The Slow but Sure Death of the US Dollar

On September 13^th the Chairman of the US Federal Reserve, Ben Bernanke announced the latest round of QE (Quantitative Easing) but with a dangerous twist. Unlike previous rounds in 2009 and 2010 although large in scale included limits, this time there are no limits and Bernanke effectively indicated that the government will do whatever it takes to achieve various targets, notably employment growth. It is very doubtful that this new policy will work, the previous rounds have summarily failed to stimulate employment and the economy continues its lethargic path. But of far greater note is the open ended nature of the current commitment, and its disastrous consequences on the US dollar and in fact fiat currencies globally.

QE

Quantitative easing is a convoluted way of describing money printing, and printing with nothing to back it up. As with all economies, companies or indeed families, it is not unusual for budgets to not balance, for short term deficits to arise, for loans to be required. Yet the US economy is in chronic deficit, with an enormous $1.5 Trillion dollars yearly shortfall within its $15 Trillion economy. For Obama’s last budget he expected to overspend their tax revenues of $2.5 Trillion by $1.33 Trillion (53%). Like the recalcitrant debtor which never balances the books the US is taking advantage of several factors in its favour.

Of paramount importance to the US is the status of the US dollar as the defacto world currency, a position it has held for most of the past century since Bretton Woods in 1944, with a fixed conversion rate of $35 to an ounce of gold, from which the rest of the world then set fixed rates against the dollar, the US had the strongest economy and the most gold. The US again set the pace when unilaterally Nixon took the US and the world, by default, off the Bretton Woods form of gold standard and launched our current reality of free floating exchange rates, with no world currency backed by any tangible assets. The results have been predictable with currencies unilaterally devaluing against gold rapidly. Since 1971 the US dollar has devalued by 98% from $35 per ounce to $1780 per ounce. The latest ruse of Bernanke’s with open-ended QE shows all likelihood to take the dollar to complete nothingness. However, the US is leading the other main economies of the world down the same path. Faced with a global recession a competitive devaluation of your currency versus your export competitors policy is rampant, its a “beggar thy neighbor” stance where your exports will be cheaper – but is in effect an impossible policy – over the longer term no one can win, and the British, Japanese, Brazil and now likely Europe and even China are following fast in the QE train. If all are devaluing their currencies it becomes difficult to gain an advantage, but the costs to the economies are enormous.

The main cost is of course via inflation whether overt or hidden, printing of substantial amounts of new money without growth in goods and services (the economy) means inflation. That it is not so obvious yet is due to the governments covertly changing their measurement of inflation in ways that underplay its true reality (since the time of Clinton the calculation of the consumer price inflation basket of goods has changed in such a way that the inflation rate has effectively halved) and due to the banking industry salting away much of the newly created money to strengthen their heavily weakened balance sheets.

Ben Bernanke’s recent announcement is nothing but a continuation of the policies to prop up a bankrupt banking system. Since 2007 he has:

• Cut interest rates from 5.25% to .25%
• Taken on $30 Billion in Bear Stearns junk mortgages prior to its sale to JPMorgan
• Provided virtually open-ended lending facilities to US and related global banks
• Provide up to $400 Billion for the Fannie Mae Freddie Mac bailout
• Taken over the bankrupt AIG Insurance group for $85 Billion, then provided a further $45Billion
• Provided $700 Billion for the euphemistically named “Troubled Assets Relief Programme” (TARP) for the Banks – effectively buying Bank junk assets to bail out the banks from imminent collapse.
• Provide $540 Billion in back up loans to money market funds
• Provided $280 Billion to back up Citigroup (Oct 08)
• Provided $140 Billion to back up Bank of America (Jan 09)
• QE1 of $1.25 Trillion of mortgage debts and government treasuries (Mar 09)
• Further QE of $200 Billion in Aug 10)
• QE2 of $600 Billion in Treasuries in Nov 10
• Operation Twist (Nov 11)
• And now QE3 of $40 Billion of mortgage backed securities every month from now on (Sept 12).

 There is a consistent theme to the above spending, apart from there being no real money surplus to meet the payments! They are predominantly geared around the banking/financial collapse. Rather than feed money to those that are losing their homes (home price/jobs collapse) Bernanke has channeled the money to those holding the mortgages and losing derivatives gambling stubs (the bankers). With the bankers jealously holding onto the money to rebuild their balance sheets. To add insult to injury the provision of more money to banks in buying Mortgage backed securities (the latest QE) will enable the Federal Reserve to take over the multitude of mortgages which were packaged together into instruments like Collateralised Debt Obligations – many of which have severe ownership issues. The Fed will be in a strong position to foreclose on those homes where the banks dithered and struggled under a barrage of legal challenge. With partial ownership and influence (including over Board membership) of the Federal Reserve exercised by the major US banks, it is little surprise that the policies of this body overwhelmingly meets the interests, bailout and liquidity needs of those least deserving from the banking sector.

Organised theft

Bernanke caveated the latest “potentially unlimited” QE with the aim of getting the stubbornly poor employment figures of the US back on track. None of the earlier versions of QE have helped employment in the US or elsewhere, we are in the midst of a deep recession and throwing money at banks to keep them afloat is not helping employment other than Bank executives which of all people should be the first into the dole cue.

