Page 1 of 3 CHINA AND THE GLOBAL CRISIS Denial as the storm gathered
By Henry C K Liu
China's response to the current global financial crisis is predicated on the
reality of the international situation and the separate responses of other
major economies around the world.
It took more than a year for US President George W Bush, in whose country the
decades-long credit joyride finally imploded in August 2007, to belatedly
acknowledge that the financial crisis resulting from decades of US monetary
indulgence and fiscal irresponsibility is not merely a passing shower needed to
deflate the latest debt bubble in the housing sector of the US economy.
The credit turmoil turned out to be a catastrophic, global, financial
perfect storm of unprecedented dimension that will cause serious structural
damage to all market economies around the world. It may even spell the end of
the cowboy finance capitalism of the past two decades in which risks are
socialized and gains privatized, with debt manipulated to act as phantom
capital and high returns on pension funds of workers paid for with permanent
loss of employment and regressively low wages for those still working.
Snake-oil theory of big market, small government
For decades, aggressive globalization and wholesale deregulation of finance
have been propagated by the flawed US ideology of faith-based, capitalistic,
free-market fundamentalism and of the alleged merits of government
nonintervention in markets.
The snake-oil slogan of "big market and small government" has been promoted
around the world as a win-win, neo-liberal miracle, good for all
trade-participating economies and regurgitated tirelessly by neo-comprador
economies such as that of Hong Kong. Ironically, free-market Hong Kong finds it
necessary to turn to socialist China for government bailouts whenever its free
market slows, while it continues to mindlessly boast the superiority of its
free-market regime.
Hong Kong's infatuation with US propaganda notwithstanding, the fact is that US
ideological imperialism on free-market fundamentalism allowed the financial
crisis that began in the US in August 2007 to quickly lead to interconnected
market failure in advanced, emerging and developing economies alike the world
over.
Predatory dollar hegemony The exporting economies have been lured into
shipping real wealth to the US in exchange for US debt denominated in fiat
dollars, which cannot be spent in their own domestic economy without monetary
penalty and which must be returned to the US as capital to finance US sovereign
debt. The adverse effects of this predatory monetary regime, known as dollar
hegemony, differ on economies at different stages of development. But one
common effect can be observed clearly: the helpless working poor in all trading
economies around the world, who had no voice in economic, trade and monetary
policymaking, did not benefit throughout the phantom boom phase from trade
globalization and are now suffering the most in these days of reckoning when
the boom bust.
US neoliberal trade globalization, having promised a primrose garden of
economic growth, has instead led the global economy into a jungle of poison
reed, resulting in the worst financial disaster in a century, setting the whole
world ablaze with a financial firestorm. This unhappy fate was finally
acknowledged as having been policy-induced by Alan Greenspan, the former
chairman of the US Federal Reserve who was largely responsible for the monetary
indulgence that had caused this hundred-year financial perfect storm. Greenspan
confessed before Congress that his trust on transnational finance institutions
for self-regulation as a survival instinct had been misplaced, leading him to a
flawed policy in support of anarchical financial deregulation and permissive
risk management.
Still, Greenspan left unmentioned his equally misplaced faith in central bank
ability to mitigate the adverse effect of burst bubbles by creating larger
sequential bubbles with more liquidity. The Federal Reserve under Greenspan
repeatedly created money faster than the global economy could profitably
absorb, creating serial bubbles denominated in fiat dollars. Greenspan insisted
that it was not possible, nor desirable to identify an economic bubble in the
making as he was inflating it with easy money lest economic growth should be
prematurely cut short. It was a perfect example of the rule that intoxication
begins when a drinker becomes unable to know its time to stop drinking.
On a more fundamental level, politically independent central banking under
Greenspan, instead of being a market-stabilizing force, has become part of the
destabilizing causes of recurring economic bubbles. The Hong Kong Monetary
Authority (HKMA), the self-styled central bank notwithstanding the peg of the
Hong Kong dollar to the US dollar at a fixed rate of 7.8 to 1, thus rendered
itself to the status of a monetary policy subsidiary of the US Federal Reserve.
When the US Fed eases monetary stance, HKMA must also ease to sustain the
currency peg. Thus Hong Kong has been exposed to a contagious bubble from the
US bubble.
