G8, toxic securities, US and Chinese addictions

Milan (AsiaNews) – For the past year and half how to rid large commercial and investment banks of their toxic securities has been at the heart of the public debate. Freeing the financial sector and the world’s economy from this sort of addiction could be a way to do what the Pope asked in a letter to Italian Prime Minister Silvio Berlusconi ahead of this year’s G8 summit, namely give “ethical value” to technical solutions.

The Federal Reserve’s “methadone”

The world’s financial and economic systems are doped in many ways. According to Bloomberg’s Mark Pittman and Bob Ivry the total cost for the US federal government of the various rescue packages adopted to help the US banking and financial sector amounts to US$ 12.8 trillion.1

Five months ago the two journalists wrote that this is almost the equivalent of the whole US GDP; US$ 42,100 per US man, woman and child; 14 times the amount of currency in circulation.

In order to wean the US economy away from private sector “cocaine”, the US government has administered its own “methadone” at a huge cost to US taxpayers. The Fed has injected “fix” into the financial system in exchange of toxic securities, which include almost valueless or highly devalued equity. However, this financial “methadone” can only treat short-term situations (for the bosses of banks and financial institutions) but does not have any long lasting effects.

In the current US economic cycle no one is a winner. The US dollar is (still) the main reserve currency and its health and that of the world’s economy are closely correlated. Despite the stimulus packages of the Obama administration the US economy is still slowing down (-5.5 per cent in the first quarter) and unemployment is up (9.5 per cent of the workforce according to official figures, much worse than what the US president had promised).

Declining US real estate prices is causing fears that another wave of bankruptcies is just around the corner, involving more than the loans linked to the subprime fiasco but also loans considered safe until now.

As we at AsiaNews have already sugeested,2 leftwing Keynesian solutions have not worked any more than rightwing solutions. Pumping more money, whether “cocaine” or “methadone,” into the system will not work. All it can do is cover up the responsibility of banks and credit institutions, central banks and international financial institutions like the Bank for International Settlements (BIS), the World Bank (WB), the International Monetary Fund (IMF) and the Financial Stability Forum (FSF) as well as economists and academic scholars from various schools.

Following such a path seeking “solutions” can only guarantee ordinary people more pain. It discredits democracy and its institutions, and this is no small danger, because public opinion might end up losing trust in its institutions when they are seen as mere tools of those who control financial power.3

Confucian statism

If we only focused on this kind of “addiction”, all we would have done is produced an anti-system lecture, however fashionable that might be these days for obvious reasons. Indeed many could line up to point the finger at bankers, the United States and Western nations. 

Many others would probably like to remove the dust of time from many a statist idea, whether inspired by Confucianism-Shintoism, Islamism, post-Soviet para-Communism, left-leaning Bolivarian Third World strongman-led dirigisme, or the kind of old-fashioned anti-colonialism still lingering on in some African dictatorships 50 years after decolonisation.

Whatever the case may be, each example is somewhat unique because unlike capitalism, which is money-grabbing, gold-seeking, cosmopolitan and nationless, statism has many nations to exploit and many formulas to do the exploiting.

One of the features of modern-day statism, especially in its Confucian-Shinto version, is mercantilism, whose focus is on the accumulation of economic assets or capital through a positive balance of trade with other nations. This is the case of many Asian nations, especially Japan and China. For our purpose here, we shall look at China, because of its importance, something which AsiaNews has often done before.4

On 1 July of this year the World Bank released data updated to 31 December 2008.5 They show that mainland China’s GDP stood at US$ 4.879 trillion against a world GDP of US$ 57.412 trillion. Hence China’s GDP is 8.5 per cent of the world’s total. By comparison, China’s GDP at Purchasing Power Parity (PPP) is equal to US$ 7.903 trillion against a world GDP at PPP of US$ 69.697 trillion. This means that China’s GDP in terms of PPP is equal to 11.34 of the world’s PPP-measured GDP.6

For this reason, at the current exchange rate, the US dollar, which is traded at 6.833 Yuan RMB, is still significantly undervalued since it is only 74.95 per cent of its theoretical worth when measured against the PPP. To be on par, the yuan should gain 33.43 per cent, from where it stands now against the dollar, and be traded at 5,121 Yuan RMB.

Over the past 12 months the Chinese currency has gained in value against the dollar compared to a year ago. Given what happened last year this readjustment is not amazing. However, despite the sharp drop in its exports China has continued to accumulate economic assets and capital through a positive balance of trade.

China’s persistent reliance on a highly positive trade balance and limited domestic consumption is another form of “addiction” that mirrors the unchecked printing of money by the US Federal Reserve

In the yuan’s case China’s currency has been undervalued and by a lot for a long time, since 1 January 1994. The artificial exchange rate played a role in the 1998 crisis in Asia.

It does not take much to see that the underlying tensions in China’s (and the world’s) economy should not have been allowed to persist for as long they have as a result of the country’s export-driven growth.

In retrospect it might be easy for some to say ‘I told you so’, but AsiaNews did raise such issues in the past five years, but was anyone listening?

Even back in January since no one was making any change to the roadmap we expected “a violent and dangerous rebalancing act of the system of international exchange”.

Now things do seem to be changing course, but changes to the development model (if that is what Chinese leaders are doing, and we are not sure of that) might be too little, too late.

Dangers and solutions

Recent press reports show how dangerous redressing the situation can be.7  An addict suffering from abstinence does constitute a great danger. If this is the case, how can we say about two addicts like the United States and China who have nukes!

We have often said that globalisation developed on the basis of an unbalanced economic model. So far it has survived precisely thanks to grip by the Fed on the issuance of the world’s reserve currency on one side  and to non-tariff barriers on the other side.

Yet it makes little sense to call for greater and more stringer regulations, for greater and quicker globalisation, for greater and better “equality”, uniformity and standardisation. This is what led us into this mess in the first place; how can it pull us out?

What is needed instead, first and foremost, is a greater sense of responsibility at the individual as well as collective levels. What is needed is a greater sense of group cohesion, trust, flexibility, self-sacrifice, readiness and purpose. Greater creativity is also a must.

However, if those who are responsible for this crisis, the current financial and political oligarchies that rule much of the world, do not pay a price, precious little of what has emerged from modernity and post-modernity in the past three or four centuries will survive. Some people might not have realised this yet, but this crisis is not like other crises; it is one of those that come at least every 300 or 400 years.

[1] See Mark Pittman and Bob Ivry, “Financial Rescue Nears GDP as Pledges Top .8 Trillion (Update1),” Bloomberg, 9 February 2009.

[2] See Maurizio d’Orlando, “The way out of the crisis is neither Left nor Right,” AsiaNews, 25 November 2008.

[3] See Ibid., “Paulson plan: useless and harmful to democracy,” in AsiaNews, 6 October 2008.

[4] See Ibid., “Chinese yuan set to replace dollar,” in AsiaNews, 3 January 2009.

[5] Thus, we can also update what we have published before. See Ibid. “Economic crisis: US, China and the coming monetary storm,” AsiaNews, 9 December 2008.

[6] Calculation by author based on data released by World Bank (1 July 2009).

[7] In an editorial published yesterday, AsiaNews editor, we have seen how the China is a real powder keg that could explode. See Bernardo Cervellera, “Uygurs, Tibetans, Catholics, Protestants; the Chinese powder keg,” in AsiaNews, 6 July 2009.