In this US election year Obama is sweating over the official unemployment rate which is stubbornly over 8%, and has remained above 8% throughout his administration, yet like the inflation “figures” the administration is adept at presenting as good a picture as possible. The 8% figure is only possible by taking more people from the labour participation rate in the US which is now at an anaemic 63.5% (less than two thirds of the population are even included as working or looking for work – and not all of the 36.5% are retired or under-age). Also little comment is made of the fact that many of the jobs that have come into the economy in recent years are part time. Western economies are severely compromised, governments are facing growing deficits and no growth. Unemployment is rising. Unofficial, yet credible independent employment statistics (shadowstats.com) show US unemployment at 22.8% with no signs of recovery on the horizon.

A Golden future?

Perhaps the biggest scandal of QE is that it is a direct theft of wealth from the masses. The constant devaluation of currencies is nothing but a hidden and oppressive tax on a massive scale. Anyone with monetary and related assets finds their purchasing power constantly eroded and wages do not keep pace with the real inflation created by money printing. The 1% are well protected, know the game, and act accordingly – keeping their wealth in commodities and real assets like land in these inflationary times. The poorest in society suffer from the lack of jobs and opportunity and without assets of note generally depend on societal welfare programmes (46.5 million Americans depend on food stamps for survival). The rest – the vast majority in society – whether in work or looking over their shoulders as companies close and austerity programmes bite, are having their wealth stolen. The high and rising costs of energy and food are strong indicators of the inflation working into the system, and it will only get worse.

The only protection that populations have in the face of this theft is via real money – gold and silver – which has a history of acting as a true store of value over millennia. As assets which cannot be produced at the flick of a central bankers computer print button, and which have intrinsic value (jewellery, industrial use, etc) they are really the only suitable medium of exchange the people deserve. The central bank dominated capitalist world will fight against gold and silver and their right to inflate tooth and nail. It is really left to the Islamic world under the Caliphate system which obliges gold and silver as currency, to lead the way back. Of course the Bernanke’s of this world are walking a tight rope between printing and a deflationary depression. The academic inside of Bernanke (he produced his doctoral thesis on the 1930’s depression) is convinced he can control the printing presses he administers without falling into a hyperinflationary spiral which will destroy not only the US dollar but most western economies, plunging the world into a protectionist and depressionary mess. Even if they can avoid hyperinflation, the high levels of inflation which his “unlimited” QE will cause, is slowly but surely killing the US and defacto world fiat currency.

Ironically the latest phase of the currency wars has seen the US attack the Iranian Rial via sanctions and market operations as part of its covert war to stop Iran’s nuclear march (the Rial has lost 80% of its value this year). The unintended consequence of which is the use of gold again in international transactions in the settlement of oil deals between Iran and China. The BRIC (Brazil, Russia, China and India) countries are already settling increasingly with their own currencies rather than the US dollar, and for very good reasons. (By, Jamal Harwood)

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Economic Burden on Citizens

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Evolutionists Vs. Creationists

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Islam offers 'Mercy' against Poverty, But Arab Leaders disturb Wealth Redistribution

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Corrupt capitalism approaching endemic levels

Britain, if not indeed the western world, is in a crisis that envelops all key influential and decision making institutions – politics, media, business, in particular the banks – have all been publicly exposed and humiliated for corrupt, deceptive, highly immoral and in a tiny few cases illegal practices. Given the deep and widespread nature of the malaise the fact that only a handful of individuals have ended up in prison is revealing. Fundamentally, this shows the corrupt and immoral practices, while reprehensible, were in most cases not illegal which is an indictment of capitalism and secular society at large.

Britain’s Barclays bank is the latest institution to hit the headlines for corrupt practices. Barclays Bank has been fined a staggering £290 million – the largest banking fine in UK history – for manipulating a key bank lending rate – LIBOR (London Interbank Offered Rate). Whilst the commonly known base interest rate is set by the Bank of England, banks lend to each other using a different metric – the Libor rate.

This rate is calculated by the British Bankers Association (BBA) based on what appears to be far from transparent practices – with daily estimates submitted by the major banks on the cost of their own interbank lending, a clear recipe for hidden and corrupt practices if there was any. Subsequently, trillions of pounds of financial transactions and prices are then set every day across the country based on the Libor.

Barclays Bank submitted false and misleading figures about the banks’s financial standing in a bid to boost profits during the peak of the recession through 2007 and 2009. This was done to disguise the financial difficulty that Barclays was going through during the economic downturn and astonishingly but perhaps unsurprisingly may have had the blessing of the Bank of England – one of the main banking industry regulators.

With this background in mind we make the following points:

Whilst much is being made out of an impending enquiry into the Banking industry the reality is criminal charges have not been brought forward against the bank as technically it did not do anything illegal. Deception, manipulation and hiding the truth is not illegal in capitalism. Indeed it seen as perfectly rational capitalist behaviour.

Looking at other recent examples, highly immoral practices were found in the tax system. The rich, wealthy and celebrities use tax vehicles and anti-avoidance schemes created within the tax system to avoid paying taxes. Once again they are not doing anything illegal but something perfectly rational given a capitalist mindset.

The problem therefore lies not with highly suspect individuals or institutions but with capitalism itself which creates the mindset that produces these corrupt behaviours and practices. What is worse is that some influential and powerful people see this mindset as a virtue, in spite of the widespread public revulsion when the corruption is exposed.

