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Political economists Radhika Desai and Michael Hudson are joined by Beijing-based scholar Mick Dunford to discuss what is actually happening in China’s economy, explaining its technological development and transition toward a new industrial revolution.
Radhika Desai and Michael Hudson at The Geopolitical Economy Hour.
Video:
Podcast:
Transcript:
RADHIKA DESAI: Hello and welcome to the 24th Geopolitical Economy Hour, the show that examines the fast-changing political and geopolitical economy of our time. I’m Radhika Desai.
MICHAEL HUDSON: I’m Michael Hudson.
RADHIKA DESAI: And working behind the scenes to bring you our show every fortnight are our host, Ben Norton; our videographer, Paul Graham; and our transcriber, Zach Weiser.
And with us today we have, once again, Professor Mick Dunford, professor emeritus of geography at Sussex University and now working at the Chinese Academy of Sciences, keeping a close watch, among other things, on China’s economy. So welcome, Mick.
MICK DUNFORD: Thank you very much.
RADHIKA DESAI: So, China’s economy is what we’re going to talk about today. Where is it at after decades of breakneck growth, after executing the greatest industrial revolution ever? Where is it headed?
Trying to understand this is not easy. The disinformation that is fake news and even what I often call fake scholarship that distorts the view that any honest person may be trying to take on China’s economy is simply overwhelming. It’s absolutely wall-to-wall propaganda, no matter which Western publication or website you open.
If we are to believe the Western press and the leading scholarly lights of the West, who are the major generators of the Western discourse on China, we are at peak China. That is to say, they claim that China has reached a point, reached the highest point, that is, that it ever can. And from here on, it’s only going to be downhill, more or less rapidly.
They say that China has, in recent years, inflated a huge property bubble to compensate for the West’s inability to keep up imports. And this bubble is about to burst. And when it does, it will subject China to a 1980s and 1990s Japan-style long-term deflation or secular stagnation. They have even invented a word to talk about this: “Japanification”. We are told that the Japanification of China’s economy is impending.
They say that the U.S.’s trade and technology wars are hitting China where it hurts the most, at its export and its reliance on inward foreign investment. They are saying that China has grown only by stealing technology. And now that the U.S. is making it harder for it to do so, its technological development can only stall. They are saying that China followed disastrous COVID-19 policies, leading to mass death, draconian lockdowns, and economic disaster.
They are saying that China over-invests, and its growth will not pick up unless China now permits higher consumption levels. They are saying that China has a serious unemployment crisis, that the CPC, the Communist Party of China, is losing legitimacy, because it is failing to deliver ever-higher living standards. And they are saying that Xi Jinping’s authoritarian leadership is ensuring that the private sector will stall, and with it, so will China’s growth.
All this, they say, before even beginning to talk about China’s foreign policy. And there, of course, lie another long litany of alleged disasters and misdemeanors that China is responsible for, beginning with debt-trap diplomacy and China’s allegedly voracious appetite for the world’s resources.
The only reason why Western experts ever stress the strength of China’s economy is when they want to argue that the West must redouble its efforts to contain China and to stall its rise.
So today, we’re going to take a closer look at China’s economy, and in doing so, we’re going to bust a lot of these myths. We’re going to show you that, sadly, for the purveyors of the fake news and fake scholarship about China, no amount of their huffing and puffing has been able to blow down China’s house, because, like the good, the smart little pig, China is actually building its house with bricks.
So, we have a number of topics to discuss in this show. Here they are:
1. Characterising China’s Economy: Capitalist? Socialist?
2. Growth Story
3. Covid Response
4. The Alleged Debt and Property Bubble? And Japanification?
5. Restricted Consumption? Stagnant living standards?
6. Exports in the China Story
7. China’s new growth strategy
8. China’s foreign policy
So, these are the topics that we hope to discuss. We want to begin by talking about how to characterize China’s economy. Is it capitalist? Is it socialist? Then we will do the most important and primary basic thing, we will look at the growth story with some statistics. We will then look at China’s Covid response. We will look at the alleged debt and property bubble and whether China is being Japanified.
Then we will look at the issue of whether China is overinvesting and neglecting consumption and living standards, etc. How reliant is China on exports? What is China’s growth strategy? And what is China’s foreign policy? And are those myths about it true? So, this is what we hope to discuss.
So, Mick, why don’t you start us off with your thoughts on exactly how to characterize China’s economy?
MICK DUNFORD: Ok, the way I would characterize China is as a planned rational state. I mean, right the way through, it has maintained a system of national five-year planning, and it also produces longer-term plans. But it’s a planned rational state that uses market instruments.
China has a very large state sector. And of course, some people have claimed that this state sector is, in a sense, an impediment to growth. And we’ve seen a resurrection of this idea, guo jin min tui (国进民退), which is used to refer to the idea that the state sector is advancing and the private sector is retreating.
It’s a very, very strange concept, in fact, because the third word is min (民), and min refers to people. So, what they are actually, in a sense, saying – these ideas were invented by neoliberal economists in 2002 – the private sector is equated with the people, which I find absolutely astonishing. But, I mean, the country does have a very significant public sector.
What I find striking is that one can actually turn it around and say, what is it that these Western economists seem to think China should do? And they seem to think that China should privatize all assets into the hands of domestic and foreign capitalists. It should remove capital controls. It should open the door to foreign finance capital. It should transfer governance to liberal capitalist political parties that are actually controlled by capital.
I think one of the most fundamental features of the China system is actually that it’s the state that controls capital, rather than capital that controls the state. And it’s, in fact, this aspect of the Chinese model, and in particular, the rule of the Communist Party of China that has basically transformed China from what was, effectively one of the poorest countries in the world into one of its largest industrial powers.
So, in a way, it’s a planned rational state in which the CPC has played an absolutely fundamental role. And without it, I mean, China would never have established the national sovereignty that permitted it to choose a path that suited its conditions and to radically transform the lives and livelihoods of its people.
RADHIKA DESAI: Michael, do you want to [speak]?
MICHAEL HUDSON: The question is, what is the state? There are two aspects of the state with China. One is public infrastructure. And the purpose of China’s public infrastructure is to lower the cost of doing business because infrastructure is a monopoly.
That’s what really upsets the American investors. They wanted to buy the phone system, the transportation system, so that they could benefit from charging monopoly rents, just like under Ronald Reagan and Margaret Thatcher.
The most important sector that China’s treated in the public is money creation and banks. Americans hope that American banks would come over and they would be making all the loans in China and benefiting from China’s growth and turning it into interest. And instead, the government’s doing that. And the government is deciding what to lend to.
And there’s a third aspect of what people think of when they say state. That’s a centralized economy, centralized planning, Soviet style.
China is one of the least centralized economies in the world because the central government has left the localities to go their own way. That’s part of the Hundred Flowers Bloom. Let’s see how each locality is going to maneuver on a pragmatic, ad hoc basis.
Well, the pragmatic ad hoc basis meant how are localities, villages, and small towns going to finance their budgets? Well, they financed it by real estate sales, and that’s going to be what we’re discussing later.
But once you realize that the state sector is so different from what a state sector is in America, centralized planning and the control of Wall Street for financial purposes, finance capitalism, hyper-centralized planning, you realize that China is the antithesis of what the usual view is.
RADHIKA DESAI: Absolutely. And I’d just like to add a few points, which dovetail very nicely with what both of you have said.
The fact of the matter is that this was also true of the Soviet Union and the Eastern European countries when they were still ruled by communist parties. We generally refer to them as socialist or communist, but in reality, they themselves never claimed to be socialist or communist. They only said they were building socialism, especially in a country that was as poor as China was in 1949.
The leadership of the Communist Party of China has always understood that there has to be a long period of transition in which there will be a complex set of compromises that will have to be made in order to steer the economy in the direction of socialism, in order to build socialism.
So, from its beginnings, the revolutionary state in China was a multi-class state and a multi-party state. People don’t realize very often that while the Communist Party of China is the overwhelmingly most powerful party in China, there are other parties that exist as well, which reflect the originally multi-class character of China.
Now, it’s true that since 1978, the government has loosened much of its control over the economy. But the important thing here is that the Communist Party retains control of the Chinese state.
The way I like to put it is, yes, there are lots of capitalists in China. Yes, those capitalists are very powerful. They are at the head of some of the biggest corporations in the world, and they are quite influential within the Communist Party. But what makes China meaningfully socialist or meaningfully treading the path to socialism, let’s put it that way, is the fact that ultimately the reins of power are held in the hands of the Communist Party of China leadership, which owes its legitimacy to the people of China.
So, the reigns of power, the reigns of state power are not held by the capitalists; they are held by the Communist Party leadership.
So, in that sense, I would say that China is meaningfully socialist. Although, as Mick pointed out, there is a fairly large private sector in China, but so too is the state sector very large. And the extent of state ownership means that even though the private sector is very large, the state retains control over the overall pace and pattern of growth and development in the country.
And I just add one final thing here, which is going to become quite important as we discuss the various other points, and that is that the financial sector in China remains very heavily controlled by the state.
China has capital controls, China practices a fair degree of financial repression, and China’s financial system is geared to providing money for long-term investments that improve the productive capacities of the economy and the material welfare of the people. And this is completely different from the kind of financial sector we have today.
So, Mick or Michael, did you want to add anything?
MICK DUNFORD: Just to reiterate, I mean, the point is, the government sets strategic targets that relate to raising the quality of the life of all the Chinese people. And it has strategic autonomy, which gives China the opportunity or the possibility of actually choosing its own development path.
And I think that’s something that very strikingly marks China out from other parts of the Global South that have had much greater difficulty, in a sense, in accelerating their growth, partly because of debt and their subordination to the Washington financial institutions.
So I think that is critically important, the role of sovereignty and autonomy in enabling China to make choices that suited its conditions, and at the same time making choices that are driven by a long-term strategic goal to transform the quality of the lives of all Chinese people.
MICHAEL HUDSON: I want to put in one word about sovereignty. You put your finger on it. That’s really what makes it different.
