250 Liu vs Krugman over Yuan. When China Rules the World, by Martin Jacques

Liu vs Krugman over Yuan. When China Rules the World, by Martin Jacques

(1) China should denominate its exports in Yuan, not $, to escape $ Hegemony - Henry C. K. Liu
(2) Henry C. K. Liu takes on Paul Krugman over China's manipulating $ to keep Yuan low
(3) Japan's crash: BOJ printed Yen; Wall St tried to buy-up Japan; EIR/Larouche warned
(4) When China Rules the World, by Martin Jacques

(1) China should denominate its exports in Yuan, not $, to escape $ Hegemony - Henry C. K. Liu
http://www.atimes.com/atimes/China_Business/LA12Cb01.html

Jan 12, 2010

China and a new world economic order

By Henry C K Liu

Merely two years before the end of the first decade of the 21st century, the post-Cold-War world economic order found itself facing its most serious crisis under the weight of unsustainable deregulated debt capitalism created by dollar hegemony. There are clear signs that out of this current crisis a new world economic order will emerge. China is in a promising position to influence this development toward a sustainable, balanced and cooperative world order of global fairness and universal justice.

The root cause of the current crisis can be traced to the dismantlement of the Bretton Woods international finance architecture by the US in 1971 when president Richard Nixon suspended the dollar's link to gold, and the subsequent deregulation of globalized financial markets that has allowed free cross-border movement of funds.

Toward the end of the World War II, the United States, through its dominance in the Bretton Woods Conference of 1944, constructed a post-war international finance architecture based on a gold-back dollar as a reserve currency to revive world trade. The Bretton Woods monetary regime allowed the US, which at that time was in possession of most of the world's gold, to take over the role of financial and economic hegemon in a new age of neo-imperialism under finance capitalism previously played by Britain in the age of imperialism under industrial capitalism.

Economics thinking prevalent immediately after World War II, drawing lessons from the 1930s' Great Depression, had deemed international capital flow undesirable and unnecessary for national economic development. Trade, a relatively small aspect of most national economies at the time, was to be mediated through fixed exchange rates pegged to a gold-backed dollar. These fixed exchange rates were to be adjusted only gradually and periodically to reflect the relative strength of the economies participating in international trade, which was expected to augment, but not overwhelm, the national economies.

The impact of exchange rates was limited to the settlement of international trade. Exchange rate considerations were not expected to dictate domestic monetary and fiscal policies, the chief function of which was to support domestic development and regarded as the inviolable province of national sovereignty.

During the Cold War, there was no global trade. The economies of the two contending ideology blocks were completely disconnected and did not trade outside of their own blocks. Within each block, allied economies interacted through foreign aid from and memorandum trade with their respective superpowers. The competition was not for profit but for the hearts and minds of the people in the two opposing blocks, as well as those in the non-aligned nations in the Third World. The competition between the two superpowers was to give rather than to take from their separate fraternal economies.

Convergence to equality the aim

The population of the superpowers worked hard to help the poor within their separate blocks. Convergence toward equality was the policy aim even if not always the practice. The Cold War era of foreign aid and memorandum trade had a better record of poverty reduction within either of the two camps than post-Cold War, globalized, neo-liberal trade dominated by one single superpower. The aim was not only to raise income and increase wealth, but also to reduce income and wealth disparity between and within economies.

In the world economic order that emerged after the Cold War, income and wealth disparity has been rationalized as a necessity for capital formation even in the rich economies. From 1980 to 2007, the total after-tax income earned by the top 0.1% of earners in the US more than quadrupled, while the share earned by everyone else in the top 10% rose far less and the share of the bottom 90% actually declined in purchasing power.

In China, privatization of state-owned-enterprises since 1978 has pushed a large segment of the working population outside of the socialist sphere of free social benefits in healthcare, education and retirement entitlements. Unemployment is now a serious structural problem everywhere, including in the Chinese socialist market economy.

Excessive reliance on export financed by foreign capital has also left developmental imbalances between China's exporting coastal regions and the isolated interior. Despite recurring big trade surpluses denominated in dollars, China has been prevented by dollar hegemony from using sovereign credit to finance domestic development. China is now the world's biggest creditor nation, yet the Chinese economy continues to require foreign capital that demands rates of return higher than such capital could get in their home economies.

