Monday, March 23, 2009

Economics and Power - The Loss of US Power

Regular readers will know that I avoid discussion of wider political issues with regards to the economic crisis, but events are suggesting that the two are becoming ever more closely entwined. In particular, I have long been concerned at the appearance of an aggressive nationalist agenda in China, and wrote an article expressing my concerns a long while ago:
What is very clear is that China, and the Chinese government, are actively pursuing a policy of unfair trade at home and abroad. Quite simply, they are using economics as a tool of power rather than just enrichment.
Later in the same post, I discussed an article in which it was apparent that China was intervening to prop up the $US:
'China has resorted to stealth intervention in the currency markets to amass US dollars, using indirect means to hold down the yuan and ease the pain for its struggling exporters as the global slowdown engulfs the economy...'
My comment on the news was as follows:
There are many motivations that could be given to justify this action, some of which are more forgiving than others. It might be argued by apologists for China that they are doing this to protect the value of the $trillion+ reserves of $US. However, such a move can only delay the day of reckoning for the $US, so I do not believe that this would be why the policy is being enacted. Furthermore, it is just multiplying the problem of increasing the holdings of a currency that is structurally weak, meaning that the problem that it is trying to solve would just be getting more acute. However, I agree with the article that China is using unfair means to subsidise exports.
I later added that China had already made indirect threats to destroy the $US:
On a related subject, in an article a while ago the Telegraph, it was reported that senior Chinese officials were willing to use dollar sales as a way of exerting power over the US. In short, the Chinese have the power to destroy the $US by selling the currency, and therefore have huge economic power over the US. The Chinese government later denied the policy, but those familiar with Chinese culture will know that using such methods of presenting a threat is not unusual.
You may wish to read the full post (including some of the notes in which I respond to some reader comments) before continuing with this post. It outlines some of the aggressive 'mercantilist' policy pursued by China. You may also wish to see my article on China from July of last year, in which I outlined/predicted my view of the future of the Chinese economy through the crisis (a less worrying post). The reason I am returning to the subject is that I recently dug out a report that suggests that Chinese Banking Regulators were aware over two years ago that the US was going to suffer a financial crisis:
The Xinhua News Agency has a headline news story about a recent statement by Liu Ming-kang, chairman of the China Banking Regulatory Commission, claiming that the Commission anticipated the current financial crisis over two years ago.
The report goes on to say:
“With almost everyone immersed in the excitement of (financial) innovation and large-scale liquidity for the past two or three years, the China Banking Regulatory Commission long ago predicted that the current financial crisis was soon to occur, as well as the fact that its occurrence was inevitable. We gave early warnings. In June
2006, at a symposium jointly held in Beijing by the Bank of Communications and HSBC, we warned the industry that they must guard against the liquidity risks caused by inappropriate financial innovation - derivative products in particular. At the same time, the CBRC adopted quasi-periodic adjustment and regulatory counter-measures, and warned financial institutions in the Chinese banking industry on numerous occasions of risk, demanding that they adopt strict preventative measures during this period of constant economic growth.”
That China could see the disaster coming but still continued to invest in an economy that it knew was going to suffer major trauma is most unusual. Why did they seek to prop up the $US, and why increase their reserves?

I observed some time ago that the UK suddenly, for no clear reason, changed the diplomatic status of Tibet to a status that was more to China's liking. I wrote the following:
Another indication of the state of desperation is the official UK change of status of Tibet to a status that appeases China. As one article points out, a cynical interpretation of such an action would be that the UK has 'sold' the status of Tibet - in other words this change of policy has been exchanged for a better prospect of continuing Chinese credit for the UK (possibly indirectly by ensuring that the IMF is able to fund a UK bailout).
We now have a fascinating article from the Times of India, in which they detail the many ways in which China is flexing economic muscles:
The financial crisis is proving to be a major diplomatic opportunity for China on three levels: placating a desperate United States with purchases of its treasury bonds, buy accolades from poor nations with promises of more funds and extend the international influence of the Renminbi.
The article goes on to detail the many ways in which China is using economic weight to create influence more widely, and I therefore recommend a full reading of the article. In a recent trawl through various articles I also found that China announced a new initiative in Asia to use the RMB for settlement of trading with several neighbours, in a move which suggests that the Chinese government is looking to initiate a reserve currency status for the RMB. The timing of the announcement was December 24th 2008, a time when most Western agencies would not be paying attention (sorry, could not find the original Reuters article about this, so the link is to a less reputable source). The timing of the announcement at Christmas is a good way to bury a story for Western analysts and politicians.

On top of all this, we now have a rash of news stories (e.g. here) about Chinese proposals to develop an IMF based reserve currency, and even more discussion of the growing importance of the RMB (as in the Times of India article), including as a potential reserve currency. I recently speculated on the ways in which China might utilise the economic crisis, and a forthcoming $US crisis to introduce the RMB as a replacement for the $US as the world reserve currency:
Inevitably, such a large fall/collapse in the $US will see the undermining of the status of the $US as a reserve currency. The Euro is now in a position of such instability that it will not have the potential to act as a replacement. The Japanese Yen might have some potential as a replacement, but the RMB will be better positioned as the strongest contender. In particular, the Japanese will likely act to rescue the $US during the crisis, but will fail to stem the tide, and undermine the credibility of/weaken the Yen in the process.

