Monday, March 23, 2009
Hongbin is deliberately understating the situation. The problem is not the fact that the US Federal Reserve is printing money, but, rather, that the Fed is printing money in an attempt to preserve the global preeminance of US financial institutions that would otherwise be moribund, with the risk assumed by foreign holders of dollar denominated assets. If the Fed was printing money in support of a policy that would revive the US consumption of Chinese exports, the People's Bank of China would not be nearly as alarmed.
China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.
In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.
Analysts said the proposal was an indication of Beijing’s fears that actions being taken to save the domestic US economy would have a negative impact on China.
“This is a clear sign that China, as the largest holder of US dollar financial assets, is concerned about the potential inflationary risk of the US Federal Reserve printing money,” said Qu Hongbin, chief China economist for HSBC.
But the Fed is doing the opposite, as US banks cut back on the extension of credit and Americans pay down their debt and increase their rate of savings. As a consequence, the US is slowly, but surely, moving towards reduced consumption, if measured by expectations before the recession, and increased domestic manufacture of products at the expense of foreign countries dependent upon the US market. Hence, the lack of concern by the Obama administration and the Federal Reserve about the inevitable decline in the dollar that will result from the bailout and the stimulus plan. The policy is also alluring from a geopolitical standpoint, as a decline in China's manufacturing base would be perceived quite positively by the military-industrial complex, a way of perpetuating US global hegemony.
Accordingly, if accepted on its own terms, the internal logic of such a policy is quite compelling. There are, however, good reasons to speculate as to whether Americans will accept the sacrifice involved in such a painful transition, as noted here last fall. In effect, the US would be atttempting to preserve its financial and military dominance through a conscious policy of import substitution, a policy that would initially require a form of shock therapy that prices many imports out of the reach of most Americans. Generations of people accustomed to possessing the most advanced Japanese, Chinese and European products will be stunned to discover that they only the wealthy will still be able to purchase them. Increased social unrest is very likely as the effects of the policy become evident, although the prospect that such unrest, predominately populist in nature, will result in more equitable social policies appears slight.
Furthermore, the policy also assumes that China does nothing in response, clearly, a misguided belief, as this article demonstrates. China has substantial reserves, and can direct them towards the creation of domestic market to replace foreign ones like the US. One suspects that the leadership of the Chinese Communist Party anticipated this threat before the recession because Hu Jintao has been emphasizing the need for a more equitable distribution of income within China for several years. It has been common to dismiss these concerns as a mere rhetorical effort to address growing unrest, but, perhaps, there was something much more serious beneath the surface, a recognition that China had to become more economically independent of the US in order to avoid a preemptive US financial strike against it through devaluation of the dollar.
Projecting the future is a dangerous business, but the advantage here would appear to lie with China. Debtor nations rarely, if ever, succeed in reestablishing the dominance they possessed in their manufacturing and export heydeys. Of course, I shouldn't ignore the possibility that it will all end badly for all concerned. Even so, East and South Asia seems more favorably positioned to weather the storm. And, then, there are the workers themselves. How will they react to these tumultuous changes, changes that, in all instances, will result in even more rapacious forms of primitive accumulation within the societies in which they live? Or, to put it more simply, how will they react to more extreme expropriations of their wealth, expropriations required to facilitate future capitalist development? So far, with the exception of continental Europe, there are few, if any signs, of an emerging collective consciousness required to resist it.