Ironically, much of this "foreign" capital comes from the US which is deeply indebted to China. The US is investing in China with money it borrows from China. The US is able to do this because the debt and capital are both denominated in dollars that the US can print at will.

Today's post-industrial financial market economies are all plagued by overcapacity created by insufficient consumer purchasing power. The Chinese market economy is a glaring example of this structural contradiction which arises from the need of companies to keep down wages to maximize corporate profit. Workers everywhere are not able to afford all the products they produce, thus causing overcapacity that has to be absorbed by export.

American entrepreneur Henry Ford (1867-1943) understood this structural contradiction in industrial market economies and identified rising wages as a solution to overcapacity caused by rising labor productivity. But foreign capital denominated in foreign currency (dollars) rejects the need for high local wages because it earns its dollar profits from export to foreign markets. This is the main reason why emerging economies must avoid excess dependence on export for dollars financed by foreign capital in dollars.

China needs to accelerate its domestic development with sovereign credit denominated in Chinese currency to proportionally reduce its excessive dependence on export for dollars financed by foreign capital in dollars. China needs to denominate its export trade in Chinese currency to break free from dollar hegemony. This is the key strategy for positively influencing a new world economic order of universal justice to replace current predatory terms of international trade under dollar hegemony.

Since the Cold War, which officially ended with the dissolution of the USSR in 1991, world economic growth has been distorted by a shift from aggregate domestic development with sovereign credit within sovereign nations to excessive reliance on globalized neo-liberal trade engineered and led by the US as the sole remaining superpower. International trade has since been denominated in the US dollar, a fiat currency after 1971, as the main reserve currency. International trade has been driven by the huge US consumer market made possible by the high wages of US workers backed, not by rising productivity, but by US dollars that the US, and only the US, can print at will through its central bank.

In China, rising worker productivity has not resulted in higher wages, but only in lower export prices. This is the main reason why the Chinese domestic market lags behind in consumer demand despite enormous rise in Chinese worker productivity. Many Western critics erroneously pressure China to revalue its currency to address the persistently large trade imbalance. The only effective measure to deal with this trade imbalance is for China to raise wages rather than to revalue the exchange rate of its currency.

For the two decades before the global financial crisis that first broke out in mid 2007, economic growth in the dysfunctional world economic order has been, and still is, based primarily on free cross-border flow of capital and speculative funds driven by cross-border wage and regulatory arbitrage. This growth has been sustained by knocking down national tariffs worldwide through the authority of supranational institutions such as the World Trade Organization, and financed by a deregulated foreign exchange market working in concert with a global central banking regime independent of national political pressure, lorded over by the supranational Bank of International Settlement and the International Monetary Fund.

Domestic development overwhelmed

Ever since the end of the Cold War in 1991, which actually began winding down in the early 1970s with US policy of detente, trade has increasingly overwhelmed domestic development in the global economy, as superpower competition to win the hearts and minds of the world in the form of aid subsided. Persistent fiscal and trade deficits forced the US to suspend in 1971 the peg of the dollar to gold at $35 per ounce, in effect abandoning the Bretton Woods regime of fixed exchange rates linked to a gold-back dollar. The flawed international finance architecture that resulted has since limited the global growth engine to operating with only the one cylinder of international trade, leaving all other cylinders of domestic development in a state of permanent stagnation. The venue of sovereign credit for national development has been foreclosed permanently. China needs to free itself from dollar hegemony to use sovereign credit to develop her domestic economy.

Since 1978, China has exposed itself to the disadvantages of export trade denominated in dollars. Much of the wealth created in China during the last 30 years has ended up in the US, leaving China in an extended state of capital shortage despite being the largest holder of foreign reserves in the world. When it comes to consumer power and environmental pollution, China is only the kitchen; the dining room is in the US. In a new world economic order, China should move the dining room back inside China.

The global economy is a comprehensive and complex system of which trade is only one sector. Yet economists and policy-makers promoting neo-liberal globalization tend to view trade as the entire global economy itself, downplaying the importance of non-trade-related domestic development. Neo-liberals promote market fundamentalism as the sole, indispensable path for national economic growth, despite ample evidence in the past three decades that trade globalization tends to distort balanced domestic development in ways that hurt not only the less developed, but also the developed economies.

