The Arab Spring continues to spread throughout the Middle East, and it will end up transforming Islamic countries just as much as the two World Wars changed Europe. The Great Recession that began in 2008, along with defects in the global economic system, played a large role in the unrest. During the 2000s, the economic prosperity of the United States and much of the world was based on borrowed money-and, as it turns out, borrowed time. Hedge funds and economic policies of the United States complicated matters further. In this scholarly book, author Dr. Susmit Kumar examines how financial blunders have led to political upheavals in Islamic countries, as well as exploring the history of Islam and Islamic empires; the modernization of Islam; the state of the world economy, and where it's headed; and the present situation in Islamic countries. The immediate future promises bloodshed and grandstanding, but in the end, the majority of Islamic countries will become secular and democratic. As with the two World Wars, a cataclysmic turn of events will ultimately unify the world as Islamic countries deal with the fallout from Casino Capitalism.

Casino Capitalism

The Collapse of the US Economy and the Transition to Secular Democracy in the Middle EastBy Susmit Kumar

iUniverse, Inc.

Copyright © 2012 Dr. Susmit Kumar
All right reserved.
ISBN: 978-1-4697-3455-2

Contents

Preface..........................................................................ix1. Introduction..................................................................12. A Short History of the Global Economy.........................................573. The Post–World War Global Economy.......................................674. State of the US Economy, 2011.................................................815. Casino Capitalism.............................................................1116. Collapse of the American Economy and Its Effects..............................1337. Effects of US Intervention in Afghanistan (1980–89).....................1418. History of Islam and Islamic Empires..........................................1499. Present Situation in Islamic Countries........................................16510. Emergence of Islamic Empire and Modernization of Islam.......................20111. Multipolar World Order.......................................................21512. Concluding Remarks...........................................................237Endnotes.........................................................................277Index............................................................................299

Chapter One

Introduction

Since 2010, the United States has proposed limits on "sustainable" trade surpluses and deficits. The proposal has been rebuffed by the BRIC (Brazil, Russia, India, China) countries and also Germany, which currently produces the second-largest trade surplus in the world. The US proposal is nearly the same as the one proposed by the British economist John M. Keynes and his team (the Keynesian stimulus plan is named after him) during the deliberations that led to the 1944 Bretton Woods Accord.

The Americans claim that China has been manipulating its currency yuan (renminbi) by keeping it undervalued. According to Paul Krugman, the Nobel Prize winner in economics and New York Times columnist, the United States needs to impose at least a 25 percent tax on Chinese items if China does not appreciate its currency significantly. Yes, it is true that China does manipulate its currency, but, on the other hand, the United States has been doing the same since the 1980s.

Let us first explore the following issues:

(1) During economic recessions the United States goes for budget deficit. Other countries in similar distress, however, are forced by the International Monetary Fund (IMF) to balance their budgets when they approach that institution for a loan. Generally a country applies for an IMF loan when it does not have enough FOREX (FOReign EXchange Reserve) to import goods or save its currencies against the onslaught of currency traders.

(2) During economic recessions the United States reduces it interest rate. At the moment it stands at near zero in order to spur growth and reduce unemployment. On the other hand, having to swallow the bitter pills of IMF, aid recipients are required to increase their interest rates by double digits, which leads to an increase in their unemployment rates and depresses their economies further. During the 1997 East Asian economic crisis, a popular phrase was used to characterize the IMF and its policies: For the average person the actual meaning of IMF was "I'M Finished." After watching IMF at work during the crisis, Joseph E. Stiglitz, the 2001 winner of the Nobel Prize in economics, wrote in April 2000:

I was chief economist at the World Bank from 1996 until last November, during the gravest global economic crisis in a half-century. I saw how the IMF, in tandem with the US Treasury Department, responded. And I was appalled.

The IMF may not have become the bill collector of the G-7, but it clearly worked hard (though not always successfully) to make sure that the G-7 lenders got repaid.

(3) In the IMF, major decisions, including the election of its managing director, require an 85 percent super-majority. The top three countries, having the highest votes, are the United States (16.75 percent), Japan (6.24 percent), and Germany (5.81 percent).

(4) Why was the United States able to sell a trillion dollars worth of its Treasury Bonds in 2011, whereas Greece found it difficult to shore up a mere $30 billion in bonds?

(5) According to Economics 101, money should be invested where it gets the maximum return. However, the entire world, including China and Russia, deposits its money in the United States, where it gets nearly zero interest rate right now.

(6) The United States has record trade deficits, upward of $500 billion per annum during the 2000s, whereas countries like India, South Africa, and Vietnam cannot sustain even a modest trade deficit. According to Economics 101, the US dollar should have lost its value drastically, as the United States has had trade deficits since the 1980s, except for 1991 when it received a significant amount of money from allies in the 1991 Gulf War. Instead, since the 1980s the US dollar has risen sharply against all other currencies except for major economies such as Japan and Western European countries. When I arrived in the United States two decades ago, the exchange rate for the Indian rupee against the US dollar was 15. In December 2011, it was 51 rupees for one dollar—in the last twenty-two years the Indian currency has been devalued by 250 percent against the US dollar. In February 2011, Vietnam devalued its dong by 6.7 percent, the fourth time in the last fifteen months.

The root of all these complicated issues is found in the 1944 Bretton Woods Accord. At this planning meeting for the postwar era, the United States implemented its dollar as the world currency. We will see in the second section that the US economy in itself is not an exceptional economy. The exceptional thing about the American economy is that it has been able to print its currency whenever it so desires in order to fund budget and trade deficits, whereas others cannot do such a thing. However, the enormous piles of money that are accumulating are neither realistic nor sustainable.

The 1944 Bretton Woods Agreement and the United States' $14 Trillion Credit Card

During the 1930s, countries used currency devaluations to increase their exports in order to reduce balance of payment deficits. But instead it resulted in a decline in world trade. At the time, Nazi Germany had bilateral trade agreements with several countries, while the members of the British Empire formed an exclusive trading bloc, known as the "Sterling Area." These agreements caused discriminations and obstructions in world trade.

Toward the end of World War II (WWII) there were two competing plans for the future of the global economic order—Britain's Keynes plan and United States' Harry Dexter White plan.

Keynes favored a world currency, to be called bancor, and managed by a global bank and an International Clearing Union. That "neutral" world currency would be exchangeable with national currencies at fixed rates of exchange. Under Keynes's plan, both debtors and creditors would be required to change their policies. A country with a large trade deficit would pay interest on its account and devalue its currency to prevent the export of capital. On the other hand, a country with a large trade surplus would increase the value of its currency to permit the export of...