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/
with half of the top10 foreign currencies traders being banks that are shareholders of the Federal Reserve..........China will get screwed everytime and anytime............
these banks control the value of the USD and that controls the value of other currencies..............they are the true masters of the world.
Originally posted by As romanista2001:with half of the top10 foreign currencies traders being banks that are shareholders of the Federal Reserve..........China will get screwed everytime and anytime............
these banks control the value of the USD and that controls the value of other currencies..............they are the true masters of the world.
I think we can put an end to that jewish fed nonsense already.
fact : the FED is a private bank owned mostly by European jews..............not bullshit
fact : half of the top FX trading banks are shareholders of the FED...............not bullshit
all these are facts and it's not even a secret, you can find it in MAINSTREAM news even..............
Originally posted by As romanista2001:fact : the FED is a private bank owned mostly by European jews..............not bullshit
fact : half of the top FX trading banks are shareholders of the FED...............not bullshit
all these are facts and it's not even a secret, you can find it in MAINSTREAM news even..............
But the conclusion is bullshit.
so you're saying the Federal reserve is not a private bank ?
so you're saying Goldman Sachs and JP Morgan are not among the top FX traders worldwide ?
or you didn't even try to find these info that's available on the mainstream news...............