This is why a new world economic order must restore domestic development, with sovereign credit as the driving force, and reduce world trade as an auxiliary force in which export should be denominated in the exporting country's currency.

The distributional consequences of predatory terms of global trade liberalization under dollar hegemony work against the developing economies in the world. Such predatory terms of trade also work against the poor and the financially weak in all economies, including the advance economies, putting the less-educated and the less-skilled in a downward spiral of chronic unemployment and persistent hopelessness.

Reductions in tariffs reduce tax revenues for public spending that can help poor people and weaken needed protection for endangered domestic industries. While distributional consequences of trade liberalization are complex and country-specific, the general trend has been to exacerbate income disparity everywhere, which in turn leads to economic underperformance and political instability in all countries.

In the United States, the Mecca of free-market entrepreneurship, spending by the statist sectors - government operations, public finance, defense, health care, social security and public education - have kept the economy afloat in recurring protracted recessions, while entrepreneurial ventures in corporate finance, insurance, high-tech manufacturing, airlines and communication languish in extended doldrums needing government bailouts.

Unregulated markets lead naturally to monopolistic consolidation and abuses in corporate governance and finance through the concentration of market power. It has become clear and undeniable that "free" markets are inherently self-destructive of their own freedom. Free markets depend on enlightened government regulations to remain free and to prevent them from turning into failed markets.

Government, from monarchy to democracy, within capitalist market economies or socialist economies, exists to protect the weak from the strong and to maintain socio-political stability with a just socio-economic order. A new world economic order will have to be based on this principle of universal justice between and within sovereign nations. For China to exert influence on the formation of this new world economic order, it must construct its domestic economic order on the same principle of equality and fairness.

World trade is now a game in which the US produces fiat dollars of uncertain exchange value and zero intrinsic value, and the rest of the world produces goods and services that fiat dollars can buy. The world's interlinked economies no longer trade to capture Ricardian comparative advantage; they compete in exports to capture needed dollars to service dollar-denominated foreign capital and debts and to accumulate dollar reserves to stabilize the value of their currencies in world currency markets.

To prevent speculative and manipulative attacks on their currencies, central banks of all trading governments must acquire and hold dollar reserves in amounts that can withstand market pressure on their currencies in circulation. The higher the market pressure to devalue a particular currency, the more dollar reserves its central bank must hold. Only the Federal Reserve is exempt from this pressure, because the US Treasury can print dollars at will with relative immunity. This creates a built-in support for a strong dollar that in turn forces the world's central banks to acquire and hold more dollar reserves, making the dollar even stronger.

Dollar hegemony

This phenomenon is known as dollar hegemony, which is created by a geopolitically constructed peculiarity through which critical commodities, among the most notable being oil, are denominated in dollars. Everyone accepts dollars because dollars can buy oil. The recycling of petro-dollars into other dollar assets is the price the US has extracted from oil-producing countries for US tolerance for the oil-exporting cartel since 1973. The trade value of a currency is no longer tied to the productivity of its issuing economy, but to the size of dollar reserves held by its central bank.

{In that case, the Yuan should be higher - Peter M.}

By definition, dollar reserves must be invested in dollar assets, creating an automatic capital-accounts surplus for the dollar economy. Even though the US has been a net debtor since 1986, its net income on the international investment position has remained positive, as the rate of return on US investments abroad continues to exceed that on foreign investments in the US.

This reflects the overall strength of the US economy, and that strength is derived from the US being the only nation that can enjoy the benefits of sovereign credit utilization while amassing external debt denominated in dollars, largely due to dollar hegemony. Unlike other economies, the US economy incurs no foreign debt, only domestic debt denominated in dollars held by foreigners. These debts can always be repaid by the Federal Reserve, the US central bank, printing more dollars.

{This is an amazing claim - he's saying that the US does not need to pay its foreign debt. What happens if SDRs replace the $ as a reserve currency - does the US have to pay its foreign debt then? What about Australia & Britain - is their trade denominated in US$ or their own currencies? What % of their Foreign Debt is denomiated in their own currencies? - Peter M.}

Since such a move will devalue the exchange rate of the dollar, foreign holders of the US dollar sovereign or private debt are prevented from demanding payment. Further, when basic commodities are denominated in dollars, the US essentially owns all such commodities. Foreign owners of dollar assets are merely unwitting temporary agents of the US dollar hegemony.