HKMA chief executive Joseph Yam has for decades held up Greenspan as his policy
guru, tirelessly declaring himself publicly without shame as a faithful
disciple of the Wizard of Bubbleland. Greenspan has confessed publicly his
policy blunder. The people of Hong Kong, now suffering the pains of the
Greenspan virus, have yet to hear from the self-important Mr Yam to whom the
people of Hong Kong pay an obscenely high salary, several times that of
Greenspan as chairman of the Fed.
Fiat dollar liquidity destroys wealth
This US-induced global financial disaster that now threatens to keep the world
in deep economic depression for another decade and more is essentially the
product of US ideologically based policy and practices. While substantial
damage has already been irreversibly done to the world economy by the collapse
of economic bubbles caused by a liquidity flood, particularly to confidence in
the market system, the US rescue strategy has been to keep the debt bubble from
bursting with indiscriminate injections of liquidity.
Until the US monetary policymakers realize that excess liquidity denominated in
fiat dollars cannot create wealth, but rather it destroys wealth, the
debt-infested US economy will not begin to recover.
Further damage to the global economy cannot be averted without a fundamental
change in US policy that has been exploiting its predatory monetary hegemony.
This dollar hegemony grows out of a fiat dollar that has allowed the US to
finance its decades-long current account deficit with a compulsory compensatory
capital account surplus. This sucks wealth from the exporting emerging
economies to the US to keep it as the world's richest economy, consistently
consuming more than it produces with the help of debt denominated in fiat
dollars that the US could print at will.
Now, in the face of a global firestorm of debt that the US has single-handedly
created with its flawed ideology and dysfunctional monetary and trade policies,
the international community is being asked to coordinate and follow still
misguided US ideologically-constrained bailout measures to help the US deal
with a global problem of its own making. Yet the solution lies only in
fundamental reform of US policy.
The venue for this audacity was the White House Summit on Financial Markets and
the World Economy of November 15, 2008, called by a lame-duck president whose
office would last only five weeks beyond the summit. He invited the attendance
of leaders of the Group of Twenty countries along with representatives of the
United Nations, the World Bank, the International Monetary Fund, the Financial
Stability Forum and other international agencies.
[The G-20 members are: Argentina, Australia, Brazil, Britain, Canada, China,
France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia,
South Africa, South Korea, Turkey, the United States, and the European Union.]
The G-20 members combined produce 90% of global gross domestic product (GDP),
account for 80% of world trade, and are home to two-thirds of the world's
population. The summit was billed as the first of a series of follow-up summits
to deal with the urgent and complex crisis.
The summit agenda, set by the US, was for world leaders to exchange views on
three "important" issues: (1) to assess the progress made by the international
community in response to the current financial crisis; (2) to discuss the
causes of the financial crisis; (3) to discuss issues such as the regulatory
norms and institutional reform in international finance and try to reach
consensus on some principles.
The key issue of the basic flaw in neoliberal market fundamentalism was not on
the agenda. World leaders were not asked to deliberate on new alternative
economic orders to save the world from US-created impending financial disaster,
but to "coordinate" with US efforts to validate flawed US ideology and to save
predatory finance market capitalism based on it.
To drive home the point, President George W Bush gave a speech on "The
Financial Markets and World Economy" at the Manhattan Institute in New York
City on November 13, two days before the White House Summit, in which he
claimed:
The leaders attending this weekend's meeting agree on a clear
purpose - to address the current crisis, and to lay the foundation for reforms
that will help prevent a similar crisis in the future. We also agree that this
undertaking is too large to be accomplished in a single session. The issues are
too complex, the problem is too significant to try to solve, or to come up with
reasonable recommendations in just one meeting. So this summit will be the
first of a series of meetings.
It will focus on five key objectives: understanding the causes of the global
crisis, reviewing the effectiveness of our responses thus far, developing
principles for reforming our financial and regulatory systems, launching a
specific action plan to implement those principles, and reaffirming our
conviction that free market principles offer the surest path to lasting
prosperity.
First, we're working toward a common understanding of the causes behind the
global crisis. Different countries will naturally bring different perspectives,
but there are some points on which we can all agree: Over the past decade, the
world experienced a period of strong economic growth. Nations accumulated huge
amounts of savings, and looked for safe places to invest them. Because of our
attractive political, legal, and entrepreneurial climates, the United States
and other developed nations received a large share of that money.
It is a gigantic stretch of self deception to claim that the leaders
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