Sunday, 5 June 2011


A few months ago, I wrote a brief piece on how China replaced Japan as the world's number two economy, and I followed up with another piece on how China is expected to replace the US as the world's leading economy in the next five years. A college student from China sent me an email, presumably because s/he did not want to be identified or tracked if s/he posted a comment on my blog. The student argued that China is indeed marching toward phenomenal economic growth, but at what social costs? 
China may indeed overtake the US in five years, but there is a vast difference between phenomenal GDP growth and the reality that cost of living is very high and wages low, and China still has the largest peasant population on the planet and more people than any other country. Ironically, China may become the world's number one economy with the world's largest number of poor, and all of this accomplished under a Communist regime that in theory is committed to social justice and socioeconomic equality.
As expected in 2010 amid a global recession, China replaced Japan as the world's second most powerful economy. While China has a very long way to go before catching up with the US whose economy is worth $14.6 trillion against China's $5.7 trillion (according to CIA stats), it all depends on how the US economy performs in the next half century and how stable China is politically in order to achieve global economic preeminence.

Can China remain an one-party Communist state with an expanding middle class and capital economy without having to make any political concessions in the next forty years? Doubtful even by the Communist Party's estimation. In the budget it has just submitted, China will be spending more on internal security than on defense for the first time ever, a sign that it is not worried about foreign enemies but it is worried about mounting internal opposition gathering momentum after the success of the Tunisian, Libyan, and Egyptian rebels.

As far as the US is concerned, the world knows that the US reached its zenith of political, economic, and military power when the Second World ended and it has been a very slow road downward ever since.We have come a long way from guaranteeing the dollar with gold collateral under president Truman to the current
85% of foreign-exchange global transactions in non-dollar currencies. However, the dollar remains the dominant reserve currency with 50% share of international debt securities and 60% of central bank reserves globally. This kind of muscle allows the US to write blank checks and not pay the consequences as it would have if it were another national currency like the Mexican peso. But for how long?

On 4 March 2011, the European Central Bank hinted at interest rate hikes, indicating that it is adamant on pursuing a monetarist policy, which is in line with German monetary policy. If the EU is committed to a strong euro as a reserve currency competing with the dollar for the long term, it makes perfect sense why it is forcing all of the debtor EU members especially Portugal, Italy, Ireland, Greece, and Spain (PIIGS) to adopt fiscal austerity combined with privatization of public sector assets and liberalization of the market so that it becomes easier for foreign investment to penetrate it. Clearly, the EU is looking beyond the present and down the road in competing with the US globally and perhaps overtaking the dollar as a reserve currency. Will that strategy work if half of EU members have high unemployment, weak middle class, and they are plagued by sociopolitical instability? 
Because China wants to help the EU retain a strong currency, it is considering buying Portugal's government bonds as part of the impending bailout/austerity package. This is because China wants to continue expanding trade relations with EU and a strong euro means more Chinese products sold in European markets. Moreover, China sees its role as the world's largest holder of surplus capital as an ally of the IMF and European Central Bank that are pursuing austerity for debtor nations.

The US has opted for 'cheap money' as a mean to growing the economy out of the current recession, and repaying foreign debt with cheap currency. But the rest of the world, China and Russia included, is well aware this strategy comes at the expense of everyone else, and it will not work long-term.  That the price of precious metals has skyrocketed reflects lack of confidence in paper currencies, especially in reserve currencies like the dollar. The US dollar still has the best liquidity globally, but for how long now that the euro has established itself as more stable and the Chinese are geared to present the yuan yet another world reserve currency.

Considering that EU members are pursuing very tight fiscal policies, combined with anti-labor and anti-public sector and anti-social welfare policies, the US will be forced to follow suit to keep the dollar strong and competitive. That EU will be issuing E-bonds backed by the credit of member states thus creating an integrated an EU bond market competing with U.S. Treasurys in so far as holding central-bank reserves is an added pressure on the dollar as a reserve currency.

There are those who have argued that the US actually went to war against Iraq and Afghanistan not because of any 'real terrorism' threat, but because the US used war as a tool to retain its competitive advantage against the EU. I am not so sure that I would accept the theory for it seems too conspiratorial, but it is a fact the US dollar is under fire from the entire world - from oil producing nations, China that is carrying such a large percentage of the US debt, Russia that is concerned about the cheap dollar's artificial high value, and of course the EU that is setting itself up to dominate with the euro as a reserve currency.

This is not to suggest that the dollar does not have a future, but that as the US economy is weakening, so is the dollar as a reserve currency that has been on a long downward path since the IMF secretly warned the Eisenhower administration in the late 1950s. If the rise of the euro and yuan continue against the dollar, the purchasing power of Americans will decline even further and socioeconomic polarization will continue.

Ultimately the question comes down to how capital is utilized in the US, a debtor country, versus China that is a creditor. Under a quasi-statist regime (state-capitalism), China is investing in a strong national economy and its global network. Although China today has a mere 6% of investment in global firms, it is investing in future economic hegemony by staying focused on production of the civilian sector. By contrast, the US, and EU is not much different all, has an economy where there is immense capital concentration in few private hands that recycle investment parasitically.

Instead of creating new wealth by investing in new areas of the civilian economy, much US and EU capital is  invested in market trading and in existing sectors of the economy from finance to pharmaceuticals. Besides the parasitic (non-productive, money invested to make money on existing productive investment) and stagnant vertical direction of private capital investment in the US and EU, the defense sector, also largely parasitic absorbs inordinate resources in the US economy and EU to a lesser extent.

Most of the world's largest 100 defense contractors are US and European, while only four are located in Japan, three in India, three in Israel and three in the rest of the Middle East. The combination of parasitic capital investment and defense investment contribute not only to contracting economic cycles, but it debilitates the social structure by weakening the middle class and labor. Above all, the direction of such capital becoming increasingly concentrated and 'recycled in parasitic and defense sectors also leads to lack of competitiveness, which along with rising public debt and chronic balance of payments deficits accounts for the decline in the dollar as a reserve currency.
Whether in China, US, Ireland, India, or any other nation, capital represents a new form of tyranny. The concerns that the Chinese student raised in the email to me are unique to China because of the glaring contradiction of a Communist regime managing an economy soon to become the world's leader. However, the fundamental issue of social and economic justice is universal and no different for a college student at Liverpool than one in New York  or one in Beijing. 

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