Under the Westphalian world order of sovereign nation states, which has framed international relations since 1648, only coordinated economic nationalism that focuses on domestic development can pull the world economy out of its current downward spiral.

Economic nationalism should not be confused with trade protectionism. Decades of predatory cross-border neo-liberal finance and trade have generated strong anti-globalization sentiments in every country around the world. It has become a class struggle between the financial elite and the working poor in rich and poor countries alike.

Before the end of the first decade of the 21st century, in a world where market fundamentalism has become the operative norm, misguided trade protectionism appears to be fast re-emerging and developing into a new global trade war with complex dimensions. The irony is that this new trade war is being launched not by the abused poor economies that have been receiving the short end of the trade stick, but by the US, as leader of rich nations which have been winning more than they have been losing in the current economic order and trade system.

Much of this protectionism is designed to protect industries that the rich nations have voluntarily moved offshore for financial and environmental advantage. Such protectionism aims to protect non-existent economic activities by imposing tariffs on goods that the importing nations chose not to produce.

The biggest battles of this new trade war are being fought on the currency exchange rate front under dollar hegemony, a global monetary regime in which export nation ship real wealth produced with low wages and high environmental abuse in exchange for fiat paper money of uncertain exchange value and zero intrinsic worth.
Rich nations need to recognize that their efforts to squeeze every last drop of advantage at all levels from already unfair finance and trade will only plunge the world into deeper depression. History has shown that while the poor suffer more in economic collapse, the rich, even as they are financially cushioned by their ill-gained wealth and structural advantage, are hurt by the sociopolitical repercussions of such a collapse, in the form of war, revolution or both.

The structural problem of the Chinese economy can be described in one sentence: China produces from plants on its soil financed by foreign investment that operate with low domestic wages for foreign markets that pay with dollars that cannot be used in the Chinese domestic economy.

{Actually, those $s COULD be spent if China opened its Capital Account. BUT China manipulates the $ to keep the Yuan down. Henry never seems to talk about that.}

Domestic markets the key

The solution to this structural problem can also be summed up in one sentence: China must finance Chinese plants with sovereign credit to produce for the domestic market where consumer purchasing power will come from high wages, with sovereign credit repaid by increased tax revenue from a vibrant domestic economy.

The adverse impact from the current global financial crisis on the Chinese economy originates from the bloated export sector financed in large part by foreign capital denominated in dollars. Foreign markets have abruptly contracted since mid-2007 to cause massive closure of tens of thousands of foreign joint-ventures or wholly owned enterprises, big, medium and small, in the Chinese export sector located along the coastal regions that has caused serious unemployment.

Economic recovery through the shifting from export dependency to domestic development requires coordinated actions by both the state and the private sectors. The government's role is to guide state-owned enterprises and private-sector incentives toward a national full employment program through tax incentives and regulatory regimes.

Government fiscal spending should be limited to funding infrastructure, both physical and social, that cannot be efficiently financed by private or even collective capital. Consumer demand should be enhanced as a priority in a national income policy to quickly raise wage levels in parallel with a well-funded social security program to eliminate the need for compulsory over-saving out of concern for emergency health expenses and provision for old-age security.

In conclusion, China can exert a positive influence on a new world economic order by setting an example with its own national development policy. To achieve this goal, China needs to adopt the following policy initiatives:

1. China must recognize that a deregulated market economy is counterproductive to national development. The clear evidence of this is what deregulated markets have done to the US economy, destroying US superpower status within three decades. China must revitalize central planning to guide national development and to use the market mechanism only to augment central planning targets. National destiny and national interest cannot be subjected to the dictation of market profit incentives.

2. China must place full employment with rising wages as a national economic priority and shift from the current market fundamentalist, macro-management on growth in gross domestic product, with unemployment as a natural outcome of a monetary policy of price stability. Economic equality and justice must be the guiding developmental principle within the context of merit-based compensation.