Deception, manipulation and lies are all within the rules and motivations of capitalism. In contrast, business and the rules of trading in Islam are built upon the principles of trust, integrity, openness and transparency. This is exemplified by the Prophetic traditions of RasoolAllah (saw) in the following Ahadith:

Reported in Imam Malik’s Mawatta Hadith no: 97 narrated on the the authority of Abu Huraira,
Malik related to me from Abuz-Zinad from al-Araj from Abu Hurayra that the Messenger of Allah, may Allah bless him and grant him peace, said,  

“Do not go out to meet the caravans for trade, do not bid against each other, outbidding in order to raise the price, and a townsman must not buy on behalf of a man of the desert, and do not tie up the udders of camels and sheep so that they appear to have a lot of milk, for a person who buys them after that has two recourses open to him after he milks them. If he is pleased with them, he keeps them and if he is displeased with them, he can return them along with a sa of dates.” Malik said, “The explanation of the words of the Messenger of Allah, may Allah bless him and grant him peace, according to what we think – and Allah knows best – ‘do not bid against each other,’ is that it is forbidden for a man to offer a price over the price of his brother when the seller has inclined to the bargainer and made conditions about the weight of the gold and he has declared himself not liable for faults and such things by which it is recognised that the seller wants to make a transaction with the bargainer. This is what he forbade, and Allah knows best.” Malik said, “There is no harm, however, in more than one person bidding against each other over goods put up for sale.” He said, “Were people to leave off haggling when the first person started haggling, an unreal price might be taken and the disapproved would enter into the sale of the goods. This is still the way of doing things among us.”

In contrast to capitalism, as the above hadith shows, Islam not only stamps out corrupt actions but the roots of corruption and deception are closed off. This ensures businesses are characterised by good and not falsehood, if this was not stopped it will eventually lead to the breakdown of trust and integrity among all business transactions. The pervasive corruption in capitalism we are seeing exposed is fast approaching a scale where the trust of the masses is being eroded which will eventually undermine the system itself. (Ends)

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The Difference Between Value and Price?

Q&A: The Difference Between Value and Price? By Sheikh Ata' Abu Rashta

The following is the translation of an Arabic Q&A from the website of Sheikh Ata' Abu Rashta.

Question: What came in the economic system about the value and the price is not clear and in particular the issue of recording the dowry (mahr) in terms of value and price. Please explain this in some detail, may Allah bless you?

Answer: The value is the amount of benefit present within the commodity, which is fixed at all times and places. So the benefit of a jug is estimated, in itself as an object, by the materials it is made of, its suitability for carrying water, whether for drinking or ablution. 

These uses are never detached of it today or tomorrow, whether its price increased or declined. If it is estimated by the benefit of another commodity, the benefit of the other commodity should be equal to the benefit of the jug at the moment of estimation. If the value of the jug was estimated by the value of a chair as an example, then it is necessary that the internal benefit of the jug is equal to the internal benefit of the chair, in terms of its constituents (components), its use (function).....etc. This estimation by value does not differ from time to time, or from a place to a place. If for example, the benefit of the jug for a man is equal to the benefit of half a chair, this value remains the same every time, because it is estimated by the physical components of the commodity and its uses, which are fixed in it no matter whether the price increased or decreased.

If the price of the jug has increased, this does not mean that its components have increased, or its uses have increased, for its value is constant (fixed) though its price increased or decreased? This applies to the wardrobe, its components as well as its uses are fixed (constant) whether the price increased or decreased.

Similarly, if the value of the wardrobe was estimated by the value of another commodity, by gold for example, and it was found that the benefit of the wardrobe is equal to twice the benefit of a piece of gold, this value remains constant because it is estimated by the components of the substance of the wardrobe and the components of the substance of gold, and man's benefitting of the wardrobe and his benefitting of gold. Therefore, the value of the wardrobe remains equal to half the value of the golden piece, whether the price of the wardrobe or the price of the golden piece increased or decreased. This is because the value depends on the physical components of the commodity and man's benefitting of it in terms of its uses.

As regards the estimation of the commodity by the price, this is not necessarily equal to the physical components of the commodity and its benefit to man as a human being; rather such estimation by price is controlled by supply and demand.

The important observation in the subject is that the estimation of the commodity by the price does not consider the physical benefit of the commodity. It might rather estimate the price of wheat by paper currency regardless of the benefit of the physical substance of the wheat, which is great, while the benefit of the physical substance of the banknote is almost nothing more than the type of paper, drawings on it and its technical production. This is because the price is related to the supply and demand. So a wrongdoer might sell a bag of wheat to buy a bottle of wine, despite the wide gap between the benefit of the physical substance of the wheat bag and the benefit of the physical substance of the bottle.

However, when the value is estimated it is assessed by an equal benefit present in both sides. Therefore, we do not say the value of wheat bag is equal to twenty paper dinars, because the physical benefit present in the substance of wheat in the bag is equal to thousands of the physical benefit present in the substance of the twenty paper dinars.

Value is estimated by the physical benefit present in the commodity; therefore the value of a bag of wheat is estimated by such and such golden dinars or such and such commodity that has equal benefit.

Thus, while price is estimated by any commodity no matter how much benefit exists in it, the value of a commodity cannot be estimated by another commodity unless both commodities have equal inherent benefit.