If China was to follow such a course, it would put itself in the position of being the major world economic power, or would do so at least in principle.
What we have been witnessing of late is a game of cat and mouse, in which China both warns the US against irresponsibility in the management of their economy, whilst at the same time offering reassuring noises about continued purchases of treasuries. Such purchases are the only serious remaining lifeline for the US government to continue with the various bailouts and stimuli. In the meantime, the US government has started quantitative easing, including the purchase of treasuries. The US looks like it is increasingly concerned that the previous and main sources of financing government debt are about to dry up.

Then we come to the crunch.

China appears to be testing its power in the disputed region of the South China Sea, in particular the area surrounding the Spratly Islands. After unarmed clashes with a US ship (probably a spy ship), the tensions are rising:

A day later, Admiral Timothy Keating, head of the U.S. Pacific Command, sounded a strong alarm, calling the incident “a troubling indicator” that China isn’t “willing to abide by acceptable standards of behavior or rules of the road.” The country’s “behavior as a responsible stakeholder has yet to be consistently demonstrated,” he told the Senate Armed Services Committee.

Some of China’s neighbors may be similarly concerned. On March 11, Xinhua News Agency reported that China dispatched a 4,450-ton fisheries patrol boat to protect its interests in the South China Sea, which include the disputed -- and potentially oil-rich -- Spratly Islands. More vessels may be added to the mission, the state-run China Daily newspaper reported.

Whilst some analysts point to a similar incident at the start of the Bush presidency, I am not convinced that this is similar. There are strong economic interests at stake in the Spratly region, and the action of the Chinese government does not appear to be comparable.

At this stage, I think that you may be guessing where this is all leading. A good starting point is to ask why China kept pouring funding into the US whilst being able to see the coming economic storm? Why did they keep lending ever more money into an increasingly precarious economy? Why are they now courting countries with the offer of the RMB as a new stable currency for exchange? What are the private demands being made of the US government for continued purchases of treasuries? We can all remember the recent Clinton visit to China, in which she offered her thanks for China's continuing purchase of treasuries....we do not know the subjects of private discussion.

Sceptics might point to the Chinese proposal for an IMF reserve currency, but it is difficult to see how this might work. The proposal might be interpreted as a smoke screen whilst they establish the RMB as the replacement for the $US as the world reserve currency?

It is possible to make a summary from the more recent news and some of the news identified in older posts. If we take the activity in aggregate, it looks very much like a plan for China to extract the maximum out of their new found economic power. They will play the US as far as they can, extract as many concessions as possible - use the power to show that they are now the country with the real influence. As soon as the US is finally in a corner and comes out to confront China, they will simply floor the $US. At that point, as I discussed in my speculative post, they will go on a shopping trip, and pick up all the technologies, all the companies that they need to take their place at the front of the world economy, and as the new economic power in the world:

With the US in shock, China can then use the remaining holdings of $US to go on a shopping spree into the US. In particular, China can offer to enter the markets with an offer of salvation - but at the cost of unopposed access to purchase the companies that might provide a leap into the high added value industries with technology or specialist skills. They will not put it this way but, in a climate of economic panic, they will be in a position of calling the shots, as the only significant player able to halt the slide. As a result of the panic, they will be able to buy even good companies at fire sale prices. As such, they will be able to use whatever $US assets they still hold to take a major leap up into added value industries.

I have worried for a long time about the rise of China, and remember an interview with a Chinese admiral (sorry, no link, it was about two years ago and I can not find the interview on the BBC website), who went 'off message' with a discourse that appeared to contradict the official line of 'peaceful rise'. I have avoided anything more than some suggestions of concern about the economics of China on this blog, but see a clear pattern in the emergence of China. It is not a friendly rise. I do not think there is any master plan in the actions, but rather opportunistic exploitation of situations that have arisen. The US has watched on as their economic power has withered. In my earlier posts, I have mentioned that the US (and the world) needed to face down China's threat to the $US, to prevent the situation deteriorating.

The situation has now deteriorated....

When I made my post speculating how China might deal with the coming $US crisis, I emphasised that the post was speculation. As I look at the pattern of China's actions over the last few years, I am concerned that I am no longer speculating but identifying a pattern. I strongly recommend that you take a look at my previous posts, which outline more detail on Chinese policy.

However, I am trying to piece together a picture from many sources of information, and it is quite possible that my interpretation is wrong. It is quite possible that China is acting without any other intention than trying to navigate through each new stage of the crisis to minimise the impact upon their own situation. This is possible, but.....

Note 1: I have several times wanted to join in the excellent debate in the comments section of my last post, but have been distracted by this post. It has been interesting to follow the elements of the debate, and a shame I have not had time to throw in my own contribution. In particular the debate started by Lord Keynes is now too involved for anything but a long answer, and I can only put so much time in....

Note 2: MattinShanghai - excellent link to Rolling Stone. A very good read, but with some caveats about the comments on regulation. The issue of Glass-Steagall Act keeps popping up as one of the problems in the crisis, and I hope to address this question at some point. Matt - did you note the nobleman analogy? Nice to see that others have come up with a similar analogy to the aristocrat which I have used.