What makes other countries lose their sovereignty is when they let go, how are they going to finance their investment? If they let foreign banks come in to finance their investment, if they let American and European banks come in, what do they do? They fund a real estate bubble, a different kind of a real estate bubble. They fund takeover loans. They fund privatization.
Banks don’t make loans for new investment. China makes great money to finance new tangible investment. Banks make money so you can buy a public utility or a railroad and then just load it down with debt, and you can borrow and borrow and use the money that you borrow to pay a special dividend if you’re a private capital company. Pretty soon, the country that follows this dependency on foreign credit ends up losing its sovereignty.
The way in which China has protected its sovereignty is to keep money in the public domain and to create money for actual tangible capital investment, not to take your property into a property-owning rentier class, largely foreign-owned.
RADHIKA DESAI: Thank you. Those are very important points. Thank you.
I’d just like to add one final point on the matter of how to characterize the Chinese economy and the Chinese state. At the end of the day, it’s not just important to say that the state controls the economy, but whose state is it?
The way to look at it as well is that in the United States, essentially we have a state that is controlled by the big corporations, which in our time have become exceedingly financialized corporations, so that they are directing the United States economy essentially towards ever more debt and ever less production, whereas that is not the case in China.
And the question of whose state it is makes use of the word autonomy. The autonomy refers to the fact that it is not subservient to any one section of society, but seeks to achieve the welfare of society as a whole and increase its productive capacity.
MICK DUNFORD: If I may just add, I think also it’s important that you pay attention to the policy-making process in China. It’s an example of what one might call substantive democracy. It delivers substantive results for the whole of the Chinese population.
In that sense, it delivers improvements in the quality of the lives of all the people, and therefore, in a sense, it’s a democratic system. But it’s also a country that actually has procedures of policy-making, experimentation, design, and choice and so on that are extremely important and that have fundamental aspects of democracy about them.
When Western countries characterize China as authoritarian, they’re actually fundamentally misrepresenting the character of the Chinese system and the way in which it works, because they, in a sense, merely equate democracy with a system, whereas China, of course, does have multiple political parties, but a system with competitive elections between different political parties. There are other models of democracy, and China is another model of democracy.
RADHIKA DESAI: Mick, you’re absolutely right to talk about the substantive democracy. Indeed, in China, they have recently developed a new term for it. They call it a “whole process democracy”, and it really involves multiple levels of consultation with the people, going down to the most basic village and township levels, and then all the way up the chain.
And I think this process does work, because the other remarkable thing about the CPC leadership is its ability to change direction pragmatically. If something does not work, then it assesses what it has attempted, why it has failed, and then it revises course. So, I think we will see several instances of this as we talk as well.
Michael, you want to add something?
MICHAEL HUDSON: One thing about democracy. The definition of a democracy traditionally is to prevent an oligarchy from developing. There’s only one way to prevent an oligarchy from developing as people get richer and richer, and that’s to have a strong state.
The role of a strong state is to prevent an oligarchy from developing. That’s why the oligarchy in America and Europe are libertarian, meaning get rid of government, because a government is strong enough to prevent us from gouging the economy, to prevent us from taking it over.
So, you need a strong central state in order to have a democracy. Americans call that socialism, and they say that’s the antithesis of democracy, which means a state that is loyal to the United States and follows U.S. policy and lets the U.S. banks financialize the economy. So, just to clarify the definitions here.
RADHIKA DESAI: Very, very true, Michael. But let’s not go, I mean, maybe we should do a separate show on political theory of the state, because that’s equally important.
But for now, let’s look at our next topic. We hope, of course, that everybody understands how we characterize China’s state. But now, let’s look at China’s GDP growth.
So, here you have a chart, and we have several charts on this matter, but we’ll take them one by one and comment on them:
So, here we have a chart showing the annual rate of GDP growth from 1980 to 2028. Of course, post-2023 are their projections, which are shown by the dotted lines. And I’ve only taken a few selected countries from the Our World in Data website, and anybody can go there and look at this data, by the way.
So, you can see China and then a handful of the most important Western countries. And you can see that going back to 1980, essentially China’s growth rate, which is here, the top red line here, has absolutely been massively higher on practically any year than the other countries.
In fact, you see I left Russia in here. I should probably have taken it out. It’s a bit of a distraction, because here you see Russia’s growth rate massively bouncing up from the late 90s financial crisis. But let’s leave that aside.
All the other major countries, which you see here, they are all showing considerably lower growth. So, the United States here is this orangish line. And essentially, they’re all showing much lower growth.
And more recently as well, this is the Covid-19 pandemic. And you can see that China, again, like all the other countries, it experienced a fairly sharp decline in the growth rate, but it still remained positive, unlike all the other countries.
And it remains substantially above that of the rest of the economies that constantly are telling China how to improve its economic policy. So, that’s what I want to say about this chart.
But Mick, go ahead.
MICK DUNFORD: Can you show that table that I sent?
RADHIKA DESAI: Yeah, sure. Yes, here we go:
MICK DUNFORD: These are more recent growth rates for China, for the world, and for the G7. And I mean, first of all, they show absolutely clearly that China’s growth rate is still a long way in excess of the average growth rates of all G7 countries, many of which have actually performed abysmally. I mean, Germany is now in recession, it declined 0.3% per year this year. I mean, Italy has had extremely low rates of growth, France, Germany, the United Kingdom, Japan, all had extremely low rates of growth.
China last year achieved a growth rate of 5.2%. It itself expects to grow at 5% next year. The IMF forecast 4.6%. Even that 4.6% target is quite close to the average growth rate that China needs to achieve to meet its 2035 target. It has a 2035 target of doubling its GDP, its 2020 GDP by 2035. I think that that goal is perfectly realizable. And in that sense, I strongly disagree with people who argue that China has in a sense peaked.
But I do find it, really quite astonishing, that Western countries, whose economies have performed extremely poorly, feel in a position to lecture China about how it should address what is said to be an unsatisfactory rate of growth. That’s the first point I want to make.
I just want to say something else, if I may. When we talk about, I mean, China’s growth has slowed. And, there’s no doubt that in terms of people’s everyday lives, there are many difficulties. And I just want to quote something.
At New Year, Xi Jinping gave a speech. I wanted to cite his actual words. He recognised that in these years, China faces what he called the tests of the winds and rains. And then he said, when I see people rising to the occasion, reaching out to each other in adversity, meeting challenges head on and overcoming difficulties, I am deeply moved.
So, the leadership and all Chinese people are well aware that there are many, many difficulties and challenges confronted, because China is actually undergoing a major structural transformation about which we shall speak later. But China is also in the short term undertaking a lot of important actions that are actually designed to cope with some of the real difficulties that people confront.
So, if you listen to Li Qiang’s government work report, he addressed the problem of short-term employment generation. And there are proposals for 12 million new urban jobs to increase employment, especially for college graduates and other young people, because for young people, the unemployment rate, including college students, is in the region of 21 percent. Urban unemployment is 5 percent. So, there are issues to do with the generation of employment.
Government expenditure this year will target a whole series of strategic issues, but also livelihoods. So, affordable housing, youth unemployment, job security, insurance, pensions, preschool education, the living conditions in older communities. So, I’m just saying that, in the current context, difficult economic situation and a particularly turbulent global situation. I mean, China, as every other country in the world, faces challenges, and it is in many ways directly addressing them in very important ways.
RADHIKA DESAI: Great. Thanks, Mick. Michael, do you want to add anything?
MICHAEL HUDSON: No, I think that’s it. The question is, what is the GDP that is growing? There are a number of ways of looking at GDP. And when I went to school 60 years ago, economists usually thought of GDP as something industrial. They’d look at energy production. They’d look at railway cargo transportation.
If you look at the industrial component of what most economists used to look at, electricity is the power for industry, electricity is productivity growth for labor. If you look at these, what is the component of GDP, you realize that these differences in Mick’s charts are even wider than what he showed, because the American GDP, very largely interest, overdraft fees of credit card companies, as we’ve said, is providing a financial service. 7% of American GDP is the increase in homeowners’ view of what their rental value of their property is. That’s 7%.
Now, I doubt that China includes a measure like this in its GDP. But if it did, with all of its rise in real estate prices, its GDP would be even higher in a reality-based basis.
So real GDP, as we think of it, and the public thinks of it, is something useful and productive. Actually, China’s doing a much more efficient job in minimizing the kind of financial and rentier overhead that you have in the United States.
RADHIKA DESAI: Exactly, Michael. What I was going to point out as well is that these figures of U.S. GDP growth and the absolute level of U.S. GDP are heavily financialized.
The financial sector, which actually is not a force for good in general in the U.S. economy, it is out of which the indebtedness comes, out of which the productive weakening comes. The growth of the financial sector is counted as GDP in the United States and massively inflates U.S. GDP, which would not be as high as this.
And this is particularly important given that President Biden, for example, is congratulating himself now for having the strongest economy in the world or the Western world or whatever it is. Well, that’s what the U.S.’s boast is based on.
And China does not do that, nor does it have the kind of financial sector which creates, which destroys the productive economy. Rather, as we were saying, it has the kind of financial sector that supports it.
So, just another general point I want to make. We were talking about this chart:
This shows from 1980 to 2028, and the projections remain, by the way, even from conservative sources, that China’s growth is going to remain higher than the rest of the world, particularly the Western countries, for a long time to come.
And I also decided to show you this chart:
This is the chart of growth, which is just a more focused version of the previous one, which shows growth rates from 2008 to 2028.
So 2008 is when we had what Michael and I call the North Atlantic Financial Crisis. And since then, what we’ve seen is, yes, of course, all countries have seen a sort of a reduction in their growth rate, and certainly China has. But even since then, you can see that China’s growth remains high and stable. So, that’s another thing that we wanted to show.