And I think you have now got the answer to the issue of the wardrobe automatically.

Perhaps you thought the statement in the book (if a man marries a woman and made her dowry a certain specified wardrobe, and it was stated that its value is fifty Dinars..) You thought that the fifty dinars are paper money. This is not the case, because the value does not change in terms of the benefit of its substance, so the dinars here are golden dinars.

In this case, she is entitled to have a wardrobe whose value is fifty Dinars in gold, at every time and place. If the wardrobe was damaged then she is entitled to have fifty Dinars in gold. If what was mentioned is a wardrobe whose value is fifty Jordanian Dinars, for example, then the term of value in this context is redundant; and what is intended is the price.

For your information, this distinction is not explained in the books of fiqh as it is in ours, and the value is often used to mean price.

The reason for highlighting this in our studies is (the deformation) of the value by the capitalists and considering it nominal (relative), where it rises and falls according to the greed, oppression and exploitation. So, we highlighted this and explained it thoroughly. Therefore, if a wardrobe was stated in the contract of marriage, whose value is such and such, and a lawsuit case was submitted to judiciary, then the relevant parties should be asked if they are aware of this meaning, or they understand the value as price. Ignorance (of this difference) in this case is excused, because many people of their like do not know such difference. So, if they heard (the value of an item is twenty Dinars), they thought its price is twenty. I think the difference between the two cases is now clear:

1 - If he recorded its value as fifty Dinars (i.e. a currency that has inherent benefit, and it is invalid to register it as paper money  ...), then fulfillment of this record is according to the text of the contract: returning back the wardrobe which he robbed, based on the hadiths:

«على اليد ما أخذت حتى تؤديه» رواه ابن ماجه وأحمد والدارمي.

 «The hand (person) is obliged of that which he took until he returns it back",

As narrated by Ibn Majah, Ahmad and Al-Darimi.

«وإذا أخذ أحدكم عصا أخيه فليرْدُدْها عليه» رواه أحمد

«If any one of you took the stick (staff) of his brother, he should return it back to him", As narrated by Ahmad.

If, however, it was damaged he should pay its value, which is fifty Dinars worth of gold, and nothing else. This is because the value does not change with time, place or supply or demand.. Therefore, the value is not a price by which one can buy a wardrobe.

2 - If he recorded its price as fifty Dinars (where he can here register it as paper, gold, etc... because the price is not related to the inherent benefit of the substance of currency), then fulfillment of this is according to the contract text:

It is returning back the wardrobe, which he robbed based on the previous hadiths. If it was however damaged he would pay the recorded price or buy a wardrobe by this price.

Thus, he would have fulfilled the contract text.

As for your offshoot question that says: (if we assume that the husband made a part the wife dowry jewels instead of the wardrobe and he recorded the value as fifty dinars ...), in this case it is not valid to register the value in paper; he has rather either register it in the contract: dowry is jewels whose value is fifty Dinars of gold, and in this case he returns to her the jewels, and if it perished he returns to her fifty dinars of gold, because the value is fixed, which is estimated by the benefit present in the commodity substance in relation to man as a human being.

Or otherwise he registers to her jewels whose price is fifty dinars of paper or gold or whatever else.

In this case, he returns to her the jewels; and if not possible he would buy her jewels worth of fifty dinars, which is the recorded price, or he pays her the recorded price, i.e. fifty dinars. If the State has reduced its paper currency by a percentage it declared after the contract, then this percentage is taken into account at time of demand. (Islamic Revival)

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Islam: A Threat or Mercy?

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Creating A World Without Poverty; By Nobel Prize Winner Muhammad Yunus

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From boom-bust to double-dip: Capitalism’s continuing crises

While many have been in denial regarding the state of the UK economy the Office for National statistics (ONS) confirmed on the 25 April 2012 that in Quarter 1 2012 the UK fell into recession – for the second time in about as many years, in what has come to be known as a double-dip recession.

The financial crisis of 2008 dragged the global economy down with it and governments across the world have attempted various strategies to deal with its effects.

 As the UK goes into recession again, this would suggest that all the solutions that have been implemented have failed. Initially bank bailouts and nationalisations were used as a policy to save the economy from collapse. Yet saving failed businesses on an industrial scale clearly contradicted capitalist free- market principles.

As the UK economy, like that of the Western world more generally, contracted governments turned to quantitative easing, which is printing money on an industrial scale in the hope that people would again start spending and thus the recession would end.

The arrival of the ConDem coalition  government in May 2010 ushered in a policy of austerity to address the huge debt overhang from unsustainable government spending levels with the dogmatic belief that once the budget balanced the economy would stop shrinking and begin to grow.

Stimulus nor austerity has worked because the economy has gone back into recession.

Economic growth is measured through the economic metric of Gross Domestic Product (GDP). This is the value of the goods and services produced by all sectors of the economy including, agriculture, manufacturing, energy, construction, the service sector and government. The contribution of all of these sectors is calculated by periodically surveying a small selection of companies in each sector.  Data is also collected from government departments covering activities such as health and education. As perpetual growth is of so much importance to capitalist countries the UK produces the earliest estimate of GDP of the major economies, around 25 days after the quarter in question. But this is based on only around 40% actual data for the quarter with the rest being based on the guess work of economists and statisticians. A growing economy with increasing production of goods and services is said to be a healthy economy. This is because, for capitalists, peoples wants are unlimited so with ever increasing production more people are more able to access goods and services to satisfy those wants and therefore to be happy.

