EJ: My next question has two parts. The first is whether you
believe that the renminbi will rise when China eventually allows it
to float, as everyone seems to expect. Second, do you think their
decision will indicate a policy shift from an export-oriented to a
more internal demand based economy?
MH: That’s how the American press is depicting it, but not the
Chinese. U.S. press reports – and your question – are written
almost in a vacuum when it comes to Chinese politics and economic
choices. They don’t want to re-value their currency under
conditions where this would involve taking a loss on their huge
investments in dollars. They have really $2 trillion in foreign
exchange and they’ve lost faith, like everybody, in foreign
currency.
They tried to shift, to protect themselves by diversifying out
of the dollar into euros and sterling and promptly the euro and
sterling plunged against the dollar. So they lost money there, too.
I’ve urged the government not to think of it simply of revaluing
currency in the current pattern of international exchange.
The problem is that China is dealing with an America that
strongly manages its own currency. America accuses China of managing its
currency but it’s the United States that’s managing the currency by
holding down the interest rate at very low levels in order to
reflate the financial markets. Holding it down
under terms that the US dollar doesn’t rise to protect the
investment.
So China doesn’t want to have to float its currency in the face
of other countries managing their currencies against China and
under conditions where foreigners have bought into Chinese banking
and can become huge gamblers essentially trying to empty out
China’s reserves by running raids on the currency. So in order for
China to float the RMB there would have to be a political change in
the way the international financial system is structured. I’ve
urged them to balance the Capital Investment Account, in other
words all of the American capital flowing into China, by saying
that if the United States refuses to let the Chinese government and
agencies buy major American enterprises as Americans have bought
outside China from inside China, China should use its dollars to
buy out American and foreign investments in China.
So the policy will say, “Okay you won’t let us buy any
significant stake in Boeing or other significant companies in
America. Fine. We’ll buy out the American manufacturing firms and
banks that you’ve set up in China and we’ll pay you the full book
value that your corporations report their net worth at.
You’ll get the dollars back and we’ll get rid of the dollars we
don’t want and we’ll be back in balance. That way we’ll have
Chinese industry for the Chinese and you can have the American
industry for the white people, which seems to be how America
operates.”
EJ: I’m aware that China doesn’t want to do anything to lower
the value of their dollar holdings nor allow the RMB to strengthen,
and the US doesn’t want the dollar to strengthen, either. That was
one of the major reasons for our buying gold in 2001. Global debt
orgies have a way of ending up as currency devaluation orgies, and
gold was a way to hedge that. Are you suggesting to them that if US
companies refuse to sell holdings in China but that China
essentially take them?
MH: They’re very polite. Of course they’ll ask but they’re also
smart enough to ignore the response. You can either say, “Yes,
please” or “Yes, thank-you” otherwise they’ll assume its an error
in translation.
EJ: But won’t that stifle future US investment in China?
MH: I hope so. China doesn’t need American investment in Chinese
banks. It doesn’t need Goldman Sachs there. It doesn’t need
financial predators. It doesn’t need the kind…
EJ: I was referring to all the U.S. corporations that
manufacture the goods there.
MH: The US manufacturers in China don’t pay an income tax over
there because China has gone along with the US tax system and
permit these manufacturers to operate without declaring a taxable
profit. And the reason they do that is they claim they borrowed the
money from the parent company or its affiliates to set up a
manufacturer there so the American companies there expense their
profits in interest charges and appreciation which writes down the
book value.
So China can say, “Wait a minute, this whole gimmick was just
done to avoid taxes and you actually owe us money. If you don’t pay
the taxes you owe I’m afraid we’re going to have to seize your
factories for back taxes.” It doesn’t need tax evaders. It doesn’t
need financial crooks like the American companies have been
behaving there. They’ve behaved abominably there as they have in
Iceland and other countries.
EJ: Well, that may be true in some instances but surely that’s
not the majority. I’m aware of quite a few US companies that do
business in China. The deal has always been, “We’ll come in and set
up production facilities there, and in exchange for that we’re
going to create high paying jobs and teach you how to organize
networking equipment.” The transfer of technological and managerial
know-how is a key benefit to China, second only to enabling
export-led growth.