And this is a chart showing the rise of per capita GDP:
That is to say, you can have a higher GDP, but if your population is expanding, then to what extent is per capita GDP rising? So, you can see here that, again, even in terms of per capita GDP, and this only again goes to 2021, but in terms of per capita GDP, China has remained head and shoulders above all the major Western countries.
And this bounce here that you see in the case of the US and the UK here, it is only a dead cat bounce from the absolute depths to which their economies had sunk during Covid, and so they came to some sort of normalcy.
Mick, you may want to say something about this chart, because you sent it to me. So, please go ahead:
MICK DUNFORD: It’s correct, of course, that China’s growth slowed. Now, in 2013, China entered what is called the New Era. At that time, China decided that its growth rate should slow. It chose slower growth. It spoke of 6 or 7 percent per year, and it more or less achieved that, until the Covid pandemic. So, China chose slower growth for very particular reasons, and I think in this discussion, we shall come to some of these reasons later on.
But in a sense, what they want is what they call high-quality growth. And what China is seeking to do is undertake a profound structural transformation of its economy, establishing new growth drivers by directing finance towards high-productivity sectors and directing finance towards the use of digital and green technologies in order to transform its traditional industries. So, in a sense, it’s undergoing a profound process of structural transformation.
And I mean, if you, for example, look at Li Qiang’s speech, the major tasks include invigorating China through science and education, so to strengthen the education, science and technology system, to improve the capabilities of the workforce, or promote innovation, industrial investment and skills, and another, striving to modernize the industrial system and accelerate the development of new productive forces, bearing in mind that we’re on the verge of a new industrial revolution. But these are very important issues, fundamentally important issues.
RADHIKA DESAI: And I would say just, and I know we’ll talk about it at greater length later on, but it is really important to bear in mind that really, when the world stands at the cusp of being able to exploit new technologies like quantum computing or nanotechnology or artificial intelligence or what have you, a relatively centralized decision-making process about how to allocate resources, for what purposes, for what social benefits, etc., is likely to prove far superior, that is to say, China’s method is likely to prove far superior than the Western tactic of leaving private corporate capital in charge of the process.
And just to give you a couple of instances of this, the fact that private corporate capital is in charge of the development of digital technologies is already creating all sorts of social harms in our Western societies, whether it is harms to children’s mental health or even adults’ mental health, to political division that the algorithms sow and so on.
And also, it is leading to a situation where even these mega-corporations, these giant corporations, actually do not have the resources to invest, the scale of resources that will be needed to invest. So, for example, you hear in the Financial Times that Sam Altman is looking for people to invest in his artificial intelligence ventures, which will require trillions of dollars, and he cannot find private investors for it. So, this is really quite interesting.
Okay, so if we’re done with the growth rate story, oh, and I just want to say one other thing about this, which is, this is a GDP per capita in purchasing power parity, and China, in the space of a few decades, essentially, has experienced the biggest spurt in per capita well-being, etc., which includes important achievements like eliminating extreme poverty.
The Communist Party has brought China to essentially per capita GDP in purchasing power terms of next to nothing in 1980 to about $20,000 per annum in 2020. This is really quite an important achievement. And to do this for a country of 5 to 10 million people would be laudable, but to do this for a country of 1.3 billion people is a massive, historic achievement, and I think that’s something to remember.
MICK DUNFORD: I just, if you just go back for one minute, I mean, I absolutely agree with what you’ve just said, Radhika.
I’ll just make a comment about this chart. It’s because we were probably going to speak about Japanification:
It basically shows that the GDP per capita of Japan, and indeed of Germany, closed in on the United States, and actually Germany overtook it in the 1980s. But after that point in time, I mean, after the revaluation of their two respective currencies, and after the, the bubble, the stock market and property market bubble in Japan, you saw stagnation set in. And there’s a question as to whether that will happen with China.
But I mean, I think that one thing that’s striking in this diagram is that China is still at a much lower level of GDP per capita than Japan, or indeed Germany was at that time. And those economies, because, they were at the technological frontier to some extent, had to innovate, move into new technologies.
China, because there is still a technological gap, has enormous opportunities to accelerate its growth in a way in which, well, Japan failed because it chose not to take up opportunities, and it gave up semiconductors manufacture. But China has enormous opportunities, and that’s one reason why we must anticipate China’s growth as continuing.
RADHIKA DESAI: Absolutely. Thank you, Mick. Okay, so if we’re done with the growth story, let’s go to our next topic, which is what happened in China under Covid-19. Now, of course, there is just so much dispute about and controversy around Covid and Covid strategies, etc. So we don’t want to get into all of them, but I just want to emphasize two things.
We’ve already looked at the growth figures, we looked at the growth figures around Covid:
So you can see here that in 2020, all economies had a big dip thanks to Covid in their economies, but China is alone among the major economies to have remained in positive growth territory, and to have, of course, remained much higher than the rest of the other major world economies. So essentially, China, whatever China did, it did not sacrifice growth.
Now, this is very ironical, because in the Western countries, we were told that we need to, in order to continue growing, we need to, so in order to preserve livelihoods, which was the euphemism for preserving the profits of big corporations, in order to preserve livelihoods, we may have to sacrifice some lives. And the Western economies went through an absolutely excruciating process of lockdown here, and opening there, and lockdown again, and opening again, and so on.
But all of this had devastating impacts on Western economies, whereas China prioritized the preservation of life above all. And it imposed a lockdown knowing that, okay, even if we are going to develop vaccines, and remember, China developed its own vaccines, and effectively inoculated over 70 percent of the population by the time they began reopening.
China prioritized the saving of lives, and it was accused of essentially creating world shortages by shutting down its economy, etc. But in reality, China’s strategy, which focused before the availability of vaccines, on essentially physical distancing, isolation, etc., as was necessary, but China managed to do it in a way as to keep up a relatively robust growth rate, and very importantly, lose very few lives.
This is a chart, again from Our World In Data, of cumulative Covid-19 deaths per million of population:
So here we have all these countries, the United States and United Kingdom are these top two lines, Germany, Canada, Japan, even though we are told that East Asian economies did well because they had experience with SARS, etc., even then, compared to China, which is down here with a cumulative Covid death rate per million of about 149 or something people dying per million, and these numbers are over 3,000, almost 4,000 per million at this point in the United States and the UK, and then you have these other economies.
So China actually managed to avoid the worst of Covid, both in terms of lives and in terms of livelihood, and it did so because it did not compromise the saving of lives.
Does anyone else want to add anything? Mick? You were there.
MICK DUNFORD: Well, I mean, obviously, there were difficulties for some people in some places at some times. I was here right through it. All I can say is the impact personally on me was extremely limited.
It was a very effective system for protecting life. And if you lived in some places, then in fact the impact on your life, apart from having frequent nucleic acid tests and so on and ensuring that your health code was up to date, the impact on one’s life was relatively limited.
But in some places, obviously, in Wuhan at the outset, in Shanghai later on, the impact was very considerable.
But I think it’s an indication of the importance of a kind of collectivism, and the priority given to the protection of human life. And as you said, it is quite striking that actually through it, China’s economy actually kept ticking over.
And of course, China produces so many important intermediate goods that obviously it was also very important in providing things that were needed in many, many other parts of the world.
It also shared its drugs, its vaccines, which is really quite different, in a sense, from the conduct of the United States. And to some extent, the Western pharmaceutical companies.
RADHIKA DESAI: Absolutely. Michael, go ahead.
MICHAEL HUDSON: In the United States, that would be considered a failure of policy. The United States used Covid as an opportunity to kill.
For instance, the governor of New York, Cuomo, took the Covid patients and he moved them into all of the assisted living and old people’s homes. And that had a great increase in productivity. It resulted in enormous death rates for the elderly.
That helped save New York’s pension plan system. It helped save other pension plans. It helped save Social Security because the dead people were no longer what America called “the dead weight”.
The American policy was to indeed infect as many people over the age of 65 as you could. And that helped balance state, local budgets, pension plan budgets.
The increase in the death rate is now the official policy of the Center for Disease Control in the United States. They say do not wear masks. They’ve blocked any kind of mask wearing. They’ve done everything they could to prevent the use of HIPAA filters or airborne disease. The Disease Control Center says that Covid is not an airborne disease. Therefore, do not protect yourself.
Well, the result is many children have been getting Covid and that weakens their resistance system. And they’re getting measles and all sorts of other things. And all of that is greatly increasing GDP in America. The health care costs of America’s destructive policy.
I think Marx made a joke about this in Capital. He said when more people get sick, the doctors and the economic output goes up. Are you really going to consider sickness and destruction and fires rebuilding and cleanup costs? Are you going to count all of this there?
RADHIKA DESAI: But the irony is Michael, even with all of that, America’s GDP plunged so deeply down.
Well, I think we should move on to the next topic, but I will just say one thing. It is generally said that China is in a panic, the Chinese government reversed its draconian Covid policies because there were popular protests, and blah blah and so on. I would not agree with that.
Certainly, there were some popular protests. It also seems as though at least some of them were being pushed by the National Endowment for Democracy with the typical color revolution style. They have one symbol that symbolizes it. So, they decided to put up blank pieces of paper, etc. So, there’s no doubt that there was some of this going on. And as Mick said, undoubtedly, there were local difficulties in many places.
But what becomes very clear is that China decided to lift Covid restrictions towards the end of 2022 only after it has satisfied itself that the risk. And I should also add one thing. It was under pressure to lift these restrictions a great deal because the fact was that the rest of the world was not following China’s footsteps apart from a handful of other countries. And they were socialist countries. They were not following China’s footsteps.
So, it’s very hard to be the only country that’s doing it. But nevertheless, despite all those pressures, China had a very deliberate policy. It lifted Covid restrictions after assuring itself that enough of the population had been vaccinated, as to achieve something close to herd immunity.
And these figures of deaths per million demonstrate that China’s bet proved right, and China continues to monitor the situation. Covid hasn’t gone away.
And so, in all of these ways, I think that it’s important for us to understand that China’s policy has actually been above all about protecting people’s lives.