The fundamental problem with the UK is that its economy is dominated by the financial sector, with the driving engine being the defunct banking industry. The financial crisis began in 2008 with the credit crunch and thus the UK’s largest sector collapsed taking the whole economy down with it.

The problem here is the financial industry does not just dominate the economy, it also dictates politics – as recent scandals have shown.  This industry’s influence reaches parliament and government creating powerful vested interests, who protect the ailing and flawed sector despite it handicapping the UK economy.

A more fundamental issue however is the role of economic growth in the economy. Boom periods see debt drive economic growth. These artificial bubbles eventually run out of steam and burst. This last happened in 2008 but there have been major recessions at the start of each decade in 1970s, 1980s, 1990s and 2000s.

The capitalist model thus does not promote sustainable growth but economic growth at any cost, even if it undermines the long term interests of the economy. This obviously is not sustainable as periodic booms followed by busts have demonstrated – none more so than entering a second recession in about as many years.

Islam and economic growth

Islam recognises human needs and wants and their requirement for satisfactions. Needs such as food, clothing and shelter are however different from wants i.e. luxuries because without the former a person will not survive. Thus in contrast to the capitalist’s fixation with economic growth to satisfy human collective wants [which is in fact impossible] Islam’s economic policy actively works to ensure households to not go without to food, clothing and shelter. This is according to a hadith reported in Tirmidhi:

“The Son of Adam has no better right than that he would have a house wherein he may live, a piece of clothing whereby he may hide his nakedness and a piece of bread and some water.” [Tirmidhi]

Once peoples basic needs are looked after they have the capacity and ability to engage in acquiring their lawful luxuries.

In contrast to the capitalism where economic policy is orientated towards economic growth, the focus of Islam’s economic policy is on fulfilling human needs to ensure that poverty is eliminated in society. This avoids a scenario in the capitalist growth model where millions do not adequately have the basics of food, clothing and shelter in spite of the wealth in society.

But this does not mean that the Islamic (Khilafah) state hands out food, clothing and shelter to all households or that all industries that provide these basic needs are state owned.

The economic model in Islam is integrated with individual and household Islamic rights and responsibilities which are implemented via the Shariah (the law of Allah (swt). Thus for example wives and children have a right to, at least, food, clothing and shelter and it is the responsibility of the husband/father to provide these. A failure to do so allows wives to seek redress in the courts from the property of the father. This chain of responsibility and accountability stretches across Islamic society to parents, grandparents, sons and grandsons. Only when individuals are not able to be supported by their wider household does the state step in to secure individual basic needs.

Thus in Islam the imperative is to remove poverty which enables all citizens to engage in all lawful business activity. There are no taxes on income so work is incentivised and spending is boosted creating demand for a variety of lawful goods and services providing jobs and livelihoods. Meanwhile the gold and silver standard ensures price stability encouraging business investment and boosting jobs. The role of the state is clearly defined with prohibitions on price and wage fixing which promotes entrepreneurship. This creates balanced growth in the real economy in line with population and productivity increases such that growth is sustainable with all citizens always able to fulfil their needs and avoids the perennial booms and busts under capitalism which over time plunges ever increasing numbers into poverty. (HTB)

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Greece and the global crisis of capitalism

For Greek workers, the impact has been catastrophic. They have already suffered the greatest decline in living standards since the Nazi occupation. Unemployment has doubled to 22 percent and 50.8 percent among young people, while millions more are relegated to precarious and part-time work. Read more>>>

There are Alternatives to Free Market Capitalism!

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The collapse of the Soviet Union in 1990 was heralded as a landmark event in history; it was considered the wholesale rejection of a way of life and end of Communism. The post – WW2 world was dominated by the competition between the Capitalist free market led by the US and state intervention led by the Soviet Union. Francis Fukuyama considered one of the most important living public intellectuals considered the development of ideas to have ended in his ‘end of history’ thesis as there was no meaningful debate left between Marxism and the market.

The Global credit crunch more then a year on shows no sign of slowing down and has now reached boiling point due to the number of banks that continue to collapse. Comparisons continue to be made with the great depression of the 1930′s, as many of the conditions present in the current crisis were also present on the eve of the great depression.

Prior to the collapse of many of Wall streets titans in September 2008 various thinkers and free market ideologues continued to argue just as their free market ancestors did in the 1930′s and  against mounting evidence to the contrary, that time and nature would restore prosperity if governments refrained from manipulating the economy. Western governments have been forced to throw their Capitalist free market blueprint out of the window and intervene in the economy like never before. Over $5 trillion in total market capitalisation has been wiped out since October 2007, with over a trillion of this accounted for by the unravelling of Wall Street’s financial titans.

This crisis is much more then a financial crisis, this has now been accepted by free market ideologues that played down the prospects of a recession and labelled those who did as doomsayers, talking themselves into a recession. Such thinkers are now in hiding with very few economists prepared to remind the world of Capitalisms principled argument, as the Economist reminded us all: “excess and calamity are part of the package of Western finance. And still it is worth it.” With consumer deposits, savings and jobs all at stake this crisis has well and truly brought into question the suitability of the free market and as one geopolitical expert put it: “as the details of the present crisis reveal, there are huge ideological fault lines making for chaos and a potential meltdown of the Laissez Faire financial system.”

