The Money Printers
This weekend, I started Currency Wars: The Making of the Next Global Crisis by James Rickards. Rickards is an investment banker and is tied into the U.S. financial and defense circles so he is well positioned to understand the international monetary and financial system. It is a good read (so far) but one section really opened my eyes to not only the interconnectedness of it all but how the world financial system is a self-perpetuating mise-en-abyme of debt creation.
This is the scenario:
As part of its strategy to spur growth and especially employment (made altogether more urgent after the Tiananmen uprising in 1989), China embarked on a program whereby its abundant labour could be made available to the world. As part of this, it pegged its currency to the U.S. dollar. As of 1997, the yuan was pegged at 8.28 to the dollar and China’s GDP growth more than doubled in the 1990s.
Meanwhile, in the U.S. financial deregluation and ultra low interests rates fuelled bubblenomics. The tech bubble bursting and, later, 911 and the ensuing war on terror… coupled with Chinese growth… kept the U.S. Federal Reserve scared enough to keep rates at these low rates. As Rickards adds, Federal Reserve Chairman Alan “Greenspan’s low rates… were also a kind of intravenous drug to Wall Street.” (104) ‘Helicopter Ben’ Bernake arrived at the Fed (first as a governor but then as Greenspan’s replacement), underlining the deflation-fighting low interest rates with a plan for the printing of money to monetize government deficits. The stage was set for the housing bubble and the grand printing of money involving the U.S. Treasury, the Federal Reserve System, Wall Street and Congress. Oh yeah, and let’s not forget China and the many Western corporations taking advantage of extremely poorly paid Chinese workers (as well as the non-existent labour and environmental laws), because here is where it all gets so very interesting:
When a Chinese exporter ships goods abroad and earns dollars or euros, it must hand over those currencies to the People’s Bank of China in exchange for yuan at a rate fixed by the bank. When an exporter needs some dollars or euros to buy foreign materilas or other imports, it can get them, but the PBOC makes only enough dollars or euros available to pay for the imports and no more; the rest is kept by the bank.
The process of absorbing all the surplus dollars… produced a number of unintended consequences. The first problem was that the PBOC did not just take the surplus dollars, but rather purchased them with newly printed yuan. This meant that as the Fed printed dollars and those dollars ended up in China to purchase goods, the PBOC had to print yuan to soak up the suplus. In effect, China had outsourced its monetary policy to the Fed, and as the Fed printed more, the PBOC also printed more in order to maintain the pegged exchange rate.
The second problem was what to do with the newly acquired dollar. The PBOC needed to invest its reserves somewhere… preferring highly liquid government securities issued by the United States Treasury. (106)
And this doesn’t even get at the internal debt financing happening inside China as part of its economic expansion and domestic building spree, nor does really include the Euro Zone. Truly, the global financial system is out of control.
The triumph of global capitalism…?
I have been fighting a very persistent cold these last few days and in addition to making sure I could deliver my courses and finish course-prep for a brand new class, I have been lying in bed reading some old issues of Harpers and The Atlantic. I came across this passage in the book review section from a June 2008 issue of the Atlantic that I am sure the author wishes s/he could take back given the economic collapse that began to be noticed in August, just a couple of months later:
First published in 1944, a year in which a planned economy was the norm in democracies as well as in collectivist states, Hayek’s denunciation of state control over the means of production was breathtakingly audacious. Yet his book… turned out to be perhaps the most important intellectual salvo in the battle that not only brought about the end of Communism but also eviscerated the elements of socialism that had transformed nominally capitalist economies into mixed ones. Through such influence and its ripple effects, this seminal text may well be said to have helped foster today’s triumphant global capitalism.
The short review is of a new edition of F.A. Hayek’s The Road to Serfdom. I have no idea who F.A. Hayek is but he seems to be one in the long line of free-marketeers which would include:
- Ronnie Reagan (didn’t he single-handedly crush Communism with the power of his rhetoric? At least, that’s what all the Republican historical revisionists have been saying lately)
- the recently disgraced Alan Greenspan (the former Chairman of the U.S. Federal Reserve who was known as the ‘oracle’ by all free-marketeers who have been following him these past twenty years)
- and every and all so-called capitalist who has been crying that the market needs to be free and unregulated but who is now (as usual) running to government with wheelbarrows asking the government to fill them with (future) taxpayer dollars.
The truth is, there has probably never been a true free-market, except on the level of local business and entrepreneurship. Even the U.S. is a bastion of government intervention and wealth-spreading, except the government intervention and wealth-spreading has been in favour of corporations and the uber-wealthy. I was a little amused when, during the U.S. Presidential election, Republicans (as they usually do), accused Obama of wanting to spread the wealth. I mean, what has Bush, Clinton, Bush, Reagan, Carter, Ford, Nixon, Johnson, Kennedy, Eisenhower, Truman, etc. been doing these past decades but spreading the wealth… and usually to the wealthiest of Americans and multi-national corporations? Today, with the costs of secret projects and Iraq and Afghanistan, the U.S. spends well over 1 trillion dollars a year on defense. And the majority of that spending goes directly to a handful of the biggest corporations and military contractors. Talk about wealth re-distribution. For a country that has severely crumbling infrastructure, cannot or will not ensure that its citizens receive a basic level of health care, where there is a surprising amount of poverty and the biggest income gap ever seen, and is facing an economic crisis that looks more and more like it is the beginning of the end of the American Empire… they are still living under the Cold War illusion that they represent a completely free market-driven economy.
Time cover story on Corporate Welfare.
But… back to the Atlantic review of Hayek’s book and the rather self-delusional statement about “today’s triumphant global capitalism.” Even though it should be obvious that without some sort of government intervention, we (and by we I mean most everyone in the world) would sooner or later (as some already are) be rioting in the streets and fighting over the meager resources, there are still too many who are clinging to their twentieth-century ideologies and who, when we do manage to climb out of this financial mess, will go right back to demanding that capitalism needs to be free, that capitalists do have the public good in mind and would never endanger the rest of us, and that government has no business in the back-room deal making of the uber rich (but, of course, the guaranteed loans, subsidies, and eventual bailouts still need to be in place). So let’s all say it one more time: LONG LIVE THE CORPORATE WELFARE STATE!!!
If you want to read a good article on the excesses of Wall Street from a former insider’s perspective, look at Michael Lewis’ “The End” at Portfolio.com.