MICK DUNFORD: Just from my recollection, the demonstrations of which you spoke, where the slogans were written in English, I wonder who they were talking to, were on the 1st of December. China had, on the 11th of November, already announced the steps of, in a sense, removing restrictions. And then they were finalized in early December. So, the change was already underway.
RADHIKA DESAI: Exactly. Great. So, I think we are at almost, I think, 50 minutes or so. So, let’s do the next topic, which is the property bubble. And then we will stop this episode and we will do a part two of this episode, and do the other four topics that remain in part two.
So, Mick, do you want to start us off about the property bubble and the alleged Japanification, impending Japanification of China’s economy?
MICK DUNFORD: Okay. Well, if you want, you can just show the chart:
Basically, you can see that throughout this period, Chinese house prices have risen quite substantially. You know, in a sense, the story started, with housing reform, after 1988, when China moved from a welfare to a commodity system. And then, in 1998, it actually privatized Danwei housing, and it adopted the view that housing should be provided, as a commodity by developers.
And in 2003, that course of action was confirmed. And from that point in time, one saw very, very substantial growth in the number of developers, many of which, the overwhelming majority of which were private developers. So, in a sense, they moved towards a fundamentally market system.
And they very quickly had to make certain adjustments because they found that while the quality of housing and the amount of housing space per person was going up, these developers were orienting their houses towards more affluent groups. So, there was an under-provision of housing for middle-income groups and for low-income groups.
And so, there were progressively, you saw over the years, increasing attention paid to the provision of low-cost housing and of low-cost rented housing. And in fact, in the current five-year plan, 25% of all housing is meant to be basically low-cost housing.
So, the important point is that this problem emerged in a system that was liberalized, actually, I mean, in line with recommendations that were made in 1993 by the World Bank.
So, in other words, it’s an example of a liberalized, predominantly market-led, private-led system, in which these difficulties and these problems have emerged.
So, that’s the first thing I want to say. And I mean, obviously, to address housing needs, China has had, over the course of time, to considerably move back in the direction of providing low-cost housing in order to meet the housing needs of the Chinese people.
But basically, in August 2020, the government got very, very deeply concerned about, on the one hand, increasing house prices and, on the other hand, the explosion of borrowing and the fact that the liabilities of many of these developers substantially exceeded their assets.
And of course, the other line on that chart is a line indicating house prices in the United States. And of course, it was the crash of prices in the subprime market that, in a sense, precipitated the financial crisis. So, China, in the first place, is absolutely determined that it should not confront that kind of problem that was generated by the liberalized housing system in the United States.
So, I mean, that’s the first thing I basically want to say.
If you want, I can say something about the case of Evergrande. But basically, what China did in 2020 was it introduced what it called Three Red Lines, which were basically designed to reduce financial risks.
But it had a number of consequences because it, to some extent, deflated the housing market. Housing prices started to fall. Some of these developers found themselves in a situation where their liabilities substantially exceeded their assets. There was a decline in housing investment.
But to some extent, I think this is a part of a deliberate goal of basically diverting capital towards, as I said earlier, high productivity activities and away from activities, especially the speculative side of the housing market. So, I’ll just say that for the moment, but I can come back and say something about Evergrande, if you wish, in a few minutes.
RADHIKA DESAI: Okay, great. Michael, do you want to add anything?
MICHAEL HUDSON: Well, what I’d like to know as the background for this is what is the, how much of this housing is owner-occupied and how much is rental housing? That’s one question. The other question is how much is the ratio of housing costs to personal income? In America, it’s over 40% of personal income for housing. What’s the ratio in China?
I’d want to know the debt-equity ratio. How much debt, on the average, for different income groups? Debt relative to the value of housing. In America, for the real estate sector as a whole, debt is, the banker owns more of the house than the nominal house owner, whose equity ratio for the whole economy is under 50%.
These are the depth dimensions that I’d want to ask for these charts, if you know anything about them.
RADHIKA DESAI: Okay, thanks for that. And so, I just want to add one thing, which is that, this graph actually really says it all, and in some ways implicitly answers Michael’s questions:
Because the blue line, which shows the United States property prices, you can see that they reached a certain peak at 150% of the value of its 2010 values in 2008. Then it went down to below the level of 2010.
But U.S. monetary policy, Federal Reserve policy, its continuing deregulated financial sector, the easy money policy that was applied in a big way with zero interest rate policies, with quantitative easing, etc., etc., has simply led to a new property boom, where the prices of property prices have reached a peak, which is even higher than that of 2007-8, which was such a disaster. And this was all made possible precisely by the, by increasing housing debt, etc.
Whereas in China, a big driver of the housing boom has actually been that people are investing their savings in it. So, by logically, it means that the extent of a debt in the housing market will be comparatively lower. The entities that are indebted are actually the developers.
And that’s a very different kind of problem than, than the, than the owners being indebted. So that’s the main thing I want to say.
And Mick, you wanted to come back about, about Evergrande, so please do. And then remember also that we want to talk about this chart in particular, and deal with the question of Japanification:
So, please go ahead, Mick. Let’s talk about that.
MICK DUNFORD: Okay, well, I mean, as Radhika just said, the problem is, the indebtedness of developers, and the existence of debts that considerably exceed the value of their assets.
And the way in which this situation has come about, and I mean, as I said, the Chinese government, in a sense, wants to address the financial risks associated with that situation, and did so by introducing these so-called Three Red Lines.
It also is interested in reducing house prices, and it’s also interested in redirecting finance towards productivity-increasing activities.
So, Evergrande is an enormous real estate giant. It has debt of 300 billion dollars. It has 20 billion of overseas debt, and its assets, according to its accounts at the end of the last quarter of last year, are 242 billion. And 90 percent of those assets are in mainland China. So, its liability asset ratio was 84.7 percent, and the Three Red Lines set a limit of 70, 70 percent. So, it’s substantially in excess of the red line.
In 2021, it defaulted. And then, in January this year, it was told to liquidate after international creditors and the company failed to agree on a restructuring plan. In September, by the way, last year, its chair, Su Jiayin, was placed under mandatory measures, on suspicion of unspecified crimes. Basically, it was a Hong Kong court that called in the liquidators.
And the reason was that, in a way, outside China, Evergrande looked as a massively profitable distressed debt trade opportunity. There were 19 billion in defaulted offshore bonds with very substantial assets and, initially, a view that the Chinese government might prop up the property market.
So, large numbers of U.S. and European hedge funds basically piled into the debt, and they expected quite large payouts. But it seems as if this negotiation was, to some extent, controlled by a Guangdong risk management committee. And the authorities, basically, were very, very reluctant to allow offshore claimants to secure onshore revenues and onshore assets.
And, in fact, to stop the misuse of funds, I think about 10 Chinese local provinces actually took control of pre-sales revenues. They put it into custodial accounts, and the idea was that this money should basically—the priority is to ensure that the houses of people who’ve paid deposits on houses are actually built, and people who’ve undertaken work in building houses, are basically paid. So, that, then saw the value of these offshore bonds collapse very rapidly, indeed.
And I think that, to some extent, explains the concerns of the international financial market about the difficulties of this particular case. But I think, it’s clear that China intends, basically, to deflate this sector and to put an end to this speculative housing market as much as it possibly can, and to direct capital, towards productivity increasing, essentially, the industrial sector. And we shall talk about this direction of finance later on.
MICHAEL HUDSON: Evergrande debt, and other real estate debt, is to domestic Chinese banks and lenders. Certainly, many Chinese home buyers did not borrow internationally.
So, I want to find out how much the domestic Chinese banking system, or near banking system — not the Bank of China itself, but the near banks intermediaries who lent — to what extent have the banks given guarantees for the loans for Evergrande and others?
I understand that there are some guarantees domestically, and if the banks have to pay them, the banks will go under, just as occurring here in New York City. Do you have any information on that?
MICK DUNFORD: No, I don’t really have any information, except, I mean, some of the literature that I’ve read suggests that these creditors, bondholders and also other creditors, basically shareholders, are going to take a very, very major haircut.
RADHIKA DESAI: Exactly. I think that this is the key, that there will be an imposition of haircuts on the rich and the powerful, not just subjecting ordinary people to repossession of their homes, which they should have access to.
So, as Mick has already said, the Chinese government is doing everything possible to make sure that the ordinary buyers who have bought these houses do not lose out, which is the opposite of what was done in trying to resolve the housing and credit bubble in the United States.
So, I just want to say a couple of things. I mean, the Chinese government is quite aware, as Mick pointed out, the whole thing has begun by, this whole property bubble is in good part a product of the fact that when relations between China and the West were much better, China accepted some World Bank advice, and this is partly a result of that and the kind of deregulation that the World Bank had suggested.
But very clearly, now relations between China and the West are not good. In fact, they’re anything but good. China is unlikely, once bitten, twice shy, to accept such bad advice again, even if they were good. And now that they’re not good, there will be, and China is clearly looking at distinctively pragmatic, socialistic ways out.
And you see in the new address to the NPC by the Premier [Li Qiang], that social housing has become a major priority, not building houses for private ownership, but rather building houses which will be kept in the public sector and rented out at affordable rates. And I think this is really an important thing, really the way to go.
And finally, I would say that, the property bubble in Japan and the property bubble in the United States were bound to have very different consequences, partly because, well, for two reasons, mainly. Number one, the nature of their financial systems were very different.
In the case of Japan, the financial system was being transformed from one that resembles China’s financial system to something that resembles much more the US financial system. And Japan has continued this transformation and has suffered as a result. I would say in short, really, Japan has paid the price of keeping its economy capitalist. So in many ways is the United States.
And the second reason, of course, is that, funnily enough, one of the effects of the Plaza Accord was that, by the time the Plaza Accord came around, Japan was no longer interested in buying US treasuries. And as a result, the United States essentially restricted its access to US markets in a much bigger way. And so, essentially, Japan lost those export markets.
And it did not do what China is able to do. It perhaps could not do what China is able to do, being a capitalist country, which is massively reorient the stimulus for production away from exports and towards the domestic market, including the market for investment.
