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     Apr 15, 2009
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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

Continued 1 2 3

The Complete Henry C K Liu

G-20 makes it worse
Apr 08, 2009

The G-20 piles folly on folly
Apr 04, 2009


 

 
 


 

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