There are three reasons why the credit crunch crisis occurred:

1. The financial industry created complex financial contracts like derivatives that would securitize and make money from all forms of risk, this included exotic instruments such as credit default swaps and subprime loans. Banks continued to sell debt to customers with little ability to repay them, August 2007 was the point when such debt reached bursting point.

2. The speculative frenzy that gripped both the American market as well as Europe in the purchase of real estate which continued to send real estate prices to astronomical levels.

3. Greed played a direct role in the crisis as it led to predatory lending to people that had little means to make repayments. It also led to credit ratings agencies to rate investments less risky than they really were.

The events of September 2008 have for most brought to the forefront the potential demise of Capitalism as we know it and a discussion on potential alternatives. Like all previous crises any debate on alternatives is usually reduced to one of Socialist government intervention or to tinkering with regulation and transparency rules, there a number of reasons why the global credit crunch crisis represents a much deeper crisis at the heart of capitalism which was outlined by world renowned speculator George Soro’s: ‘what we are going through is the crisis of the gigantic circulatory system of a global capitalist system that is…coming apart at the seams.’

1. The periodic crash and crises as well as the boom and bust phenomena capitalism continues to historically descend into whether it is in Dutch tulips, the South sea bubble, the technology bubble as well as the dot.com crash and now the sub-prime crisis are fundamentally down to the aims Capitalism attempts to achieve with the economy. Perpetual economic growth (increasing GDP) will always lead to the development of a bubble in the economy as some section of the economy will always be needed to stimulate the remainder of the economy to ensure the economy keeps growing. The current crisis has at its heart the bubble in the housing market, the recession of 2001 across the Western world was due to the bursting of the dot.com bubble. The cyclical recession free market ideologues continue justify is something which proves the failure of Capitalism to maintain stability and is in no way due to seasonal trends.

2. The greed shown by speculators is not something isolated that has occurred for the first time in Capitalist history, it is something that forms the cornerstone of Capitalist belief and thought. The founding fathers of Capitalism concluded that if all consumers in society followed and acted upon their self-interests and greed then the right goods would get to the right people in a free market, it would lead to innovation as society competed to make items better and cheaper. Economists since then have continued to argue that greed goes hand in hand with the free market as it is necessary for consumers to pursue their greed for wealth to distribute around the economy. This has led to the current situation where hedge fund managers and company CEO’s have earned bonuses in the millions to the detriment of wider society. Greed is from the Capitalists belief; legislation and regulation in no way can curtail actions built upon values which are the foundations of the Capitalist belief.

3. The market has been sold to the world as the best method for sellers and buyers to conduct transactions and the most efficient way to distribute wealth around an economy. For years both the IMF and World Bank forced open economies in effect using the stick to ensure government intervention was completely removed from the economy. Academic textbooks in schools and colleges argued free markets mean competition will do away with companies that make any product inefficiently and it was the best way for all to partake in the wealth generation process as any individual with an innovation can meet any demand in the economy. The free market apparently got the right goods to the right people. In reality however the market works much differently, with little regulation sub-prime mortgages were created as well as derivatives. Short selling is a direct result of the free markets removal of regulation which resulted in speculative betting on the collapse of companies. The free market in the US which was for long America’s symbol of success has in affect brought the nation to its knees, this was outlined by John Gray former London Schools of Economics political philosopher: ‘the American free-market creed has self-destructed while countries that retained overall control of markets have been vindicated. In a change as far-reaching in its implications as the fall of the Soviet Union, an entire model of government and the economy has collapsed.’

The Alternative: Islam

The current financial crisis has seriously eroded confidence the Western world had in the suitability of the free market. However the Western world when looking at alternatives only see remnants of Socialism or some state intervention in economy as feasible and workable systems. It is also this reason that allowes free market ideologues to continue citing more regulation, transparency i.e. more capitalism with some tinkering as solutions. This crisis represents an opportunity for all Muslims to present the Islamic alternative. It is important to show Islamic economics as much more then Islamic finance and Banking. This is exactly what Adnan Ahmed Yousif, CEO of the Bahraini-based Albaraka Banking Group and chair of the Union of Arab Banks outlined in an interview with the Middle East’s Asharq Al-Awsat when asked about the global financial crisis: ‘The success of Islamic banking will lead to serious consideration of Islamic economics, which continues to realize numerous achievements, as a viable alternative to the current global economic system which continues to be hit by these crises.’ With this in mind the following points should be borne in mind and when presenting Islam:-

1. The Islamic economy follows a philosophy which is very different to Capitalism, as a result the end objectives both economies attempt to achieve, widely differ and thus it would be invalid to measure one against the other as they both have different foundations and aims. Islam has detailed laws on the distribution of wealth and this is its ultimate aim with the economy – to ensure wealth circulates around the economy so all can share in the wealth that is generated.