3. China must break free from dollar hegemony to use sovereign credit to finance balanced domestic development and to reduce excessive dependence on export for dollars and reliance on foreign capital denominated in dollars. A first step in this direction is to require all Chinese exports be settled in yuan, not in dollars.

4. China should conduct its foreign trade on the principle of mutual development for both trading partners rather than as a financial profit center for Chinese capital. China must reject the predatory terms of international trade developed during the age of imperialism. Unlike 19th century England and Japan, the huge size of the Chinese economy and its domestic market does not require imperialist terms of trade to survive. The US model failed because it aped the British model of empire after World War II. China must avoid making the same error.

5. China must guard against the fallacy of hoping to use green-tech investment as a stimulus to recover from the current global financial crisis. The global environment needs protection. But the time-scale concerning the needs of the environment is not congruent with that of the current global financial crisis. The environmental protection problem cannot be solved without first solving the global financial crisis. Attempting to use green-tech investment to jump-start the current economic crisis is putting the cart before the horse. Such an approach will only end up falling short on both environmental and economic aims.

(2) Henry C. K. Liu takes on Paul Krugman over China's manipulating $ to keep Yuan low

Henry's showing his Chinese-Nationalist colours here, even though he's a Canadian citizen:

Krugman blaming victim for the crime

By Henry C K Liu

Jan 6, 2010

http://www.atimes.com/atimes/China_Business/LA06Cb01.html

A year-end (December 31, 2009) opinion piece by New York Times columnist Paul Krugman with the title "Chinese New Year" contains errors of fact and flaws of logic. But the most egregious fault of the piece is Nobel economist prize-winner Krugman's approach of blaming the victim for the crime. ...

Krugman wrote in his article that "China has become a major financial and trade power. But it doesn't act like other big economies. Instead, it follows a mercantilist policy, keeping its trade surplus artificially high. And in today's depressed world, that policy is, to put it bluntly, predatory." ...

Professor Krugman should know that demonizing China for its monetary policy, which under dollar hegemony is fundamentally a reactive derivative response to US monetary policy, serve no useful purpose. Instead of pushing China to revalue the exchange value of its currency upward, he should be pushing both China and the US to raise domestic wages aggressively. Until US workers doing the same work are not paid more than their Chinese counterparts, US-China trade cannot be balanced. ...

Comment (Peter M.): I side with Krugman here. One question: why has it taken Western economists 10 years to see the Currency Manipulation that's been obvious to everyone else?

(3) Japan's crash: BOJ printed Yen; Wall St tried to buy-up Japan; EIR/Larouche warned

INTERVIEW: AKIRA NAMBARA

`Washington Consensus' Should Watch Its Step

This interview appears in the January 18, 2002 issue of Executive Intelligence Review.

http://www.LaRouchepub.com/other/interviews/2002/2902_aki_nambara.html

Mr. Akira Nambara served at the Bank of Japan (BOJ) from 1958, and was Executive Director from 1990-1994, then Deputy Governor of the Japan Export-Import Bank from 1994-98. He was interviewed for EIR from Tokyo on Jan. 9 by Kathy Wolfe.

EIR: You told EIR last March that Finance Minister Kiichi Miyazawa was right to warn about Japan's finances, and you warned that the Japanese political class must wake up, and get a sense of crisis (EIR, Mar. 23, 2001). Does Prime Minister Junichiro Koizumi's emergency meeting Dec. 27 indicate that Japan's leaders are finally waking up?

Nambara: It was good that Mr. Koizumi held the meeting; he needed to understand that this is a real crisis. The problem was that his popularity is fantastically high, so Mr. Koizumi believed his program was on the right track. But it's not, at all. Mr. Koizumi has always said that his plan for structural reform will cause pain, but he promised to cause the pain to the vested interests of pork-barrel politics, the "Iron Triangle" of politicians, bureaucrats, and interest groups. Unfortunately, however, Mr. Koizumi turned out to be a "NATO" man: "No Action, Talking Only." And due to his "No Action," he has given the pain instead to the entire Japanese economy as a whole.

He got away with it, until now, because most Japanese people have been enjoying "the Golden Recession." They enjoy the world's largest holdings of financial assets per capita, mostly owned by the elderly and business executives. Due to falling consumer prices, they enjoy increased real income and their children enjoy a parasite's life. They do not have any sense of crisis, but the other side of this coin, is that those who borrowed from them, mostly through government lending institutions, are seeing their assets eroded day by day. So the population's real assets, in a sense, are disappearing.