Note 3: Lemming, yes, the US bailouts will be used (to a large extent) to support returns to overseas depositors (not the stereotypical little old ladies)...I have no reason to think that the situation is different from that in the UK. You may want to read the link above which, although it does not answer your question, sets and interesting context.

Boing: A very quick reply. One of the key points being made in this blog is that the stimuli simply can not work as they seek to replace consumer over-spending with government over-spending. Over-spending is what got us into the trouble. As for the bailouts, these are simply trying to replace overseas direct lending to banks with indirect lending from overseas investors, but directed through government. Alternatively, they print money to make up for the disappearing overseas investors. And as Lemming mentions (see above) in the comments section of the last post, much of that money is flowing straight out of the banks into the hands of overseas banks/institutions/individuals.....




45 comments:

  1. Note: Sorry, thanks for the comments on the deflation scare. I will probably address this soon as a complete post. Another post on the 'to do list'...

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  2. I have just found this article in the Economist magazine:

    http://www.economist.com/world/asia/displaystory.cfm?story_id=13326082

    'In America, the article suggested, China should buy up businesses in order to acquire sophisticated know-how. If the American government balks at this, “the Chinese government absolutely can use its American dollar savings as a bargaining chip to force the American government to agree to China’s acquisitions.” Diplomats say threats have even been heard from lower-ranking Chinese officials that China might sell off American Treasury bills if Washington angers China on Tibet; a meeting between Mr Obama and the Dalai Lama, for example, could be a tripwire. Few believe that China would actually risk such a self-damaging tactic, but the airing of views like this suggests that some officials are acquiring more swagger. China’s decision on March 18th to use anti-monopoly legislation to block Coca-Cola’s $2.4 billion bid for Huiyuan, a Chinese juice manufacturer, will be seen as evidence of this by some in America (see article).'

    Interesting reading...but still believes that China will take a relatively modest approach.....

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  3. What 'deflation scare'!?

    The rising price of imported goods - particularly fruit, vegetables and toys - has caused an unexpected rise in one measure of UK inflation.

    http://news.bbc.co.uk/1/hi/business/7959564.stm

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  4. Mark,

    Thanks for a good post and the two China links you gave. To briefly comment on some of the points you made:

    A) I don't think there is some Chinese "grand plan" to take over the world, at least in the short-medium term. They are traditionally very inward looking, and there are enough problems in their own yard to keep this focus for the foreseeable future.

    B) I do think that the Chinese are playing a "long game", and will opportunistically exploit any advantages which come their way. One of the advantages they have in this game is they fully understand us, but we (or at least the idiots making policy) do not understand them.

    C) Most of their policies and the way they "interpret" and enforce laws (e.g. intellectual property) are explicable with reference to perceived long term national strategic interests (I wish we were so lucky). The narrow profit motive, which has driven the West into the ground is of secondary or even tertiary significance in their decision making. I'm sure they could weather a total collapse of their Treasury holdings.

    D) The venture capitalist who invested in my previous company repeated ad nauseam "The Golden Rule" - he who has the gold rules. Our (Europe and the US) preeminent position in world affairs in the last 200 years or so was not due to our superior racial characteristics, "values", "democracy", our sense of "fair play" or even the "invisible hand". It was simply due to our having superior gunboats, science, technology and resulting economic and military clout. When we lose those, we lose the ability to shape events, and we (or some groups in our countries) have chosen to relinquish these advantages (for short term money gain). This is what is happening now. Cannot blame the Chinese for taking advantage of the lunacy which caused our collapse.

    E) There is nothing we can do about Tibet, Falun Gong, human rights and other pet issues of our lunatic fringe (and the opportunistic politicians who pander to it). Beggars are in no position to moralize.

    F) How's that for cynicism??

    Although what you write may come as a rude shock to many in the West, but what China is and the path it has chosen was plain to see decades ago, to anyone who cared to look. It's called the "Confucian" model of development and has nothing to do with "free trade", "human rights", "western values", "democracy" or even Adam Smith. The model was first pioneered by the Japanese, and later copied by other East Asians (Korea, Taiwan and the PRC).

    This sober look at the realities of East Asian economies (or rather "political economies") has met resistance from vested interests in the West and active lobbying efforts (esp. japanese) and is almost unknown in the mainstream. I strongly recommend Eamonn Fingelton. During my last visit to London I tried to find his books (esp. the 2008 book "In the Jaws of the Dragon"). No success. But check out fragments of his books and his many articles on:

    http://www.unsustainable.org/index.asp?navID=1

    These will give you answers to pretty much all the questions you raised.

    Best Regards

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  5. Just passing through the Bloomberg screen as I read your post:

    "China 'super currency' call may show dollar concern, leadership ambition"

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  6. Thanks for the reply, Cyncius.

    But are you sure it can't work in the sense of 'can't evade a full-on, thirties-style depression'? And if so, why specifically?

    That is the issue. If it can, then it might well be worth even many years of low-level recession or stagnancy while we pay off the debt and return to cruder, cheaper forms of production.

    Anyone else feel free to reply, as I'm sure Cynicus has a lot on his plate.