So I think that we are, maybe this is the cue at which we can talk about Japanification. So maybe you can start us off by commenting on this chart, and then Michael and I can jump in as well:
MICK DUNFORD: Ok, the blue line, of course, is the flow of loans to different sectors. So the blue line is the flow of loans to the real estate sector.
MICHAEL HUDSON: Only the Bank of China or by?
MICK DUNFORD: All the banks. You can see from 2016, the share going to real estate has diminished very significantly, whereas, where it says industrial MLT, that’s medium and long term loans for industrial investment, you can see a very, very strong, steady increase in the share of loans going to industrial investment. In agriculture, it declines. And then also, that has actually increased since 2016. So this is a directing of investment towards manufacturing and towards the industrial sector of the economy.
So why is that? Well, I think the first thing one can say is that, in the past, basically, the growth drivers of the Chinese economy were, to some extent, export manufactures. But China was predominantly involved in processing activities, employing very unskilled labor and associated with very low levels of labor productivity.
So one of China’s goals is to significantly, basically, strengthen, upgrade the quality of these traditional industries, to make them digital, to make them green, and to radically increase productivity through a large-scale investment wave.
And then, secondly, we’re on the verge of a new industrial revolution, which Radhika has spoken about. So the aim in this case is, basically, to divert investment towards the industries that are associated with the next industrial revolution.
The other main growth drivers in the past, alongside this export sector, were obviously real estate, which, I mean, if you look at GDP by expenditure, was accounting probably with household appliances and furniture and household goods and so on, about 26, 27 percent of the economy.
But it’s a sector that’s associated with relatively low productivity, and of course, it was associated with very substantial speculation and generated very considerable financial instability.
So, as Radhika said, there will be, in dealing with this financial crisis, basically an underwriting of existing, of obligations to existing home buyers, and in the future, an attempt to establish a more sustainable housing market.
The other area of the economy was basically this sort of platform economy. But this platform economy was associated with very, very strong tendencies towards monopoly, and in the, about four or five years ago, a series of measures were adopted, basically, to restrict, some aspects of this platform economy, and other areas, like private tutoring, which was generating large disparities in the educational system, and is associated with the fact, that the cost of raising children in China is extremely high. I mean, it’s the second highest in the world after South Korea, actually.
So, these growth drivers, these old growth drivers, are basically seen as not offering potential to sustain the growth of the Chinese economy into the years ahead, and so there’s this attempt to look for new growth drivers. And basically, for that reason, you’ve seen this redirection of investment.
And I think one can distinguish that, from what happened to Japan, because basically, in Japan, industrial investment did not increase, largely, I think, because the profitability of investment was not sufficiently high. And also Japan, in a sense, adopted a neoliberal program. It didn’t implement industrial policies.
Whereas China is seeking to undertake this transformation, basically, through, it’s a kind of supply-side restructuring, driven by industrial policy, and driven by financial policies, providing strategic funding for industrial transformation.
Then linking that also to the transformation of education, to try to ensure that the output of the education system, in terms of skill profiles, and so on, corresponds much, much more closely with the profile of work and employment, with much more emphasis upon STEM, in the context of this new industrial revolution, radically raising productivity, and by radically raising productivity, you increase income, and ultimately, you’ll increase consumption, and so on.
So I think that the Japanification course is not one that China will follow, that China will actually address this need to innovate and transform its industrial system, in order to, in a sense, address the problems that are associated with the earlier drivers of Chinese development.
MICHAEL HUDSON: We probably need a whole other program to talk about the difference in structure. Real estate is the largest sector of every economy, and China is so different from Japan.
The Ginza district in Japan, right around the palace, that small district, was larger than all of the real estate value in California. So, we’re dealing with a huge debt finance explosion there, and then you have the largest collapse of property prices in Japan, everywhere, anywhere in the world.
In a way, what you’ve described brings us back to what we were talking about at the beginning of the show, about China’s structure. The effect of the real estate slowdown and falling in prices has a disastrous effect on localities, small villages and towns in China, who are dependent on real estate sales as funding their budget.
So, the real estate crash in China, if we’re talking about what policy is China going to take, how is it going to solve the problem of local budgets without solving it by creating a booming real estate market for towns to sell off their property to developers, and developers to make a profit selling off a property to private buyers, mainly.
I assume they’re not just selling it to the government to make a profit. I think there’s a lot of structure that I’d like to know. I don’t know what it is now, but it’s so different from what you have everywhere else.
I think that really is what I hope will be the focus of our show, the geopolitics of different real estate structures and the real estate tax that goes with it.
RADHIKA DESAI: That’s a really interesting question, and much of that we will be discussing in the second part of this show, which we’ll be recording in a week or so, I think.
But let me maybe then just bring this to a conclusion by simply agreeing with what both of you have said, which is that China has a very good chance, in fact, very likely, China is not going to follow the Japanification model because, as Michael is emphasizing, the structure of China’s economy and the imperatives generated by that structure are very different.
To name just one, if something is not profitable in a capitalist economy, it will not get done. Whereas in the case of the Chinese economy, the Chinese government can always say, well, if it’s necessary, we’ll do it even if it isn’t profitable, because it is necessary for the welfare of the people or the productive capacity of the economy, etc. So, profitability just does not play the role of a brake in the same way as it does in capitalist societies.
Secondly, the role of the state, both in terms of initiating new projects and taking responsibility for new projects, and we can already see in the current NPC and the discussions there that the role of the state is already once again expanding again in China, and it can continue to do so. And I think that’s a very good thing.
And remember also that, Mick, you emphasized in the case of when you were discussing one of the graphs, that the per capita GDP of China today is considerably lower than what it was in Japan, even in the late 80s and early 90s.
And that means that, number one, domestic consumption can be a big stimulus for further economic expansion. And secondly, of course, the industrial opportunities, the opportunities for a new industrial revolution are many, and China in particular, because of the important state role in the Chinese economy, the centrality of the state role in the Chinese economy, and the aim of the Chinese economy and the Chinese economy’s managers to develop China’s productive capacity in whatever way that works, not necessarily through private ownership.
These elements are actually going to ensure that China will exploit the opportunities of the new technologies much more effectively and execute a transition to the next industrial revolution much more successfully, and that will be an important road to avoiding what’s called Japanification.
MICK DUNFORD: You know, I think the difference is that Japan, I thought, in the 1980s was at the technological frontier, and China is not. But just, what Michael was referring to is the fact that in China, local government revenue came to depend to a very considerable extent on what is called land revenue.
You know, basically all land is state-owned, is either state-owned or owned by the rural collectives. But what happened was that if land was converted for use for urbanization, was converted for use for urbanization, for housing, then basically the local government could in effect sell leases, 90-year leases, or depending on the activity, different lengths of lease. They could sell these leases to developers. And then that revenue was used by local government to fund infrastructure.
To some extent that model has come up against limits. And I think, the issue Michael raised really concerns how in future will local government be funded, and will there be a reform in the system of taxation?
Will a property tax be introduced in order to generate government revenue rather than relying upon this land tax? Because of course that did encourage local government to allocate that land to people who are going to build housing for upper-income groups, because the implications for land value were under that situation, they would actually be higher rather than providing that land to construct housing for low income groups.
So, this issue of land revenue is one that has to be addressed basically by someone who’s an expert in public finance.
MICHAEL HUDSON: That should be what we talk about in the next show, I think.
RADHIKA DESAI: Great. So I think that we should bring this part of the show, the first part of this show to an end. And let me just do that by going back to our list of topics.
So just to conclude, we managed to cover the first four, although the question of Japanification and the alleged property bubble will resonate into all the rest of the topics, certainly the question of consumption, exports and China’s new growth strategy. So we will return to it.
But in the next [Geopolitical Economy] Hour, we will be talking about these topics, restricted consumption, exports, new growth strategy, and of course, China’s foreign economic policy.
So thanks very much both. Thanks to all the listeners. And we look forward to seeing you in another week or two. Thank you and goodbye.
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A New Global Trade Currency Paradigm and the End of the Era of Dominant Western-based Fiat Currencies
With thanks to our own Colin Maxwell of New Zealand.
Please read in order: Part 1 ; Part 2
Preamble
My apologies in advance to the vibrant GS community for Part III being so wordy. I have really struggled with this task, as the entire subject is so monumental in all of its interconnected elements.
To try to avoid it becoming too tedious I have broken it down into multiple chapters to try to make the weight of the subject matter a bit more palatable, and to hopefully avoid losing readers within the first few paragraphs.
None of this is intended as gospel or sermon, but simply as a discussion document that endeavours to pull together as many of the current contrasting thought threads as possible.
It is also part of my own personal intellectual journey, and extremely steep learning curve. I learn the most by writing on subject matter like this.
Critique and suggestions are very much welcomed.
1. Operation Sandman – to use or not to use?
In 2022 the Saudi MOF revealed in a WEF/Davos interview that ‘Operation Sandman’ was activated and that the KSA would now gladly accept all currencies for settling oil transactions.
The theory was that when it is properly launched, at least 100 countries would conduct a coordinated sell off of their trillions of dollars worth of US government debt to break the U$ dominance of the global economy. This would immediately open the door for a completely new financial hierarchy.
According to Stephen Jen, CE of Eurizon SLJ Capital, the share of global reserves held in U$ dollars eroded in 2022 at 10x the average pace of the last 20 years, and stood at 47% – a much lower estimate than that of the IMF. This represents a plunge, especially in relation to the 15 year trend.
Multiple factors include…
<< *This was effectively a move from Tier 3 class for commercial banks holding it as an asset on their balance sheets. The BCBS (Basel Committee for Bank Supervision) is arguably the highest global authority on banking supervision, with the key role of defining capital requirements.
Ironically with the latest developments with the BRICS+ bloc and the revelations of just how precarious some of the Western fiat countries are in being underpinned by their ability to sell government bonds, the new physical gold Tier 1 designation could really put the skids under this entire fiat edifice.