MH: I don’t doubt that as long as China believes there is a
mutual gain in foreign investment it will welcome this. But will
cease to do so at the point where it no longer sees a mutual gain –
not only a gain on a case-by-case basis, but also on a systemic
macro basis. At first, China looked at each investment in terms of
whether it would as help the Chinese counter-party.
But now the question is whether the overall pattern of U.S.
investment is going to help the overall Chinese economy, not merely
one firm bringing in a particular technology. (And foreign
investment in banking is especially predatory, because it gives
foreign-owned banks a free lunch inasmuch as they can create new
credit on a computer keyboard and load down domestic real estate
with debt.) Now that they’ve elevated their economy’s overall
activity, they can afford to look beyond the narrow micro-picture
and proceed to place it in a macro-context.
At this point, national long-term economic strategy comes into
play.
EJ: Possibly part of their strategy is not to allow their
currency to appreciate against the dollar, except gradually over
time as part of their policy to restructure their economy to be
more internal-demand driven.
MH: There are two traditional reasons for a currency to
appreciate. Most discussion in the United States oversimplifies the
issue by reasoning as if the balance of payments is only for
imports and exports of goods. Most economists shy away from
confronting the main dynamic pushing America’s balance of payments
into deficit in recent decades: U.S. military spending abroad.
Americans are throwing off dollars by ringing China and Russia
with military bases all over Asia. So by financing the U.S. payment
deficit – by buying Treasury bonds to finance the federal budget
deficit, which itself is largely military in character – China is
financing its own military encirclement.
The second reason for the dollar’s weakening is the huge capital
outflow from the United States. American money managers are bailing
ship like rats, putting their money in Third World countries and
trying to move as much into China as possible – largely to gain on
the anticipated dollar depreciation against the renminbi.
China can turn around and say, “You’re creating money on a
computer keyboard as free credit, and trying to move billions of
electronically created dollars into China on a leveraged foreign
exchange bet. But we have to earn our foreign exchange by our
labor. You’re trying to force our currency up with your own flight
capital. This is not a good economic reason for our currency to be
forced up. If it rises, it should be for real economic reasons
having to do with trade and tangible capital investment, not for a
purely speculative wave. That is what caused the Asia crisis in
1997. We’re not going to let it happen again.”
So essentially they’re saying, fool me once, shame on you; fool
me twice, shame on me. They’re not going to fall for the U.S.
currency-raid ploy a second time. So people like the Paul Krugmans
and Tim Geithners of the world are being rejected by China’s policy
makers. They see them as hatchet men pushing junk economics and
they’re not going to fall for it. The words I hear over there are,
“These guys are full of shit.”
EJ: I think
most people probably forget that during the so-called Asian current
crisis, Taiwan and China were among just a handful of countries
that were immune because they quickly implemented capital
controls.
MH: Malaysia did the same thing. Prime Minister Tun
Mohammed Mahathir and his advisors prevented foreign speculators
from buying domestic currency. As a result, they couldn’t cover
their short sales. They sold the currency short, but then they
couldn’t buy it to cover their open positions. So it actually was
forced up. George Soros claimed (I don’t know if it’s true) that he
actually lost money in Malaysia.
EJ: I’m
hearing that there is a growing consensus in Asia to start
unwinding the large defensive currency reserves that they’ve built
up since Greenspan went there in the early 2000s and said: “Here’s
how to prevent a recurrence of the Asian crisis, just keep a year’s
worth of foreign reserves.”
MH: I can’t
tell you the contempt they have for Mr. Greenspan. They realize
that what he was telling them was a deliberate
falsehood. They know very well that he knows
that the purpose of having a country build up reserves is to that
provide a pot of gold to be looted by raiders.
EJ: I’m hearing that if there is another similar crisis, every
Asian country will just do as Malaysia did in 1998. They’ll all
apply currency and capital controls.