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  7. Dear Mark, a good book about China (and it's plans to the rest of the world) is from James Kynge and is called "China shakes the world". Very interesting reading

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  8. Sorry I know this is off topic today but in my lunch break today walking past The Old Lady on my way to Moorgate I just couldn't help screaming (not literally - I'd be arrested) in the direction of the Bank of England for their breathtakingly crass co-opting of inflation statistics for Gordon Brown's political utopia of eternally-ascending house prices (which as you might have observed, has fallen into disarray of late).

    When the Bank of England made the very British decision earlier this month to cut interest rates in the face of rising inflation and then made the very Zimbabwean decision to print more money to buy government debt, you would think they might at least have made sure that the inflation statistics backed up their case.

    Instead we see that the Bank appears to have temporarily 'switched' their target to RPI because it suits their case for printing money and lowering interest rates better than the pesky official CPI measure they're meant to be targeting which inconveniently is rising. Oh and to top it off, the bank has had to write to the Chancellor to explain why inflation is above target - again.

    The whole letter high inflation writing thing has become a bit of a ceremonial farce really - a bit like the opening of parliament ceremony when the Black Rod is refused entry, but then allowed to enter the House. No-one actually believes it serves any purpose other than to symbolize a notion long since dispensed with. In the same way, no-one actually believes that Mervyn King is answering for his failure to control inflation to the Chancellor - it's rendering Bank of England independence as nothing more than a symoblic joke!

    And the symoblic joke is on young people saving to buy an overpriced house, and pensioners sitting in cold and damp houses ekeing out a living on diminished and heavily-taxed savings returns.

    Indeed, shortly after cutting rates again, you might also have thought the Bank wouldn't be crass enough to start fiddling around with the CPI basket to make it say what they want in the same month that it starts to say the wrong thing.

    For goodness' sake! They're not even bothering to do it behind a veil of half convincing 'independence' from the government any more. It's like when Dorothy discovers the Wizard behind the curtain, and all the Wizard can think of to defend himself is to tell her to step away and stop interfering.

    The Monetary policy Committee's inflation reporting handbook must read "If the inflation stats say the wrong thing, scribble them out, do the sums again with different numbers and talk to the ONS about the inflation basket."

    It's almost as bad as the away team having a word with the ref at half time, taking the FIFA rule book off him, and then jotting a rule in the margin saying "the ball can only travel in the home team's direction". The referee (that's the media in my increasingly twisted and overstretched metaphor) receives their newly abridged version of the FIFA rules, shrugs and says "Righto, play on!".

    You can only despair and wonder how the BoE MPC and Labour government have gotten away with continually egging on the housing bubble at everyone else's expense for so long ...

    Sorry that's all I'm going to say today. I'm off to lie down for a bit while I seethe with disgust at the UK's corrpution of economic policy and tell myself "no wonder the UK's bankrupt with monkeys like these in charge".

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  9. More china pressure.
    http://news.bbc.co.uk/2/hi/africa/7960968.stm

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  10. Morani: Thanks for the book tip. I have a copy here at home. I would also recommend it to others.

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  11. Thanks for the post, CE, which was as good a read as ever. Sorry I'm not commenting as much lately, but its getting close to campaign season and I've got mountains to do.

    One question though: If China uses a collapsed dollar to go on a 'spending spree', I suspect we might see the U.S. government move to block it with some kind of new (or misused old) legislation.

    After all, American pundits are going to be all over it, screaming about what's going on. In some places they'd grab a financial lifeline with both hands, but I wonder if America might go the other way to avoid losing their best stuff to an overseas rival en masse?

    If that were the case, I wonder what the outcome would be?

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  12. It looks as if China may be already taking on the US in innovation, see http://www.telegraph.co.uk/motoring/5044697/China-takes-on-America-in-electric-car-race.html

    The key point here is not anything to do with 'saving the planet', but China's enthusiastic pursuit of advanced technology.

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  13. What a nice conversation here.

    Just answer me one thing (not you CE, I'm talking to myself)

    If the toxic waste is bigger than the proposed amount of stimulus...

    What does the first auctions of that monster, really worth?

    What would you try to sell first?

    Zed

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  14. @MattInShanghai,

    Well, at least I feel nice that our friend Cynicus has a better cynic to advice him. Some fast training lessons in cynicism at politics, wealth, power and corruption would be appropriate.

    My time in this blog is over.

    PS. Lord Keynes, learn understanding of your math.
    If in 2009, one US citizen, buys the house of another US citizen for 20 trillion $, while all other US citizens starve to death, we have some interesting numbers.

    US GDP rises to 20 trillion. GDP per capita goes to 10 trillion. Wow, that was a good policy.

    Disclaimer: I know I move to the "crazy" limit but if you live in a society that makes a living on a "margin up", sooner or later you are going to meet a limit to infinity.

    And that concludes my stay here. Good luck CE and everyone else.