EIR: We heard that warnings from the BOJ that one of the Top Four Japanese bank groups is in severe danger, helped to trigger the emergency meetings in Tokyo—along with some very dangerous actions by U.S. hedge funds, banks, and think-tanks pushing to "sell Japan."

Nambara: As I have been warning for over a year, Japan is in the midst of the most serious and dangerous deflation in the industrial economy in our history. Despite all the cash the BOJ is printing, the banks can't use it, and most Japanese banks have now almost lost their function as financial intermediaries. They have simply stopped lending to many companies in the economy. This means that companies which could be the next Sony or Matsushita, are not being created, while increased corporate bankruptcies are eroding the banks' assets.

I am now relieved that BOJ finally has made the correct diagnosis that the nation is endangered by a deflationary spiral like the 1930s.

EIR: Some BOJ officials say that the whole system is completely non-functional.

Nambara: Yes, in fact some of them are just too pessimistic. They believe that there can be no more half-way measures; that all they can do now, is to demonstrate the failure of today's entire system. The BOJ has been pushed to expand the monetary base despite the fact that the banks can not use the money, but the Washington Consensus and the Tokyo economists just demand that the BOJ print more money, without any thought of the result. Thus, many people at the Bank of Japan have given up, and they say: "Fine, we will do as you demand and continue your insane policy—and let it all blow up!" They now believe that only if there is a complete crash to the bottom, a crisis as bad as the end of World War II or the crisis which led to the Meiji Restoration, could we possibly wake up the politicians and the population. I don't agree with this extreme view, but it does show the total failure of the current policy. So, of course, we won't do this.

EIR: What about the American Enterprise Institute report that Japan's entire system is about to crash?

Nambara: I agree with some others you have interviewed, that while Japan is in big trouble, we don't need to pile on top of it, certain nasty manipulations to cause the markets to "sell Japan." I read the AEI report already some days ago. It's part of a pattern of things from the Washington Consensus.

EIR: Do you mean the mass sales of Japan bank stocks by U.S. hedge funds?

Nambara: Yes, this is outrageous. Did you know that in 1998, the Long Term Credit Bank was bankrupted when S.G. Warburg did huge short-selling of its stocks? One of the most important banks in Japan. Now the major U.S. hedge funds are doing it again, selling the Japanese bank stocks short. Fortunately, now the BOJ and Ministry of Finance understand that we can't tolerate this; that is why they froze the Goldman Sachs operations in Tokyo. So that's good news. And this is also thanks to the constant warnings from EIR.

Also, Kenneth Courtis and Deutsche Bank: Mr. Courtis used to be at Deutsche Bank, where he lost his job because he incorrectly forecast the appreciation of the yen. Now he's with Goldman Sachs, where he has been calling for a yen collapse for months. Goldman Sachs, again. And now the Deutsche Bank in London has issued a forecast for the yen to fall to 205 per dollar. Even if it's in four years, this is still too much.

EIR: What about the secret International Monetary Fund missions to Japan all this year?

Nambara: The IMF and the Federal Reserve diagnoses on Japan are terrible. They demand the immediate sell-off of all NPLs [non-performing loans] right now, which would just bring down many industrial companies. That way, Wall Street can purchase Japanese assets a dime on the dollar, while Japanese investors will be crippled. You remember, in 1998 some Wall Street investors were able to buy a large regional project in Miyazaki-ken at about 10% of the true, original value. The IMF also wants a total devaluation of the yen, as was done to ASEAN countries in 1997, as the IMF is now demanding in Argentina. If the yen drops dramatically, it means everything would become cheaper in Japan for the foreign buyouts. We can't tolerate that....

