Page 1 of 3 World leaders miss the target
By Henry C K Liu
Leaders attending the Group of 20 second Summit on Financial Markets and the
World Economy in London on April 2, echoing the first such gathering in
Washington in November 2008, continued the tradition of superficial posturing
for political theater on global television, while missing the real target -
that is, the need not so much to revive dysfunctional trade that has collapsed
from its own internal contradictions, but to redefine the predatory terms of
international trade created by dollar hegemony.
British Prime Minister Gordon Brown, host of the G-20 London summit, declared
it as having created a "new world order". While unipolarity appears to be in
the process of being replaced by emerging multipolarity, the world is still a
long way from
developing a new order. If anything, the G-20 London summit was a desperate
last-gasp attempt by the Group of Seven (G-7) leading industrialized nations to
restore a failed old world order.
Need for restructuring dysfunctional terms of trade
To save the world from a prolonged depression, international trade needs to be
restructured from its current destructive role of preempting domestic
development towards a new constructive role of augmenting it. That the now
nearly two-year-old crisis in financial markets has been created by excessive
debt denominated in a fiat dollar whose issuer has for decades failed to live
by prudent rules of fiscal and monetary discipline was acknowledged by the new
president of the United States only in passing during the summit, while the
solution to a debt-infested financial crisis is mistakenly deemed to be simply
shifting massive private sector debt into public sector debt by spending future
taxpayer money to save zombie financial institutions from bankruptcy.
This approach of saving the decrepit institutions of free-market capitalism
rather than saving the severely injured global economy will only exacerbate and
prolong the current financial crisis into a decade-long global economic
depression.
For all economies except that of the US, whose fiat currency has the unfair and
unearned advantage of being the dominant reserve currency for international
trade, excessive national debt denominated in foreign fiat currency, either
private or public, threatens the economic and political sovereignty of
independent nations.
When international trade is denominated in fiat dollars, the US essentially
imposes a global tax on all trade around the world, whether or not the US is a
direct participant in the transaction and whether or not the transaction takes
place within US jurisdiction. Foreign investment denominated in dollars, direct
or indirect, naturally goes only to projects than can earn dollars and not to
where the target nation needs them most for domestic development. Foreign
investment then serves mainly the foreign investor and only peripherally the
target nation. This is why both foreign trade and foreign investment at levels
beyond augmenting domestic development are undesirable and why nations should
seek alternative methods of economic development.
Breaking free from dollar hegemony
Dollar hegemony prevents all non-dollar economies from financing domestic
development with sovereign credit denominated in their own currencies and
forces them to rely on foreign capital denominated in dollars. Moreover, the
exporting economies are in essence shipping real wealth created by low wages
and environmental abuse to importing nations that have unearned sources for
dollars.
The dollar-denominated trade surplus earned by the exporting nations cannot be
spent in the domestic economy without first converting them to local
currencies. But such conversion will create inflation since the wealth behind
the new local currency has already been shipped to the importing nations.
Thus the exporting nations, while starved for capital, have to invest the
dollars they earn from low wages and environmental abuse back into the dollar
economy, enabling the importing economies to have more dollars to import more.
Capital from the dollar economy is in reality debt from the exporting
economies. Yet such debt will return to the lending economies as foreign
capital to invest in the export sector in a vicious circle. Dollar hegemony is
in essence the venue for a free transfer of wealth from the poor economies to
the rich economies. This free transfer of wealth hurts workers in both the poor
and rich economies by keeping wages low through cross-border wage arbitrage.
Low wages then create overcapacity unsupported by adequate demand in every
economy.
When buyers and sellers are located within the same country, with settlements
denominated in domestic currency, even with imbalance of payments, free trade
is not predatory. But when buyers are located in different countries from
sellers and trade is denominated in the buyer's fiat currency due to currency
hegemony, trade is predatory in favor of the buyer even if the balance of
payments is in favor of the seller. Essentially this is the situation with
US-China trade.
False promise of market fundamentalism
Market fundamentalism is the belief that the optimum common interest is only
achievable through a free-market equilibrium created by the effect of countless
individual decisions of all market participants each freely seeking to maximize
his/her own private gain and that such market equilibrium should not be
distorted by any collective measures in the name of the common good. It is
summed up by Margaret Thatcher's infamous declaration that there is no such
thing as society.
The fact is that, in a world of sovereign states, all economies are command
economies. The United States, the Mecca of market fundamentalism, commands its
alleged market economy in the name of national security. While the US
tirelessly advocates free trade, foreign trade is a declared instrument of US
foreign policy. President George W Bush declared that "open trade is a moral
imperative" to spread democracy around the world. The White House Council of
Economic Advisers is organizationally subservient to the National Security
Council. National-security concerns dictate trade policies the US adopts for
its economic relations with different foreign countries.
World trade today is free only to the extent of being free to support US
unilateralism. For the US imperium, the line between foreign policy and
domestic policy is disappearing to make room for global policy. The sole
superpower views the world as its oyster, and global trade is to replace
foreign trade in a global economy the rules for which are set by a World Trade
Organization dominated by the sole superpower.
Market fundamentalism as the term is generally used in macroeconomics is a key
component of neo-liberal globalization of trade, in the same sense that the
British, through Adam Smith, promoted "free trade" in the 18th-19th centuries.
The difference between Smithian free trade and today's neo-liberal market
fundamentalism is that British free trade was limited to the sphere of
political influence within the British Empire, whereas neo-liberal market
fundamentalism aims to be truly global. The Washington Consensus is a
conditionality for inclusion into global market fundamentalism through
intervention on national sovereignty over monetary and fiscal policies.
Eisuke Sakakibara, Japan's former vice minister for international finance,
widely known as Mr Yen, presented in a speech titled "The End of Market
Fundamentalism" before the Foreign Correspondent's Club in Tokyo on January 22,
1999, a coherent and wide-ranging critique of global macro-orthodoxy. His view,
that each national economic system must conform to agreed international trade
rules and regulations but need not assimilate the domestic rules and
regulations of another country, is heresy
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