    Zed

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  15. The Chinese are definitely in it for the long haul but they do not have some sort of masterplan for global domination. All they care about is their people, that is it. To ensure a modest economical well-being they put their country first. They do not care about anything that is unrelated to China, if something is of importance to China they will put their full weight behind it. It was nice while it lasted for the West but the delusion that we could all sell ourselves beer and live in prosperity was just that, a delusion.
    The Chinese will not be the economical superpower because they had a plan to be that, the Chinese will be the economical superpower because the West lost its way... and industries.
    I am European but can speak Chinese and will move over to Asia once I have graduated, I will definitely not pay for any banker bailouts. Lets face it, it is over.

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  16. MattInShanghai wrote:
    "Our (Europe and the US) preeminent position in world affairs in the last 200 years or so was not due to our superior racial characteristics, "values", "democracy", our sense of "fair play" or even the "invisible hand". It was simply due to our having superior gunboats, science, technology and resulting economic and military clout."

    So where did all that science and military tech come from? Did it just fall out of the sky in the places european caucasians happen to be?

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  17. Anonymous 6:56 wrote:
    "The Chinese are definitely in it for the long haul but they do not have some sort of masterplan for global domination."

    How do you know? Are you close friends with all the Chinese top brass then?

    "I am European but can speak Chinese and will move over to Asia once I have graduated"

    If the SHTF on an international scale, what makes you think they're going to want you?

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  18. US and UK bond auctions flagging.

    A record $34 billion five-year note auction on Wednesday was met with what traders described as subpar demand, with the government forced to offer a higher yield to attract buyers. Following the auction, bonds added to their early losses, slipping to session lows.

    http://www.reuters.com/article/marketsNews/idUSN2529481520090325

    The UK Treasury has failed to sell all its government bonds in an auction for the first time since 2002.

    It wanted to sell £1.75bn of 40-year bonds, but investors only bid for £1.63bn of the debt, the Debt Management Office said.

    http://news.bbc.co.uk/1/hi/business/7963815.stm

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  19. You can call me "Dave in Tianjin", like "Matt in Shanghai" also an expat in the "People's Republic."

    Matt pretty much summed it up. I'll add a postscript: one agency of the Chinese government said they saw all this coming. Not surprising. Other agencies and powers played along with the status quo hoping for the best.
    You don't need a conspiracy theory
    to explain what they've done. And any direct knowledge of how the government operates here and the way the people think will lead to the conclusion that these masters of the slow shuffle and obfuscation just went with the flow because too many at the top were getting paper rich on dollars and had a stake in the game they couldn't abandon.

    Sure, the PRC government thinks of China first. Who are they supposed to think about? And since when have western nations given a fig for these people, let alone the sovereignty of their state?

    They make an outrageous claim over the South China Sea and send a few fishing boats against an American battle fleet. Shiver me timbers! I'm quaking in fear before a nation where the per capita income is less than $2,000 a year.

    This is a poor country and if I may venture an opinion, a fairly corrupt one. There are islands of enlightenment and hi tech. But let's be honest. What's frightening is the sheer weight of their numbers and the "alien" quality of their lives.

    Rather than rattling sabers we should be seriously thinking about restoring some equity in the world.
    The bailouts which Cynicus decries are parcel of a world order which has enshrined unequal power and wealth relationships. The ordinary
    worker in China has given his sweat to his masters in Beijing and by extension, the Credit Lords in the West. And now that the world order is coming unraveled you want that Chinese guy and his government to roll over and accept the worthlessness of the dollars they accumulated through suffering and sweat. Really, your post is sickening.

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  20. Hi Cynicus,

    I'm sure you might be aware of this already; The government has failed to raise enough cash for UK Gilts (40 year period - which is a pretty long time and worrying).

    http://news.bbc.co.uk/1/hi/business/7963815.stm

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  21. @ Alf

    "So where did all that science and military tech come from? Did it just fall out of the sky in the places european caucasians happen to be?"

    Yes, pretty much that's what happened. But we squandered this advantage, by having our industrial and technological base destroyed, and transferred to China and other places by parasitic finance capitalism in search of a quick buck.

    "How do you know? Are you close friends with all the Chinese top brass then?"

    (This is a question for Anonymous, but since I raised this point also, I might as well answer it).

    If the "Chinese top brass" had plans for "world domination", you would think they would tell someone about it. After all, they would need to have at least some of their people "on message". In fact, to my knowledge every expansionist power in history has been quite explicit about its goals. Think imperial and Nazi Germany, imperial Japan, the soviets, and in recent times, the good ole US of A (PNAC, foreign policy documents, etc.). But from the CCP - not a squeak. Regardless of the "cultural argument", why on earth would someone want to stick up a poker game in which they are by far the biggest winner? Do you really think that the PRC would go toe-to-toe against the strategic forces of the US? Anyway 'nuff said.

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  22. The author of the Rolling Stone article was interviewed about it yesterday by Amy Goodman on "Democracy Now" . You can read a transcript of the interview on their website (democracynow.org)

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  23. Every now and then an empire will fall and another will arise. This happened with all past empires and now we face a waiting situation with the Chinese and the Indians asserting itself into the geopolitical sphere.

    Where would the Americans be at that point? It remains to be seen where the American would find themselves be once the Chinese start to make moves into the real politik game. What about the Indians? Would we find ourselves facing a situation with 2 upcoming superpowers in the arena of geopolitics? Hmmm....this is rather tricky.