2. Because all economic systems aim to address the same issues, there are many peripheral similarities between Islam and the free market. At a doctrinal level however Islam and Capitalism are two distinct systems. The Islamic economic system is fundamentally about people and their needs, this is the fundamental principal the Islamic economy is built around. In a narration from the Prophet Muhammad صلى الله عليه وآله وسلم it was said that: “The son of Adam has no better right than that he would have a house wherein he may live and a piece of cloth whereby he may hide his nakedness and a piece of bread and some water.” (Tirmidhi). The Islamic economy is geared towards fulfilling the basic needs of its citizens and these in origin were defined as food, clothing and accommodation. This forms the basis of the Economic system of Islam, all policies and rules are geared towards achieving such ends. Islam focuses on the needs of the people which the hadith outlined and not merely increasing Gross Domestic Product (GDP).

3. Islam does not view the human as an economic unit and then look to find the most economically viable solution thus viewing all problems, whether from marriage to pensions to drugs to education, from the angle of the economic effect and cost. Neither does Islam view the human the way the Communists did which is that people are simply matter, just one aspect of nature, nothing more. Islam views the human as being composed of organic needs as well as instincts, all of which requires answers on how to satisfy them. So Islam organised these instincts and needs in a way that ensures the satisfaction of them all, such as the need to eat and the need to reproduce and others. However, this organisation is not arranged in Islam by satisfying some of them at the expense of the others, nor by suppressing some of them, setting others loose, or setting all of them loose. Instead, Islam has co-ordinated the satisfaction of all of them in a way to ensure comfort, preventing conflicts and a lapse to a primitive level through the anarchism of instincts.
   
4. Through its own economic system, Islam laid down rules for the means to acquire wealth and commodities, how they can be utilised and their manner of disposal. It certainly did not make freedom of ownership the basis of the economic system or even the socialist principal of ‘from each according to his ability, to each according to his needs’.  It did not define the basic problem as ‘unlimited wants, limited resources’. Islam views the resources to be ample enough to completely satisfy the basic needs of all. Therefore, amongst a host of other detailed rules, one will find the Shari’ah aims to secure the satisfaction of all basic needs (food, clothing and housing) completely for every citizen of the Khilafah State.

5. In order to facilitate the acquisition of goods and services Islam put forward rules related to the manner of possessing wealth without any complications. Islam defined the legal means of ownership, and it defined the contracts through which possession can take place. This left humanity free to develop the styles and means by which they earn, as Islam did not interfere in the production of wealth.

6. The Islamic economic system has extensive rules for ownership and disposal of citizen’s wealth and assets. Beyond this Islam recognises a sphere of the economy as the economic science i.e. through study and research a solution can be derived. Hence how to develop and economy or to industrialise, where the factories and the supply lines should be, how the steel and iron mills should be constructed fall under this category, however what is produced and how it is distributed falls under the ‘system’ for which Islam has extensive rules

7. The Islamic economy is based upon wealth generation where participants partake in investment, employment and trade in the real economy. Islam does not have a dual economy where the real economy operates alongside a financial sector. The Islamic economy focuses all participants on the real economy, through employment, company profits, utilisation of land (agriculture) and manufacturing, wealth is generated in only one sector. This brings the huge benefit of wealth only circulating in one sector – the real economy, where all can participate. Derivatives would be withdrawn as this type of contract is not trade in real goods; rather it is betting on the price movements of a commodity and one must posses what they sell in Islam.

8. The Islamic system does not recognise the financial markets in their current form. One is able to purchase shares and transfer them without actually partaking in the running of the underlying company that the shares are meant to represent. In Islam ownership is a direct role in a company and not just a share certificate which in effect the stock market allows to be traded and re-traded. It is this ability to not have a direct role in a company that allows excessive speculation.

9. The Islamic economic system does not recognise the financial markets in their current form and has made the Western style Public Limited company (joint stock (share)) companies haraam for a number of reasons. Fundamentally this type of contract contradicts the Islamic rules for contracts. The company in the West represents a particular type of contract – the ‘Solitary Will,’ this is where an individual agrees to the written constitution of a company by purchasing its shares with no formal offer from anyone. This has come to be termed as the Individual Will whereby shares could be exchanged very quickly without the need for two people to continuously sit down and have a formal offer and acceptance. An example of this is the take-over bid of the world’s richest football club, Manchester United FC by Malcolm Glazier in 2005. He imposed his will on the company (i.e. he brought shares) and even though other shareholders were against such an action it was a legal form of acquiring ownership even though there was only one person in the contract. Most contracts involve two parties where one party offers terms and the other accepts, however under corporate law in the West setting up a business is a contract of ‘solitary will.’ It is not a contract between two or more people; rather it is an agreement that stipulates that all parties agree to it when they subscribe for shares in the company. So an individual joins himself to the conditions of a company – through purchasing their shares. This means to become a partner one does not need approval from the existing owners – this contradicts Islam.

10. Islam’s monetary policy is centred around a legal tender based upon the Gold and Silver standard and not one based upon interest rates to regulate inflation and the economy. In Islam when it comes to exchanging a commodity with a specific monetary unit, Islam has guided Muslims to the monetary unit by which the exchange is to take place. It has restricted the Khilafah to a specific type of money, which is gold and silver. The Islamic evidences have designated gold and silver as the primary measuring unit for prices and labour. This is understood from the actions of Muhammad صلى الله عليه وآله وسلم when he collected Zakat, levied taxes and imposed fines, all were measured according to gold and silver. This means the notes and coins circulating in the economy would all be backed by gold and silver. This will no longer make possible the free printing of currency as the Khilafah would need to increase the actual holdings of gold and silver. This has a unique effect on Inflation which free market economies have been unable to contain.