Prior to this new ruling, banks were very much dis-incentivised to hold gold, and instead to hold risky assets such as equity capital, currencies, and debt instruments. IMO opinion the fiat currencies carry significant risk already, let alone when the new hard backed BRICS+ instrument comes into play. >>
This erosion of support for the existing reserve main currencies will inevitably lead to…
2. Why I doubt that Operation Sandman will be invoked…
a crucial historical review
It is a pointless exercise and counterproductive for the entire planet, including the BRICS+, and the RoW to do this in unison. They can all simply gradually dedollarise by stealth, and in doing so maximise the benefits whilst transitioning in an orderly fashion.
Besides, the US is massively naked shorting gold anyway, in the vain hope of hiding the massively eroding purchasing power of king dollar. This is a godsend for the RoW central banks – the US is idiotically accommodating their rival’s gold bullion stacking binge at massively discounted and contrived synthetic prices – they must be laughing all the way to their central banks.
For more than half a century, since Nixon took the dollar off the international gold standard, all currencies became fiat. Prior to that event, they all were hard backed and most of all by that barbarous relic, gold. The way things are panning out the 50 year experiment of a non hardbacked reserve currency is coming to a close very soon. In the context of some 5000 years of financial history this is barely a drop in the bucket.
Essentially, from 1971 on, there was a divergence of investment in the U$, and many other Western financial systems, away from the industrial capitalism of the real world economy, into what would turn out to be ruinous financial capitalism. Surely fiat currencies, coupled with a greedy obsession with financial rentier capitalism, is a guaranteed recipe for disaster.
3. Is The U$ Pinning its Hopes On Discovering Alchemy?
Europe’s tiny central bank gold holdings are probably accurate and likely not rehypothecated to any great extent, but the same cannot be said for the US’s claimed 8133 tons of US gold holdings.
It is almost certain that there are multiple ownership claims on each ounce, and this is why global central banks are quietly repatriating physical bullion. The same with silver, as the paper claims for each physical ounce are at least 90:1. The silver price discovery market is even more broken with the true G:S ratio needing to be more in the realms of between 8 -16:1.
Texas is very wisely building its permanent state depository and recategorising gold as legal tender. They do not trust the centralised system, and now at least six other states are looking to follow their lead, because they too are losing trust in the federal system, and in the management of US Treasury gold.
If Texas doesn’t trust the U$ system, then why on earth would the RoW?
4. Foreign Exchange Reserves Quietly Converted Into Gold Bars
It turns out that the massive global shadow banking industry, and with gold being auto-categorised as foreign exchange reserve, that this combination has hidden the fact that large swaths of foreign exchange reserves are being converted into physical gold.
This trend dates back to at least 2010 but really ramped up when the US weaponised the dollar in March 2022 with Russia’s SMO in Ukraine.
This makes a ton of sense (literally) for the RoW, as it amounts to de-dollarisation by stealth – converting incumbent US dollar debt into stacks of debt-free bullion.
Furthermore, this sanction-proofs potentially trillions of excess reserves – a no-brainer when the entire globe is in such a state of financial and military turmoil.
Estimates are that China has around $6 trillion in excess FX reserves giving a truly staggering gold/GDP ratio compared to Europe with a pitiful 4% average and the US potentially massively negative.
Robert Triffin, Belgian-American economist (1911–1993)
5. Another new Global Paradigm — no national currency having the ‘exorbitant privilege’ of reserve currency status
indeed a first for humanity…
Why on earth would any country, especially China, want its currency to have overwhelming reserve currency status anyway? A very bright spark, Robert Triffin, predicted back in 1959 that the Bretton woods system, with the U$ dollar as the world’s utterly dominant reserve currency, was doomed because of fundamental flaws.
Triffin was right – the Belgian born Yale professor predicted that by definition a reserve currency would run increasing deficits. The more popular a reserve currency is, the higher its exchange rate tends to be and the less competitive its domestic exporting industries become.
This means trade deficits for the country issuing the currency. They love the effectively ‘interest free loan’ generated by selling their currency, or in essence their debt, to other countries, but at the same time they need to raise capital for dollar denominated bonds. This is part of the paradox – cheap sources of capital and positive trade balances rarely coincide.
6. Implications of Gold Backing – a national currency versus a trade only international instrument
History has proven that gold is inappropriate for domestic monetary backing. Michael Hudson covered this on page 433 of his epic book ‘Super Imperialism‘ quoted/paraphrased…
‘Freeing domestic credit from gold backing has been a precondition for promoting rising employment and production of goods and services. But in the international setting gold backing is a positive because it serves as a very real constraint on trade imbalances but not on domestic production and employment.
You could say that Europe and Japan abandoned gold prematurely before developing an alternative to the U$ dollar or the dollar-proxy SDRs issued by the IMF, as an effective arm of the U$ government.
Only the U$ has shown the will to create international structures, and to restructure them to fit its financial ‘needs’ as they devolved from a hyper-creditor to a hyper-debtor nation.
Removing the gold convertibility of the dollar enabled them to unilaterally pursue protectionist trade and cold war military practices simultaneously. The US claim that their surplus dollars act as a ‘growth locomotive’ for other countries by expanding their credit creating powers – as if they need US dollars to do this.
Meanwhile they were able to derail foreign attempts to break free from what has become a tidal wave of US deficit dollars. History will reflect on the remarkable asymmetry between the U$ and the RoW.” … end quote.
Of course public utility models, like the incredibly successful Commonwealth Bank of Australia, prove that assumption to be patently and tragically false, as this model went on to be arguably the most successful public utility equivalent to a reserve bank in world history.
7. The Commonwealth Bank of Australia — a Pubic Banking Utility Masterstroke
I have included this long chapter, because it is actually an integral part of this entire subject of eCONomics – which is to say that everything about neo-classical economics is based on false maxims and lies, designed to enrich the financial kleptocrats ensconced at the head of the human food chain.
This is integral because it illustrates the fact that in so many cases countries do not even need to borrow from abroad if they effectively deploy the PBS at reserve bank or treasury level. This is another key piece in the global jigsaw puzzle where the global economy could be transformed into a completely new egalitarian paradigm.
The public banking model in itself would become a huge source of liquidity and capital for the entire domestic economy. This would replace the status quo con where nations allow a parasitic global banking cabal to constantly thieve from them like a giant squid, sucking the lifeblood out of the entire nation.
This concept is extremely simple – it means that the public creates their own money and liquidity and to reap the benefits of any interest paid domestically, rather than third parties creating that money and subsequently allowing them to charge us as a nation for that privilege. In the current broken model, we annually allow billions of dollars to disappear overseas into these parasitic global banking institutions.
The exciting part of it all this is that incredibly successful public banking utility models have already been tried and proven to work, and to generate huge sustainable wealth for entire national economies.
One of the most stunning examples was the Commonwealth Bank of Australia which Ellen Brown details in her awesome book ‘The Public Bank Solution‘. Of course, history informs us of the tragedy that this incredible model didn’t last – it actually became a victim of its own astonishing success, and it was destroyed by the combined might of the parasitic global central banking cartel.
While the US was setting up its privately owned central bank, for the Federal Reserve, to become a parasite on the productive economy of most of the world, Australia was at the exact same time taking the bold step of establishing a PBS bank that issued credit for the sole benefit of – wait for it – Australians!
The huge irony is that Denison Miller, the bank’s first Governor, was allowed to try this model only because he was considered by the other existing bankers of the day to be one of their own thieving ilk, and that therefore they would be able to keep this new bank in line.
In essence, Miller understood how the commercial banks thieved from the nation at large and he set about creating this new model that could very rapidly revive a struggling economy and create long-term wealth for the entire Australian society. The first branch opened in Melbourne in July 1912 and Miller was the only employee.
Somehow he had persuaded the Treasury to advance him £10,000 as seeding money – the first and last time this version of the CBA was lent any money. Of course, this money didn’t even exist – it was simply created as a ledger entry.
Miller subsequently promised that the CBA would at all times be the people’s bank. It slowly dawned on the private bankers, who were so intent on having to guard against the socialisation of their own banks, that they completely underestimated the power of an orthodox banker who simply mobilised the resources of the entire country to enable the CBA to quickly grow into one of the greatest banking models the world had ever seen.
The bank began advancing massive sums of money simply on the credit of the Australian Nation. An early example was the Melbourne Board of Works which went to the market for money to redeem existing loans and to raise new capital – normally they relied on loans from the viper’s nest residing in The City of London. Instead, this time they approached Dennison Miller and were loaned £3 million at 4% – this was an enormous sum at that time.
In 1914 during WW1, citizens started rushing into their banks to withdraw their funds – Miller quickly put a stop to these bank runs by simply declaring that the CBA would support any banks in difficulty – that was the end of the panic immediately. It was a dramatic demonstration of the power of the Govt to stabilise the financial system without relying on any other parties.
In just 2 years from the creation of this bank, Miller was basically in control of financing Australia’s war effort and ZERO money was borrowed from overseas. It was the first bank in Australia to receive a Federal Govt guarantee and offered both savings and general transactional services. By 1912 it took over the State Savings Bank of Tasmania, and by the following year, it had branches in all 6 states.
In 1920 it began acquiring central bank powers and took over the responsibility of issuing Australian bank notes from the Dept of the Treasury. In 1924 a board was appointed with 6 members as the new governing body. During WW2 emergency legislation was passed and the CBA was granted almost full central bank powers.
The CBA was a remarkable success, but was subsequently seen to be threatening the hegemony of the City of London thieves. Prior to the establishment of the CBA, London capital had always dominated the Australian financial system.
This was the colonial model of the time – ie financial colonialism, where the colonies were granted the right to “govern” themselves – provided they obeyed the financial rules of the COL (City of London) – shame about this acronym!. As such the Old Lady of Threadneedle Street (The Bank of England) presided over the financial dynasty of the empire.