    There is ofcourse the Japanese and let's not forget that they would be concerned of an awakened dragon right on their doorstep. Maybe the question should be asked of where would the Americans be once China and India begin to asset itself.

    Then again, the US might have its first Asian American President. Again the ball game might change and we might that American may find itself playing the political pivot game between India and China. This sounds familiar coming from the fact that China played the ball with the US against the former USSR back in the 20th century.

    Regime change is always interesting innit? Then again regime changes always evolve in violent fashion, look at the World Wars in the 20th century.

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  24. MattInShanghai wrote:
    "Yes, pretty much that's what happened. But we squandered this advantage,"

    !!!

    So you REALLY DO believe science and technology just falls out of the sky then. Hilarious.

    "If the "Chinese top brass" had plans for "world domination", you would think they would tell someone about it."

    No I don't think they would, not the public at large anyway. I'm not saying the Chinese are aiming to 'dominate the world', but if that was the plan I would expect them to keep fairly schtum about it being as the other would-be attempts you mentioned failed.

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  25. @Alf

    So where did all that science and military tech come from? Did it just fall out of the sky in the places european caucasians happen to be?

    Read Guns, Germ and Steel by Jared Diamond for a full answer, but a whole combination of factors, some religious, weather, some key technologies, how close Europeans are as nation states leading to constant conflict, blah, blah, blah

    The idea that we are racially blessed is hilarious. The Islamic countries were miles ahead of us on mathematics for years, the Chinese on almost everything else for years. The Egyptians were the epitomy of civilisation, building the most awe-inspiring monuments, whilst farming and architecture in Britain was incredibly basic - that'll be technologically superior black people then, for hundreds and hundreds of years.

    This is hardly the forum for long discussions on the benefits or otherwise of colonialism but read some history before reaching for simple 1+1=2 solutions.

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  26. Have I said something? You don't seem to publish my comments. Does this mean we are getting pre-selected comments only?

    ReplyDelete
  27. Fiunary: All comments are published excepting those that are spam etc. The comments are not published immediately, as I need to check them for spam before publishing, so I am wondering whether your concern has arisen as a result of the delay.

    If you have had a problem with publishing, let me know and I will try to ensure that whatever has not been published is included. Your comment is the second time I have had a similar concern, so I think that there may be an occasional bug in the blogger system.

    Please accept my apologies if something has gone wrong. I chose blogger as a service because it is well established but it does appear to have a few quirks. I am sorry that you have been inconvenienced, but hope that this will not prevent you from continuing to comment.

    If all else fails, try the email address given at the top of the comments section, and I will ensure that your comments are published.

    As a note, I publish everything outside of spam, even if highly critical of my own posts.

    ReplyDelete
  28. IrrationalRationalityMarch 26, 2009 at 6:07 PM

    Hello all - can anyone suggest why this story has not been higher up the agenda? Neither the BBC nor Sky mention it! Is this not the most visible political intervention of the Queen's reign?

    What does this say about the state of the national purse? And, perhaps Her Majesty's frustration at Mr. Brown's reluctance to answer certain questions?

    Queen invites Mervyn King, Bank of England Governor, to palace."

    ReplyDelete
  29. Here it is again ... On the face of it the West has lost power but the arguments only really hold if there is a maintenance of the status quo. The whole financial system is a big mirage which is coming up against some big obstacles. You discuss the issue of resources in earlier blogs. Inflationary pressure due to resource shortages (energy, food, metals etc) were almost certainly part of the trigger of the current crisis. Once we get any sort of recovery, these will rapidly come to the fore again and cause another downturn. The reality is that the whole consumption paradigm we have been living in (at least since the advent of the industrial revolution) is coming to an end. Add to this population growth, environmental degradation, global warming etc and the picture is not pretty. The international financial system and free trade will not survive these changes.

    Put this in the context of the excellent points made by MattInShanghai and we have all the makings of conflict. China’s situation may look good on paper but it has a huge population most of which is living at a subsistence level. It needs to keep economic growth going to maintain social cohesion. It is suffering from water shortages, pollution, loss of arable land. Geographically, it will be an early victim of global warming. The path it has chosen requires huge resource inputs from outside the country. Once the financial rules begin to break down (and China pulling the plug of the USD might well trigger this) there is going to be a massive scramble to control resources (China is working hard at this already).

    The West’s interests lie in thinking long term, coveting its resources and getting out of the clutches of the short termers who have dominated. We need to recognise our self interest and that other player’s play by different rules. The likelihood is that this will be an ugly process. In an ideal world we would all come together to tackle the “problematique” which threatens to swamp us.

    ReplyDelete
  30. "
    The idea that we are racially blessed is hilarious."

    I can't understand why any white people would think this. While the Chinese were creating the Terracotta army and writing down complex philosophy over 2000 years ago, white northern europeans were still a primative race running around the forests.

    ReplyDelete
  31. Anonymous said:
    "While the Chinese were creating the Terracotta army and writing down complex philosophy over 2000 years ago, white northern europeans were still a primative race running around the forests."

    Francis Pryor might disagree with you.