But they should watch out because, as BOJ Governor Masaru Hayami mentioned in his New Year's interview, from the standpoint of economic fundamentals—and as Mr. LaRouche says—the U.S. economic fundamentals are actually much worse than those of Japan. For example: Look at the behavior of Enron and Citibank and similar U.S. companies issuing these huge amounts of debentures based on nothing. They have swindled many investors in Japan. Japanese money market funds trusted the Arthur Andersen accounting firm, but they deceived the private investors in Japan. Citibank, which runs Nikko Securities, pushed Nikko to sell so many Enron debentures to Japanese investors. S&P, Moody's, they stood by and never warned Japanese investors of this, and we trusted them. Again, the "Washington Consensus": although the BOJ recognized the situation, and immediately purchased CPs [commercial paper] to avoid a deflationary spiral.

EIR: What about the rest of BOJ Governor Hayami's New Year's Day interview?

Nambara: He did a good job. He was correct to warn the situation is very serious, and as Mr. LaRouche mentioned, he understands the diagnosis, that simple money-printing by the BOJ is going nowhere, while the danger of a deflationary spiral increases rapidly. And he said, they would do everything they could to try to stop it. He clearly stated we shouldn't push the yen to be weaker, or it could become dangerous for Japan.

But as for the remedy, I'm afraid Mr. LaRouche is also right that Mr. Hayami does not have an effective remedy. One problem is both Prime Minister Koizumi and Mr. Hayami seem too committed to the idea that all the NPLs must be disposed of immediately. It could be similar to the pessimists' standpoint that nothing really can be done, except to let it all crash. Or it could also be similar, unfortunately, to the IMF standpoint. But to dissolve NPLs is not structural reform at all. The increased NPLs are the result of minus growth of Gross Domestic Product, in nominal terms, in the past four years. In every country, NPLs will increase when it becomes recession. The mere dissolution of NPLs at deflation time, will only exacerbate the deflation.

EIR: Mr. Koizumi's chief economic architect, Mr. Heizou Takenaka, unfortunately seems to have a similar, Margaret Thatcher-type of philosophy.

Nambara: I have always criticized Mr. Takenaka since he wrote the report of the Economic Strategic Conference in March, 1999.... When Takenaka refers to "structural reform," his model is Margaret Thatcher, but Japan today is completely different from England 20 years ago. The lost competitive edge of British industry, and the Wilson government, brought inflation and stagnation. Here in Japan, stagnation, yes! But no inflation! On the contrary, we are in the midst of deflation.... In spite of the burst of the bubble, our economy had never recorded minus growth until mid-1997. It was the Hashimoto government and BOJ which brought deflation to Japan, like the United States early in 1930, because Mr. Hashimoto, and the previous main stream of the BOJ, never learned from history and accepted the "Washington Consensus."

Comment (Peter M.): Larouche puts out a mixed bag. But notice that this former head of the Bank of Japan thanks EIR and Larouche - repeatedly - for their warnings of what Wall St. were up to.

(4) When China Rules the World, by Martin Jacques

Reviewed by Mary Dejevsky

Friday, 26 June 2009

http://www.independent.co.uk/arts-entertainment/books/reviews/book-of-the-week-when-china-rules-the-world-by-martin-jacques-1719353.html

Well before it was published, even before the author had typed his final chapters, this book was causing a stir. What Martin Jacques set out to do - and has done in meticulous detail - was to challenge what he regards as a dangerously false premise: that the rise of China will be benign. Don't lull yourself into a false sense of security, he warns. China's ascent to global dominance is inevitable, and the Western world has much to fear.

In so saying, Jacques takes on a formidable global establishment and breaks a series of taboos. Chief among them is the idea that Western civilisation reflects the pinnacle of universal achievement and that the success of individual countries will forever be measured by how closely they match that model.

This ringing rejection of Western universalism is where he begins. As he puts it, "There is still a widespread view in the West that China will eventually conform, by a process of natural and inevitable development, to the Western paradigm. This is wishful thinking." By concentrating on similarities, rather than recognising difference, the Western world "excludes everything... that makes China what it is".

Increasingly, he posits, China will exemplify an alternative model for development, and one likely to spell the end of the West's dominance in every sphere: economic, political and cultural. China's differences concern the nature of the state (a "civilisation state", not a "nation-state"), its regional relationships (a "tribute system"), and a particular attitude towards race and ethnicity. China's scale, its long and consistent polity, and the fact that, even when its GDP outstrips the world, it will still be a developing country, are other elements that make China, in Jacques's view, different.

