Few days back I had to send some money to my brother studying abroad. I sent him 50000 indian rupees. When he received it on the other end it was approx. 1000 US Dollars(USD). This difference between indian rupee and dollar made me to think that why money earned by me in rupee is less when it gets converted to USD. I did some studies on it and here I am with my findings, about the US dollar's past present and future.
No doubt all the countries are seeking to get dollar in their pocket and few are running behind Indian rupee. So this explains the difference between value of the dollar and Indian rupee. Same logic can be used to explain the reason for difference between the value of any two different currencies.
So many countries have saved huge sum of the dollars in their Foreign exchange reserve (Forex). According to some statistics published on internet China has approx. 2273 billions, Japan has 1019 billions, Russia 434 billions , Taiwan 321 billions, India 285 billions of USD. Eurozone, Brazil, South Korea, Germany being other major aggregators. Rough calculations show that nearly 5437 billion USD are held by 10 countries only. This is a huge sum of money if we see the value of dollar in the current perspective. Now let's think in another way. A country has to deploy a lot of resources to maintain this much forex reserves.The benefit of holding forex reserve is that it gives a country a feel of being in a better position to defend itself from speculative attacks on the domestic currency. Now let's take the case of a few countries. Lets start with China because it holds the largest forex reserve so it is of special interest to me. China has progressed very fast in the last decade and is well placed economically as well as in military modernization. So it does not need 2273 billion dollars to have that secured feel. A meager reserve of 400 billion USD is sufficient to do that. Now question arises that: What China can do with the rest 1700 billion dollars in it's wallet? I am sure that policy makers in that country are definitely working on this topic. I could think of 2-3 answers of this question.
The first obvious answer is that , it will retain this amount as it is. Benefit of keeping this much reserve gives the power to manipulate exchange rates - usually to stabilize the foreign exchange rates to provide a more favorable economic environment. The problem with this is that it requires to deploy some resources to maintain reserves. Another point is that it does not fit well into China's undeclared strategy to become the supreme world power.
The second option which according to me is more likely to happen is that China will invest this amount in capturing the natural resources possessed by developing and under-developed countries in the third world. Most of these third world countries natural resources are in the claws of US corporations.This is because of the following reason:
Most of these countries are in the big debt. Because of the debt they are in the agreement with International Monetary Fund (IMF) and this agreement forces them to let the US corporations to access their natural resources.These countries can restrict access of these US corporations to their natural resources if they pay back their debt to IMF or to world bank. Some of the countries are trying to do that. One example is Venezuela. Hugo Chavez, President of Venezuela, paid all the debt to IMF. So that he can use natural resources of his country to benefit his own people rather than getting them transferred to US. Venezuela is rich in oil so Hugo Chavez was able to repay the loan and get out of the contract from IMF. But not all the countries are capable of doing that. So even though these countries have realised that they are getting exploited but still they are unable to get out of this.
US corporations are holding a large share of natural resources in these countries. From these resources they are creating different products which are required in the day to day life of a common man. It is also true that these corporations have made these products necessary for day to day life by their excellent marketing. These corporations ask for USD when they sell these products across the globe. So everyone needs USD to buy all these products and hence this creates demand for USD. Because of this continuous demand USD is always strong as compared to most of other currencies.
Now let's say China starts using its forex to help some of these poor countries to pay back their debts to IMF. In return China can ask for a limited share of their natural resource. This will be a win-win situation for both. China will get a share of resource and that country will be out of the claws of US corporation.
The consequence will be that both the China's currency yen and and helped country's currency will gain some value whereas dollar will lose some. This can be explained as follows. Let's say that country A has a natural resource R. Since A is in debt to IMF or world bank so USA corporation C has access to this resource R. C is making some products by using R and selling it to the rest of the world in exchange of USD. Now if China helps A to repay it's debt then A will no longer require to be in contract with IMF and will kick C out of their country. Now what ever products C was selling out of R, China and A will be selling the same to rest of the world. China will ask for yen and A will ask for it's own currency or may be gold in exchange for these products. USD will be out of the picture and it's value will decrease. This could have two consequences. One is either other countries who have the big USD forex reserve would start helping poor countries to pay back their loan in return to a fair share of their natural resources. Or they will start buying gold (the ultimate currency). In both the cases USD will lose it's value. In case of former it is already explained whereas in case of later gold's value will increase and since market is flown with USD and it is well understood that whatever is available in excess is cheap. So in any case dollar will lose it's value.