    ReplyDelete
  32. Have just read "the ascent of money" after you mentioned it. Found it dissapointing. It seems like he he fit the stories to conclusions he had previously made, rather than it being genuine exploration. He has his ideology, but tries to pass the book off as an independnet history. Very poor logical thinking at times: his dismissal of "the economic hitman" because Ecuador's ecoomy is too small to warrent murder is pathetic. A far inferior work to Nassim Taleb's last two - which he mentions.

    I thought you got the aristocrat idea from Peter Schiff's book where the US economy is likened to a "philandering playboy".

    Still awaiting the collapse of the dollar :)

    ReplyDelete
  33. Mark, I have a challenge for you:

    Can you design a system of capitalism which doesn't rely on economic growth to function? (Or is this simply a contradiction in terms?)

    Is it possible to make a fully functioning economy (with concepts such as 'saving') which can handle, for example, a declining population?

    And here's a question regarding the free markets:

    Supposing a poor country with a desperate need for water suddenly discovers an underground supply which could meet all its needs. At significant cost the government could build the necessary pumping and distribution equipment to supply it to the people for free. The government might feel that supplying ample water to its people is an 'investment'.

    Or, at an actual profit to the country, it could sell the rights to the water to the highest bidder (without any restrictions which might distort the correct functioning of free market mechanisms). The purchaser could then sell a restricted supply of water to the people, setting a price that they could just afford, and use the remainder for some other purpose such as a very profitable Waterworld theme park for Americans.

    Which of these scenarios would Adam Smith approve of?

    ReplyDelete
  34. @Lemming

    Very good question! To understand the answer you need to be aware of the shift that occurred in economic thinking between the "classical" school of A. Smith (Ricardo, J.S. Mill, Marx, H. George) and the "neoclassicals" (Menger, Jevons, Walras, Marshall) regarding the category of "value".

    The classical economists were concerned with "wealth" - its production, distribution and exchange. They called their science "political economy", and it dealt with a much wider range of issues than modern "economics".

    The framework they adopted is called the "labour theory of value". In short, things are valuable in proportion to the amount of human work that needs to be expended in their production. So to give a simple example, if it takes (on average) five times as much effort to catch a deer as it does to catch a rabbit, then the value of a deer will be equal to the value of five rabbits.

    Now, while the labour theory of value seems to capture much of the "essence" of what we understand by "wealth", it suffers from numerous practical problems. Particularly problematic is the relation of "value" to "price". In principle, the "price" of a commodity should closely track its "value", but in reality that is not what happens. Prices seem to be set mostly by the law of supply and demand, not by the "intrinsic" values of commodities. Secondly, some things (e.g. virgin forests) can command very high prices, even though strictly speaking they have no "value", since no human effort was expended in producing" them. All the classical economists struggled with these difficulties, with varying degrees of success.

    The neoclassicals (starting with the marginalist school) decided that the classical concept of "value" was redundant. They introduced another category called "economic value". Something is an "economic value" if it can be exchanged for something different. In other words, an economic value has two properties:

    1. It has some utility
    2. It is scarce

    This greatly simplified matters, and opened the door to the now familiar microeconomic mathematical framework of equilibrium, supply/demand curves, etc. etc. Unfortunately, by overly simplifying matters, they threw the baby out with the bathwater...

    This is because the new "scientific" concept of "economic value" no longer corresponds to our intuitive concept of wealth. To see why this is so, look at the two features of "economic value" listed above. It is obvious that "economic value" can be created by:

    A) Increasing scarcity.
    B) Creating new needs.

    So enclosing public lands, limiting access to water etc. immediately "creates" new economic values (or as the proponents of such actions would term it "wealth"). Same goes for the creation of needs - e.g. addicting people to new drugs, brainwashing them with advertising campaigns etc. Now, to common sense, such actions do not benefit communities at all, i.e. they do not contribute to "community wealth", but according to standard economic teaching they **do** create "wealth" and increase GDP (remember that GDP only measures the amount of economic activity, **not** wealth creation)

    So to answer your question, it is obvious what the IMF would recommend: sell the water rights to the highest bidder, and let him squeeze every last dollar of "value" from the local population. In practice, the highest bidder would be a conglomerate of foreign capital, local prominent families and political elites. The latter could then enjoy holidays in their villas in the south of France.

    Adam Smith was far less doctrinaire and he would doubtless recommend the building of the water infrastructure by the government for the benefit of the entire population, since that would certainly increase the "wealth of the nation". In fact, Smith spoke in favour of infrastructure investment (canals, bridges, roads) by governments in many passages of his book.

    Hope this helps

    ReplyDelete
  35. "while the Chinese were creating the Terracotta army and writing down complex philosophy over 2000 years ago, white northern europeans were still a primative race running around the forests".
    If they were able to do it 2000 years ago,how come they are not able to do it today? Why did they need the Western science to create contemporary China.Is not that weird? Discontinuity of civilization?
    This book may give some explanation
    http://www.white-history.com/

    ReplyDelete
  36. Hmm... some "interesting" comments from the "white is best" crowd. Are you guys trying to get us placed on the ADL list of "hate sites"?

    I didn't want to engage in the thread of the discussion started by "Alf" and picked up by a few "anonymous" commentators, but here are a few brief points I'd make.