Australia was a debtor nation until WW1 when it suddenly demonstrated its ability to independently finance its war effort. It also used the CBA to finance its own shipping line which was poised to smash the City’s shipping monopoly – the old bitch from Threadneedle Street was not amused.
Miller calmly told the big bankers at a dinner in London that Australia could meet any demand, simply because it had the capital of the entire country behind it. When he arrived home in Aus he was asked by a deputation of the unemployed for a loan of £350 million for productive purposes – he advanced the money immediately, and news of this caused panic within the COL, as they realised that if other countries adopted this model their entire financial edifice could collapse.
The COL immediately set about devising a plan that would enable overseas national institutions to be drawn into its squid-like network. The plan was to centralise all banking throughout the empire over to the supervision of the Bank of England – it would become the super banker’s bank.
The horrible old lady got her way and as such the modern parasitic and hegemonic central banking model was born. The head of the bloodsucking squid would eventually moved from London to the Bank for International Settlements (BIS) in Basel Switzerland – a model originally designed to launder Nazi war loot pilfered from their rampage across Europe during WW2.
This is the disgustingly parasitic model that survives to this day, and New Zealand (NZ) is a paid-up member of this bankster club too – our RBNZ dances to their tune and as a result we squander billions of dollars annually overseas to thieving institutions when we could create our own money and credit just as the CBA did in Australia.
Sergey Glazyev, Russian politician and economist, with Vladimir Putin
8. Whats is the new BRICS+ Instrument to be – a basket of 20 commodities including gold, or gold alone?
Some very astute financial analysts, including Alasdair Macleod have thought all along that Sergey Glazyev, the Commissioner for Integration and Macroeconomics within the Eurasian Economic Commission, the executive body of the Eurasian Economic Union, was never that serious about the new trade instrument being backed by a basket of around 20 major commodities including gold and silver.
Their theory was that this multiple hard-backing would be too hard to bring to fruition and to administer. Personally, I always liked the idea because I thought it could have had a smoothing effect on the volatility of the trade instrument. This would be very much the case until the market discovery of G & S finally kicked in to properly expose the true purchasing power of the dominant Western fiat currencies.
Certainly though, the gold only backing could be easily instigated, with a brand new issuer of this currency that would not be taking a central bank style role, but to simply become an institute of issuance.
Gazyev has publicly written in a Moscow based business paper that it is time for the Russian rouble to be on a gold standard – given this was co-written by the deputy of the EUEA Committee, this must carry some weight, but it was written back before the Johannesburg BRICS+ Summit meeting, in which no decision or announcement was made about the new instrument.
Also at that time there were statements from Indian officials that there was no way they would go along with this gold-backed currency. Remember too that BRICS+ requires a unanimous vote for this new currency instrument to be accepted.
Also Lavrov has mentioned that Russia had accumulated a large quantity of Indian rupees which were difficult to convert – a new trade instrument would make the process of trade a breeze, and stop the third party ticket clipping too. No sooner was this intent announced than both the odious Yellen and Kissinger visited Beijing to try to pressure China from joining in this new initiative, presumerably using the argument that it would undermine their export market.
It appears that China is more concerned about the vulnerability of the new BRICS+ members stress arising from high interest rate loans, than they are about the welfare of the Western hegemon – who could blame them for that – the economic hybrid war waged against the RoW is hardly a secret.
Also the new trade-only currency is very different from normal bank credit, as this form of credit is self-extinguishing when trades are completed. I assume the importer would get access to the trade currency through its central bank. This would be credit created on the back of this new currency and tied to gold, not just created out of thin air.
Presumably this would make the politics a lot more simple because there would be no interference with the management of the individual member’s sovereign currencies. This also explains why the idea of the new trade instrument being just a mix of all of these currencies was probably a bad idea.
This system would also have required endless reconfiguring as a growing procession of new members joined up. I view the 153 BRI members as a precursor to a massive watershed of new BRICS+ members adding exponentially to the size of this new bloc.
Incidentally, the SCO (Shanghai Cooperation Organisation) and BRICS+ are becoming more and more aligned too, with the SCO having nine full members, two observer nations, fourteen dialog members and another six pending applications, giving a grand total of 31 nations as members and associates. Kuwait, UAE, Maldives, Myanmar and Bahrain are all new dialog members just since May 2023
9. China is under no illusions about the serial economic hitman antics of the Western financial hegemon
They have witnessed the Latin American (LatAm) crises of the 1970s US orchestrated pump and dump schemes that effectively bankrupted their victim nations and allowed U$ corporations to pick up assets and public utilities for pennies on the pound.
Closer to home was the 1997 Asian Financial Crisis, which originated in Thailand with the collapse of the Thai baht and the capital flight after they were forced to float because of their lack of foreign currency to support the peg to the U$ dollar.
This spread quickly to many other southeast (SE) Asian countries and later to Japan and South Korea as well. The result was slumping currencies, stock markets, other asset prices, and a massive rise in debt with debt:GDP ratios rising by 100-180% in all of the largest economies.
China assisted in the damage control by making $4 billion available in bailout money, and by not devaluing its own currency. However the tide of capital fleeing these countries was not stopped and the authorities had to cease defending their exchange rates and allow their currencies to float. Their foreign liabilities grew massively in domestic currency terms, causing even more extended carnage.
The ASEAN countries believed that the well co-ordinated manipulation of their currencies was a deliberate attempt to destabilise their economies. The Malaysian Prime Minister, Mahathir Mohamad accused George Soros and other currency traders of ruining Malaysia’s economy with currency speculation.
Long story short, the carnage from this Western contrived pump and dump debacle was right on their doorstep and it remains very vivid in the minds of all of these SE Asian BRICS+ bloc members.
The NDB (New Development Bank) was tasked with helping to finance developing countries, and Russia in 2023 offered 25-50,000 tons of free grain to six struggling African nations.
In short it is obvious that China sees the real priority is to support Russia and the BRICS+ bloc, together in mutual cooperation in a 21st Century industrial revolution for the benefit of all member countries, their productive economies, and to build sustainable future wealth.
Halford Mackinder’s Heartland Theory: the Afro-Asian “World-Island” at permanent struggle with the Rimlands
10. Mackinder’s 1904 theory was right – the ‘World Island’ he predicted has indeed become a reality.
This could well be recorded for posterity as the major geopolitical pivot in the history of our species.
Now we await the announcement of the new hard backed trade instrument as soon as the BRICS+ nations are satisfied with their bullion stacking, and a non synthetic market driven price discovery for gold and silver takes place. IMO it will work admirably because a better alternative to the unbacked fiat countries will be, not only available, but utterly compelling for trade settlement purposes, but also in terms of stable and secure reserves.
The US is in an impossible debt trap now and the Fed has lost control – the cost of credit is too high for the massive amount of debt entrenched in the system and if the dollar weakens, inflation will be off to the races even further.
Official inflation figures are a complete croc anyway, and as John Williams reported 5 months ago for August 2023, when the official CPI was headlined at 3.7% YOY, his estimate was 11.5%. If the changes weren’t made to the calculation formula between the 80s and the early 2000s, they would be forced to report the double digit number.
When the inflation figure is manipulated to this degree it means that the Fed is in reality, operating outside of the price stability mandate. Given that employment figures are completely fictitious too, that many part time jobs are included in the total, and people no longer looking for jobs are excluded in the formula, this figure is a complete croc too.
To me this means that the 100% privately owned Fed is not operating within any effective mandate whatsoever, and even more outrageous is the fact it hasn’t had a proper audit for over 70 years!
11. Has the U$ and the West reached peak stupidity yet?
No, it seems they are still working on it – figures below are from…
To try to put the public debt into perspective I compared the US External National debt to the highest 30 debtor nations of the world. I took out the 17 of those that were NIIP positive (Net International Investment Position) – ie net external assets less liabilities, and at the current $34.34 trillion, this was more than double the debt of all the rest of the remaining 13 net indebted countries combined.
On present trends by 2031 every single penny of tax revenue will go just to pay interest on debt and spending on social security, which is already in a $70 trillion dollar hole.
Even more crazy is the fact that the U$ informed Saudi Arabia of its intention to transition into ‘green’ energy ASAP, when the KSA was the key lynchpin to saving the petrodollar, which was in turn the only possible saviour of U$ reserve currency status.
One of the common criticisms of BRICS+ bloc is its incredible diversity – I see this diversity as a strength, with each country bringing varying degrees of raw materials, energy resources, manufacturing prowess, and logistics, to the table, in a giant bloc that is no longer beholden to the West.
12. Overseas Investment in the US
Around $33 Trillion in total – made up of…
— $7.5T in short term investments – bank deposits, treasury bills, and corporate bills
— $14.5 is invested in equities and the balance in Treasury bonds
If the confidence in the U$ economy and its fiat currency starts to slide, will these foreigners stay in these investments if they have viable alternatives? Some of this $33T will obviously flee into gold. Some will go into China because with its massive infrastructural investments in Africa, Asia, and LatAm they will be seeking these capital inflows. Some of this capital will flow into entities stockpiling commodities, as this is a hedge against the fiat currencies’ declining purchasing power.
The West is hamstrung though, as it probably has at least 10,000 tons of gold with multiple ownership, as so much has been swapped and leased out.
Investing in real estate in countries where their currencies plummet can be problematic too. History showed that rents in Germany in the 1920s fell so much in real terms that a property could become a liability because maintenance and ownership costs could overtake income. This effect does not happen with money held in gold and silver. In a currency crisis this effect can become a deterrence to invest in some normally reasonably hard asset classes.
Conclusion
Clearly this monumental transition won’t be just about sound money and economic principles. This fix requires genuine statesman and the governance structures that have their citizens and nations egalitarian and long term interests at heart. This is evident within the RoW and BRICS+ governance and leaders, but is sadly lacking within in the Western train wreck.
Tragically it seems that the West will need to comprehensively crash and burn before the political appetite ousts the current treasonous bunch from office. Of course, there remains the danger during the transition period, of even more dangerous tyrants gaining power.
