banks in India for example, HDFC Bank in India, ICICI and a bunch of other banks are systematically important. What does that simply means that in case a bank takes a debt, for example, all the deposits that are depositing in a bank, that is a debt for the bank because they will have to pay us back.
So basically, the US takes on a lot of debt, very similar to how India takes a lot of debt, how China takes a lot of debt and a bunch of other countries takes a lot of debt. Now, the difference between India, China and the US.
The US has a reserve currency. But India and China do not currently have a reserve currency. Now, what is the meaning of reserve currency and how exactly does it help the US? Well, the answer is fairly simple that reserve currency is the apex currency. Now, if you are holding the apex currency or number one currency in the world, and if the US. Government has complete, control on how much currency they can print, how much currency they can withdraw from the market, it gives them massive power over the world economy and the financial system.
Now, you might ask how exactly is that beneficial when they almost get a discretionary power as to how much more they refinance their debt? Ask yourself a simple question that what is the meaning of getting $1 printed in the economy? Well, that $1 becomes a debt that some countries would have to pay someday. Now, almost 60% of the world trade happens in the US dollar. For example, if India wants to import oil from the Saudis, Saudis will say that hey, pay us in US Dollars. So India will pay in us dollars. Therefore, India has a requirement of that US dollar. Now India will take some amount of its debt, even if it does not want to take debt in the US dollar. But on the flip side, if the US. Has a similar requirement that if the Saudis ask them that, we will give you 10K gallons of oil, pays $5 million. The US government can theoretically print that money and give it to the Saudis. So every time the US government prints money, what is it that it is doing? It is simply refinancing its debt. And US is currently the only nation on Earth that can refinance its own debt because it has complete control over the reserve currency of the world.
Now, you would have an natural question that if the US refinances its debt so, how is it causing problems for the other part of the world outside the US? Well, the answer lies in the fact that almost 60% of the trade happens in the US dollar. It's a go to currency. Before, gold was the go to currency. But after 1917, the US dollar became the go to currency of the world, not gold. So every time the US decides to print more money, what happens to the debt? The debt actually keeps on going up. Now, what is the meaning of debt going up? It simply means that there is increased risk in the economy for example;
Pakistan and Sir Lanka went bankrupt.
A lot of struggling economies completely went bankrupt. Because the riskiness associated with emerging economies, it went higher. As the world takes on more debt, the risk on the world increases. And as the risk on the world increases, investors start looking for safe havens or safe currencies where they can put their money in, which by default becomes the US dollar. And therefore, you would have seen that recently FIIs withdrew a lot of money out of the Indian market.
It was simply the fact that the risk increased in the world economy due to Russia Ukraine war, due to COVID situation was rising and a lot of money flew from emerging economies to the most stable currency, which happens to be the US dollar. So it is a classic case where a country is causing problems for the entire world, but that country itself is suffering the least.
So, what other countries are doing about it?
Well, the BRICS nation, which comprises of Brazil, Russia, India, China and South Africa, they are trying to come up with a currency or a reserve currency of their own, called as the BRICS currency. This announcement was made by Vladimir Putin, who is the president of Russia. Interesting thing is that this plan actually seems somewhat feasible given the fact that by 2030, as per the IMF estimates, BRICKS nations are going to control 50% of the world's GDP. This is a fairly big number. And one could argue that BRICS nation, if they get together, they will be able to create a currency of their own, which would prevent some of the menace that the US economy is currently exhibiting.
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