11. Islam contains inflation by changing the role of banks. Currently banks practice fractional reserve banking whereby they create credit, borrow money from the financial markets and lend to depositors. This creates a big problem in the economy as very little equity can be used as collateral to borrow large sums of money which creates a bubble waiting to burst. Islam strips the ability of banks to create money and transfers this to the central treasury – Bait ul-mal. Money creation will be the sole role of the state.

12. The role of banks in Islam will be to collect the nation’s deposits and to also act as a central pool whereby money can be collected and invested in the economy, with the returns being distributed amongst investors. The banks would only be able to invest what they have in deposits and cannot create money as this is the role of the central treasury – bait ul mal. As interest (Riba) is haraam the main function of banks will become the pooling of wealth which can then be invested across the economy aiding wealth distribution and economic growth.

13. The Islamic economy is stripped of ‘interest’ as this is something Islam has categorically forbidden in the Qur’an. Holding wealth in a bank account will no longer accrue interest and any unused wealth for a year is liable for taxation. In this way such wealth is only productive if invested or spent, and this can only take place in the real economy. The removal of interest in the economy will act as a multiplier affect circulating wealth around the economy.

14. Islam does not have a concept of income tax; value added tax, excise duties, nor national insurance contributions. Rather Islam puts the emphasis of taxation on wealth rather than income. Take the average salary in the UK of £24,000. At current tax rates the tax burden alongside National Insurance contributions falls at 33%. This alongside indirect taxation (that is taxation on spending rather than income) as well as council tax, road tax and so forth mean that the real tax burden falls at closer to the 40-50% mark.  This means that the average person in UK is losing between £10,000-12,000. So at higher wage levels, the monetary amounts lost towards taxation is much greater.

15. In Islam, although simplified, the wealth tax falls at 2.5%. This means that within one year, on average one can save at least £10,000.  Therefore two or three people could easily enter into a business contract such as Mudharabah (An Islamic company where one provides the Capital and the second partner works with it) to supply some of the demand in the economy for consumer or manufactured goods thereby creating more employment in the economy. With no concept of interest rates and hoarding forbidden in Islam wealth will circulate quickly ensuring the public can purchase what they specifically need, creating employment and giving all more and more disposable income.

16. Islam considers poverty as one matter for humans in any country and in any generation. Poverty in the view of Islam is the non-satisfaction of the basic needs in a complete way. Islam defined these basic needs as three things, which are food, clothing and accommodation. This is seen from the following evidences:

وَعلَى الْمَوْلُودِ لَهُ رِزْقُهُنَّ وَكِسْوَتُهُنَّ بِالْمَعْرُوفِ

 ”The duty of feeding and clothing nursing of mothers in a seemly manner is upon the father of the child.” [Al-Baqarah: 233]

أَسْكِنُوهُنَّ مِنْ حَيْثُ سَكَنتُم مِّن وُجْدِكُمْ وَلَا تُضَارُّوهُنَّ لِتُضَيِّقُوا عَلَيْهِنَّ

 ”Lodge them where you dwell, according to your wealth.” [At-Talaq: 6]

Specifically Islam made the financial support (Nafaqah) compulsory from the revenues of the Bait ul-Mal and from Zakah. From a Macroeconomic perspective the removal of interest, the financial markets and direct taxation allows wealth to freely circulate around the economy so all citizens can partake in the wealth generation process.

17. Islam has ordained the state to play a direct role in the economy and does not leave things completely to the market. Islam lays out three types of property; state, public and private. It designated any utility regarded as indispensable for the community, such that its absence would require people to search far and wide for it, as public property. It would then be publicly owned and the revenue generates would be administered for the benefit of all citizens. This is derived from the hadith of the Prophet صلى الله عليه وآله وسلم: “Muslims are partners in three things: in water, pastures and fire.” Although the hadith mentioned just three things we can utilise qiyas (analogy) and extend the evidence to cover all instances of indispensable community utilities. Thus water sources, forests of firewood, pastures for livestock and the like are all public utilities as well as the mosques, state schools, hospitals, oil fields, electricity plants, motorways, rivers, seas, lakes, public canals, gulfs, straits, dams etc. Islam would allow ownership if it were not indispensable for the community. This solution will have a unique effect, as it will ensure all will receive the basic requirements to live and not be at the will of monopolies or high prices.

Conclusion

The rejected $700-billion and all subsequent buyout of banks’ bad mortgaged-backed securities is not a strategy but mainly a desperate effort to shore up confidence in the system, to prevent the erosion of trust in the banks and other financial institutions and preventing a massive bank run such as the one that triggered the Great Depression of 1929. Having created the conditions that produced history’s biggest bubble, America’s political leaders appear unable to grasp the magnitude of the dangers they are facing. As the rejection of the original bailout package showed they are mired in their rancorous squabbling among themselves.

What has been very clear from the contradictory moves of allowing Lehman Brothers to collapse while taking over AIG, and engineering Bank of America’s takeover of Merrill Lynch – there’s no strategy to deal with the crisis, just tactical responses.

Islam offers the Western world its last salvation from descending into complete chaos as the Western world’s deposits continue to shrink through further collapses and the last remaining strategy the Western world has left – the printing of more money. (TGR)

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