In arguing for China's difference, Jacques is treading on a lot of toes. That is all to the good. The Western scholarly and political establishment has been extraordinarily complacent about the implications of an economically successful and more assertive China. There has been a tacit consensus that, if we treat China nicely, as potentially "one of us", Beijing will return the compliment. The result has been very little real discussion of what a world with a dominant China would be like.

Jacques, as well as having extensive experience of the region, has his own axe to grind. As founder and editor of the journal Marxism Today (which he astutely wound up after collapse of communism), he has long espoused the idea that the West is not the only, or necessarily the best, model of development. So the thesis of "contesting modernities" in this book is of a piece with his overall thinking. The fact that he comes from particular philosophical territory, however, should not negate his arguments.

Insofar as there has been high-level public debate about the rise of China at all, it has been - as Jacques notes - between, on one hand, those who believe China will rule the world, but only if it adopts "our" Western way of doing things, and on the other those who argue that Beijing's modernisation will ultimately founder because China's "Chinese-ness" will get in the way. The conclusion drawn by both schools, however, is the same. "We" don't need to worry. Strong or weak, China will not challenge our way of life.

To Jacques, this is so much whistling in the dark. He agrees with Will Hutton, that China and the West are culturally quite different, but he discerns in this a potential strength rather than fatal weakness. China could, he says - indeed, barring accidents, will - rule the world. This is not a view, to put it mildly, that will endear Jacques to the many China-watchers, diplomats and investors, who like to think that China will not become an enemy unless we make it one.

It would be wrong to say that Jacques is alone in his belief that China is alien and potentially hostile. The view of China as a threat, the "yellow peril" of old, persists at a popular level in many Western countries, and in Russia. Suspicions of China's motives also abound in parts of Latin America and Africa where the Chinese have moved in to exploit natural resources. Paradoxically, these are the very places where China's developmental model may offer more of a promise than a threat.

In the industrialised West, though, the view of China's rise as unthreatening - at least so long as the West allows it to be so - is so pervasive in polite society that it is refreshing to encounter another view. So how persuasive is it?

Japan is a country that embodies the argument both for and against his thesis. That may be one reason why Jacques devotes a whole section – to my mind one of the most interesting and perceptive – to Japan and the way it modernised in the Western fashion, while retaining its Japanese essence.

It is possible to discern something similar happening in the modernising parts of the Arab world. If China follows a similar course, then its rise could turn out to be less alarming than Jacques believes. As for China's unique culture, including its attitudes to race, the state and the family, Jacques's arguments are challenging, and designed to be so. But hierarchical attitudes to race lurk in most cultures, including our own – and in Japan. The question is whether China will be able to "rule the world" from a position of exclusiveness, where its modernisation has so far relied on imitation.

A further question – of the dozens this thought-provoking book throws up - is whether overtaking the US in GDP terms will, by itself, equip China to rule the world, so long as its per capita GDP does not reach that of a developed country. If not, we could be looking not at 2050 as the timescale for the emergence of a dominant China, but somewhere much further in the future – and only then if there is no serious disruption to growth, such as a popular revolution.

Jacques's book will provoke argument and is a tour de force across a host of disciplines. It is also, a small point perhaps, commendably free of misprints; this is especially laudable, given the many different language sources. At the same time, he is not the most elegant writer, and his argument – the broad outlines of which are relatively simple – can seem quite repetitive. You can understand why Jacques needed his 450 pages of text: his is an unfashionable and contentious argument; the scholarly back-up is essential to provide credibility in circles that will doubt him. But might there be a case for parallel publication of a shorter, more populist version?

Jacques's arguments deserve to be heard; they are part of a debate the Western world should be having but for whatever reason – academic orthodoxy, political correctness or fear – has left for another time. By then, if Jacques is right, it will be too late.

China after the Cultural Revolution

In October 1976, the Maoist 'Gang of Four' were arrested. Deng Xiaoping, an advocate of market economics, was enlisted to the State Council in 1977. In 1980, many who had opposed the Cultural Revolution were politically rehabilitated. In April 1989, pro-democracy protestors gathered in Tiananmen Square until tanks cleared the Square on 4 June, with reports of 2,500 deaths. China's annual growth rate has averaged over 10 per cent in recent years. Last summer, the Olympics were staged in Beijing.