MH: Not only capital controls. Any future raid will be regarded
as tantamount to military hostility. There will be a political
break from the West. They will say, “This is it. We’re
instituting the Asian doctrine: Asia for Asia. Get out of here,
military bases and all, or we’ll drive you out. If you don’t, we’re
going to have to do just what you would have done if we established
a military base in Cuba.”
EJ: It sounds to me like you are expecting major geopolitical
changes in China and Asia over the next few years.
MH: America is so self-destructive and so dominated by junk
economics that when it goes abroad it leaves foreign officials
open-mouthed in amazement. Then they realize that these people have
been carefully picked precisely because they are so short sighted.
America picks diplomats who believe the party line that feeds into
its strategy. But it should confine them to the public relations
department, not let them operate as people who actually do the
thinking about economic policy.
EJ: How do you suppose Geithner is doing on his latest bond
sales trip to China?
MH: The first thing they’ll say is, “What do we get in exchange for
this?” Their position will be: “Okay, we understand that you want
to sell us bonds. On the one hand you’re telling us to raise our
exchange rate. But if we do this, we will lose the purchasing power
of these dollar-denominated bonds.
So you’re actually telling us that you want us to take a loss on
them. You want to sell us bonds that will depreciate by maybe 25 or
30 percent in our currency if we revalue. Okay, we can live with
that. What’s the quid pro quo? What’s your offer? Are you going to
give us your military basis in Asia? Will you accept an Asian
version of the Monroe Doctrine and stay out of Asia and keep to the
Caribbean and Latin America? Or will you perhaps sell us our
commanding heights, your best technology and give us a stranglehold
on your public infrastructure so that we can raise access toll fees
like your guys do in debtor countries that you force to
privatize?”
EJ: What do you think the offer actually is?
MH: I think the U.S. response is jaw-dropping confusion.
Cognitive dissonance: “Gee, we didn’t think of that. You mean you
want something in exchange?”
The Asians must be laughing at this point. “Well, that’s just
how it works. When you want us to give you money and take a
guaranteed loss on something that we buy, you’re supposed to give
us something in return. Isn’t that how the world is supposed to
work?” The Americans don’t seem to be aware of that. Their
diplomacy is narcissistic, predatory and bullying.
EJ: Is this speculation, or is this what you’re hearing?
MH: Everybody I talk to asks what the Americans are going to offer.
In the press there, and just in talking to normal people, their
view of the situation is (1), “America wants us to raise the
currency. That means our dollar holdings are going to be worth less
in renminbi.” And (2), “They want us to buy dollars, but they’re
not giving us a guarantee in renminbi.
In fact, they are guaranteeing that these dollars that they want
us to buy are going down in value as the dollar depreciates.”
EJ: Isn’t it logical for China to demand a higher interest
rate?
MH: More important than the interest rate is a foreign-currency
guarantee. It should say, “Look, if we buy bonds, forget the
interest rate. Of course we want the kind of interest you paid in
the 60s. We want 6 or 7 percent interest but we also want to get a
guarantee.” Now the problem is, what can America guarantee the
dollar debt? You can’t guarantee it against euros and sterling
because they’re going down. Do you guarantee it against gold?
EJ: Reverse the 1971 U.S. default on gold obligations? Not
likely. With trillions of dollars in claims against dollar debt,
gold would rise to $10,000 in an hour.
MH: That’s the problem. There isn’t any stable measure of value
any more. This means that there is no point in accumulating
international reserves, if whatever currency you buy is going to go
down in value. When China sought to diversify out of dollars into
euros and sterling, both these currencies collapsed as a result of
the PIIGS crisis and associated currency raids.
EJ: Might China demand some kind of formula that ties the
interest rate to the exchange rate?
MH: That’s what commercial banks insist upon in Iceland and
other countries, so sure, it would be logical. But I don’t think
the American government is going to give in on that. It’s beginning
to look as if America only does that for white people – Europe in
the 1960s, for instance...
http://michael-hudson.com/2010/05/trouble-in-europe-china/