I predict an imminent watershed of U$ states seceding from the Union without radical changes in the behaviour of central government. So much for Uncle $laughter’s obsession with endeavouring to carve up the Russian Federation like a side of beef for the taking – the shoe could well end up on the other foot.
The BRICS+ bloc members don’t even need to interfere, as the West is doing far more to self-destruct than if all of their rivals combined together to deliberately try to undermine the hegemon.
I think the formal announcement of the new trade instrument will only eventuate when the BRICS+ bloc members have completed their bullion stacking, and as the new physical market discovery process begins in earnest.
The entire process to date amounts to a period of ~17 years or so. The new bloc has had all that time to carefully study historical models, and to design the new functional model accordingly.
Methinks they will get it right, especially since they hold a full hand of trump cards – including the left and right bowers, the Joker (Mr Putin) and enormous stacks of chips on the table as well.
Colin Maxwell
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For GlobalSouth.co by our Colin from New Zealand
Solutions Unearthed by a Tale of Two Economies
A SEQUEL TO PART 1 – ‘The Western Train Wreck‘ – and an effort to promote a solution orientated discussion
It seems that what I regard as an extremely important book , Scott Andrew Smith’s, ‘A Tale Of Two Economies’ released in 2023, has gone relatively unnoticed.
Of course this is entirely to be expected because of the entrenched ‘thinking’ of the eCONomists and commentators who nurture and cheerlead the ruinous Western status quo.
It turns out that the staggering size of the total volume of payments in the highly financialised U$ economy was not even known until the Fed began building the means to track payments in collaboration with the Bank for International Settlements (BIS).
Indeed, given the degree to which the Fed is compartmentalised, only a select few of them even now have a clue about this. Politicians of course were just as out of touch – I imagine that this remains the case as to date I have seen no mention of this on the MSM, let alone alternative media – hence the idea to make this subject part II of my sequel.
The Dream Team – FTT and the PBS
FTT = Financial Transaction Tax
PBS = Public Banking Solution
What I see are two distinctly different, although complimentary, initiatives which between the two could turn even the most broken financial model into a socio-economic miracle within a few short years – indeed, most often within as little as one term of government.
Both systems are stunningly simple mechanisms, which is frustrating as all hell, because that in turn generates the default reaction of at least 95% of the population – they dismiss the concept without knowing any details on the grounds that if it is that simple, it would have been done long before now.
The other automatic default reaction is that these solutions (especially any mention of Basic Income) are seen as far too ‘socialist’ and as such are the thin edge of the wedge in a slide back into communism.
Scott Smith addresses this reaction directly…
“Communism is premised on the notion that it is the worker who creates profit in the products that are produced, so if a company makes a profit after having paid its workers, the worker has been shortchanged for the value they created.
Communism was conceived of before automation as a response to the abject poverty of the 19th century. It was fuelled by the huge gap between the rich and poor, and it rejected the notion that profiting from capital investments could ever be good for society.
The issues that communism sought to address were real, and these issues still exist as shown in this book, though not to the extent they did in the 19th century. The fact that we have a middle class today shows that workers are better paid. Yet there are many who work hard and still live in poverty. The solutions in this book address these problems in a way that fuels economic growth instead of destroying the engine of our wealth, as communism does.”
Of course a huge part of the neoliberal strategy to engineer their vision of a new world ‘order’ (sic) is to point the finger at a communist takeover when in essence it is already a dead duck – NB – from 30% in the 1980s the percentage of global population ruled by technically communist governments is today down to a minuscule 0.5%.
And why the massive plummet down to 1/60th of its former glory within 40 years – BECAUSE COMMUNISM SIMPLY DOESN’T WORK – PERIOD!
In fact I have pointed out before that the U$ fought a horrible war in Vietnam, ostensibly with the aim of stamping out communism. The U$ lost the war, and then in the height of irony within a few decades communism actually defeated itself as the country of 99 million people organically transitioned into a free-market capitalist model.
The current 0.5% remnant consists of minnows Laos, North Korea and of course Cuba. What the socialist!, socialist!, socialist! panic brigade seems to miss is the fact that the US economy is ‘socialist’ anyway, only in the most obscene way possible, where the costs are born by Mainstreet, and the profits are socialised and funnelled directly into the pockets of the thieving kleptocrats.
Mainstreet and the Productive Economy Languishes
Meanwhile the bottom 50% of the population’s share of financial assets shrinks in spite of the trillions of dollars of stimulus flooding the economy.
Charles Hugh Smith has just written an excellent article pointing out how these “recession proofing” machinations by the criminal Fed have once again robbed Main Street and made a monster recession a mathematical certainty – his chart here is a real eye-opener – a reminder that everything the ‘Creature from Jekyll Island’ turns its hand to is a rich man’s trick.
The bottom 50% cohorts share of the financial assets gained a minuscule 0.2%, whilst the kleptocrats pocketed around $10 trillion.
The Two Economies
#1 Is the real and productive economy that generates genuine wealth but is penalised because it carries the vast majority of the tax burden.
#2 Is the parasitic casino financial economy that pays negligible taxes with the cartel-style commercial banks diverting multi-billions in interest payments into the hands of their oligarch owners.
This is the very foundation of the network that orchestrates the forever wars which are now hybrid techno/military in nature, in which the global private banking industry finances both sides of all of these conflicts.
The billions of interest payments that get sucked out of Western domestic economies go straight into their coffers. This same network brought us the COVID war as well. They have literally trillions of dollars at their disposal to finance ever more innovative ways of killing and thieving from Main Street.
A MINUSCULE 0.25% FTT – replacing all other taxes and funding Basic Income, Earned Income Credits, Healthcare, child care credits, free college and higher education – it sounds too good to be true doesn’t it – where on earth will this money come from?
The fact is that there is a monumental disparity between the material and monetary economies with the size of the material economy being roughly the size of the GDP, which in the U$ example in 2020 was $25.6 trillion.
However as the illustration shows, in the year 2020 the total payments were $7,625 trillion or $7.625 quadrillion!
Even though many payments like commodity trading, various options, cryptocurrency trades and EFFs have been left out, the monetary economy is still ~350x the material economy. The US GDP only represents ~0.33% of the payments made in the total economy.
Being able to see the big picture, makes the solution all the more obvious – payments need to be taxed NOT INCOME.
Basic Income Payments – Eliminating the Welfare Trap
Basic Income monthly payments for 18-69 year olds of $2,000 per month and 70+ year olds of $3,000 per month would be affordable.
The hurdle has always been how to create a basic income structure without increasing taxes. This is the whole point of FTT – the extra tax take would be from the parasitic financial economy, NOT from the productive economy.
Eliminating income tax would immediately give everyone a huge boost in their take-home pay. With the basic income payment each week added in, all wage earners would enjoy increases in disposable income.
In America with their huge income disparity, 90% of the country’s population would significantly improve their living standard.
The welfare trap and the fear of rampant socialism are the overarching concerns of the critics – IOW, how can you have a social welfare system that provides for the genuinely disadvantaged whilst not propagating an institutionalised multigenerational welfare trap?
In existing models, including within New Zealand (NZ) and the U$, when someone gets a job, they usually lose some or all of their existing benefits – as such this disincentives them from finding a job. Basic income models are the polar opposite – they incentivise beneficiaries to work.
The basic income model also encourages new business start-ups by allowing them the wherewithal and the confidence to try to establish a business that they may have always dreamed of.
Earned Income Credits
To encourage beneficiaries to work, earned income credits could be paid when they find a job. Coupled with the basic income payment this could add up to a very liveable income.
Based on Smiths figures, someone earning $15,000 would receive an extra $7,500 in earned income credits, and that bumps up to a total income of $46,500 per year when you add in basic income.
0.25% FTT was Modelled in France back in 2010
The brilliant Simon Thorpe from Toulouse in France ran the models completely independently from Smith in the U$. He came up with the exact same figure of 0.25%. Once again is is clear that in highly financially orientated economies this rate provides far more revenue to the Govt than all the other taxes combined.
In the U$ it is enough revenue to provide universal free basic health care, childcare credits, and free higher education. Within 7 years the U$ could pay off its rapidly spiralling public debt as well.
This model could work in NZ too, and if it was implemented along with Ellen Brown’s PBS (Public Banking Solution) NZ could become the sustainable socioeconomic miracle of the planet within one term of government.
Everyone is a Winner Except for the 0.1% Plutocrats
The most astonishing result that these models uncovered was the fact that all cohorts of Mainstreet benefited enormously – the only ones worse off were the thieves positioned at the apex of the human feed chain.
These were the increases in net income…
But Won’t This Increase in Disposable Income Spell Massive Inflation?
As Smith explains…
“Inflation is always a risk whenever people have additional money to spend, but if the production capacity of the material economy, including that of foreign companies, is sufficient to support the additional spending there will be very little inflation – the key to minimizing inflation is to finance a diverse and robust supply chain.”
Furthermore, this new paradigm would encourage the return of a savings culture, and this would make low-interest rate liquidity available at a local level where moral hazard restraints would once more play a big part in making soundly based loans. Lower interest rates are disinflationary too.
Budget Surpluses Could Be Used to Generate Future Wealth
some examples…
Summary
“The marvel of all of human history is the patience with which men and women submit to burdens unnecessarily laid on them by their governments.” – George Washington
BTW, Washington was the first, and sadly the last, independent candidate ever to become POTUS – incidentally, he was successful twice. These massive burdens have remained on the nation’s shoulders now for another 226 years – when on earth will our species ever learn?
Cheers to all
Colin Maxwell
Planned Part III — Banking 2.0
A discussion of the fact that ~97% of the money supply is already digital and created instantly out of thin air by the touch of a button. National and international implications and the financial instruments that could work in this brave new financial world without causing inflation and liquidity squeezes.
This is another reason why BANKING 2.0 needs to be run as a public utility and as the first key step in a transition to the PBS in which all tiers of banking are available as public utilities – this would not preclude privately owned banks, it just means that they would have to compete with the PBS model to remain in business.
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