    This is an **economics** blog, which deals with current economic events (sometimes venturing into geopolitics) giving some insight into the workings of the global economy and discussing ways of dealing with the problems we face. It doesn't seem to be an appropriate forum for discussing the issues of race, multiculturalism, superiority/inferiority of various ethnic or racial groups. There are many other sites dealing with such matters for those who take an interest in them.

    But economics (properly conceived) is more than simply balance of trade numbers and foreign exchange rates. So politics (domestic and international) is sometimes relevant, together with wider issues of social organization, customs and culture. Living in the Far East for many years has given me a deep appreciation of the qualities of my own European heritage. Despite its many faults, western civilization has been extremely successful in providing for the welfare of its citizens and achieving a quality and dignity of life and level of development unmatched by any other in the history of the world. Many of the more attractive features of our culture are quite unique and have little to do with "modernity", which is quite a recent development in our history. I would certainly not want to see it disappear. But we are seeing an erosion, not due to external causes, but internal ones, and it is necessary to be aware of the fact, unless we want to continue on our descent. Commentator "Fiunary" put it very well:

    "The West’s interests lie in thinking long term, coveting its resources and getting out of the clutches of the short termers who have dominated. We need to recognise our self interest and that other players play by different rules."

    The tragedy is that there is very little political space between the short-term, Happy Clappy globalists who believe everything should be "opened up" and put up for sale, that there is no such thing as national interest, that Mr. Market will lead us all to an Eden on earth and that we will all look like Americans, and their white supremacist opponents, with their attachment to "Blood and Soil". Anyone holding more nuanced views is immediately labeled one or the other.

    Finally, the danger of the "racially blessed" argument is not that it is false, but that it tends to breed complacency and unwarranted arrogance. As Japan, Korea and China have shown, modernity is no longer a monopoly of Western societies and cultures, despite the fact that western civilization was historically the first one to become "modern". The genii is out of the bottle, and it is irrelevant now whether our "discovery" of modernity was simply a fortunate coincidence of favourable circumstances (as "Matt" said) or an innate emanation of our racial spirit.

    ReplyDelete
  37. on the similarity of the US tax-payer funded 'bailout' to fraud, this is interesting:

    http://www.nakedcapitalism.com/2009/03/guest-post-banks-were-profitable-in.html

    ReplyDelete
  38. Can Cynicus, or anybody, unpick the knotted logic behind this article from today's Guardian:

    http://www.guardian.co.uk/commentisfree/cifamerica/2009/mar/30/us-economy-china-debt

    Thanks in advance.

    ReplyDelete
  39. China appears to be buying up loads of copper.

    Either the recession will be short lived, or war is on the horizon.

    ReplyDelete
  40. Thanks for your reply Cynicus. Here is the last post that went astray.

    On the face of it the West has lost power but the arguments only really hold if there is a maintenance of the status quo. The whole financial system is a big mirage which is coming up against some big obstacles. You discuss the issue of resources in earlier blogs. Inflationary pressure due to resource shortages (energy, food, metals etc) were almost certainly part of the trigger of the current crisis. Once we get any sort of recovery, these will rapidly come to the fore again and cause another downturn. The reality is that the whole consumption paradigm we have been living in (at least since the advent of the industrial revolution) is coming to an end. Add to this population growth, environmental degradation, global warming etc and the picture is not pretty. The international financial system and free trade will not survive these changes.

    Put this in the context of the excellent points made by MattInShanghai and we have all the makings of conflict. China’s situation may look good on paper but it has a huge population most of which is living at a subsistence level. It needs to keep economic growth going to maintain social cohesion. It is suffering from water shortages, pollution, loss of arable land. Geographically, it will be an early victim of global warming. The path it has chosen requires huge resource inputs from outside the country. Once the financial rules begin to break down (and China pulling the plug of the USD might well trigger this) there is going to be a massive scramble to control resources (China is working hard at this already).

    The West’s interests lie in thinking long term, coveting its resources and getting out of the clutches of the short termers who have dominated. We need to recognise our self interest and that other player’s play by different rules. The likelihood is that this will be an ugly process. In an ideal world we would all come together to tackle the “problematique” which threatens to swamp us.

    ReplyDelete
  41. Please ignore that - I must be loosing my marbles. Thanks.

    ReplyDelete
  42. Anonymous...

    As I see it, there is a third possibility with regards to the price of copper -

    That China is, as other contributors to this blog have suggested are 'playing the long game' - copper is a commodity with a vast aray of fundamental applications. At the same time, they will be trying to hedge against the possibility of a collapse in the $US, and other contingencies such as war.

    ReplyDelete
  43. Hi again,
    perhaps this video from Peter Schiff would prove interesting:-
    http://www.youtube.com/watch?v=3AlD6U7O1pE

    ReplyDelete
  44. Mark, we haven't heard from you for a while. I hope everything's OK?

    I'm looking forward to reading your take on the G20 summit. From the World at One this lunchtime it sounds as though the crisis is over and Gordon has saved the world again.

    ReplyDelete
  45. Hi Cynicus,

    I would love to here your analysis on the new IMF plan.

    http://news.bbc.co.uk/1/hi/business/7979484.stm

    I hope your not too busy to write another post.

    ReplyDelete

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