THE PROBLEM WITH CHINA
It looked so durable, our house of cards, in the 1990s. We marshalled our superior resources and knowledge to inaugurate an elevated machine of trading debt, farming out productive labor, and trading productive jobs for consumer consumption and credit.
Our policy elite considered China a good partner, as long as it was carrying the heavy burden of working the field and propping up a financial mansion known as “shadow banking”.
Through turbulence of dot.com and mortgage-bubbles, and leaky ships of finance, we commandeered our Federal Reserve, as if under emergency war mobilization, to keep the monetary irrigation flowing into that “shadow banking” system of finance. And in the aftermath of the 2008 financial bailout, we enlisted a “post war” strategy of patching together the system. This was the so-called Wall Street Reform and Consumer Protection Act, containing, out of plain sight, a provision to forfeit customer deposits, if necessary, to keep the sinking system afloat. This is called a “bail in” (1).
But China has had its own ideas about economy and foreign policy, having tried its hand with going along with the Transatlantic model of U.S. and Britain. So with the love affair tossed in the toilet, our ever-knowledgeable policy overlords have it mind to convince us that China is ever so sneaky, that it either concocted COVID-19 as a biological weapon, or else did not give us ample warning.
Never mind that we have a nifty NSA which supposedly can detect the smallest communication transmitted in every part of the world. China caught us off guard. Why should we take responsibility for adopting a system of fixing nothing till it’s broke? It has worked with Hurricanes Katrina and Harvey, right? But COVID-19 is too much a problem to be handled with nifty PR stunts.
But surely we have muscle to spare for an assortment of social engineering abroad? Iraq, Afghanistan, Libya, Ukraine, and Syria prove our stamina for conquest.
Shadow Banking
This is what a 2011 congressional report calls it. The title of Chapter 2 of the 480-page investigation, The Financial Crisis Inquiry Report, is Shadow Banking. It begins with this introduction:
The financial crisis of 2007 and 2008 was not a single event but a series of crises that rippled through the financial system and, ultimately, the economy. Distress in one area of the financial markets led to failures in other areas by way of interconnections and vulnerabilities that bankers, government officials, and others had missed or dismissed. When subprime and other risky mortgages — issued during a housing bubble that many experts failed to identify, and whose consequences were not understood — began to default at unexpected rates, a once-obscure market for complex investment securities backed by those mortgages abruptly failed. When the contagion spread, investors panicked — and the danger inherent in the whole system became manifest. Financial markets teetered on the edge, and brand-name financial institutions were left bankrupt or dependent on the taxpayers for survival.
First, we describe the phenomenal growth of the shadow banking system — the investment banks, most prominently, but also other financial institutions — that freely operated in capital markets beyond the reach of the regulatory apparatus that had been put in place in the wake of the crash of 1929 and the Great Depression. This new system threatened the once-dominant traditional commercial banks, and they took their grievances to their regulators and to Congress, which slowly but steadily removed long-standing restrictions and helped banks break out of their traditional mold and join the feverish growth. As a result, two parallel financial systems of enormous scale emerged. This new competition not only benefited Wall Street but also seemed to help all Americans, lowering the costs of their mortgages and boosting the returns on their 401(k)s. Shadow banks and commercial banks were codependent competitors. Their new activities were very profitable — and, it turned out, very risky.
Second, we look at the evolution of financial regulation. To the Federal Reserve and other regulators, the new dual system that granted greater license to market participants appeared to provide a safer and more dynamic alternative to the era of traditional banking. More and more, regulators looked to financial institutions to police themselves — “deregulation” was the label. Former Fed chairman Alan Greenspan put it this way: “The market-stabilizing private regulatory forces should gradually displace many cumbersome, increasingly ineffective government structures.” In the Fed’s view, if problems emerged in the shadow banking system, the large commercial banks — which were believed to be well-run, well-capitalized, and well-regulated despite the loosening of their restraints — could provide vital support. And if problems outstripped the market’s ability to right itself, the Federal Reserve would take on the responsibility to restore financial stability. It did so again and again in the decades leading up to the recent crisis. And, understandably, much of the country came to assume that the Fed could always and would always save the day.
China’s Neighborhood
China doesn’t have the luxury of wide-open turf stretching from sea to sea. And it has learned the traps of overplaying the super power card. This lesson was learned, along with Russia, during the decade of playing nice with the US-British Desert Storm condominium. (2)
If you get into and underneath deliberations of China’s Communist Party and the responses of China’s president, foreign ministers, and military leaders, you will find a huge question they consider: What should we do with our new power? Across South, Central and Southwest Asia, and in pockets of colonial real estate reluctantly abandoned but still ripe for British-American intelligence agitation, the prospects of American-style military intervention speak of expensive and unruly occupation. Stretching eastward are Japan, Korea, Taiwan, and two outposts of Five Eyes Surveillance Australia and New Zealand. (The Five Eyes is an English-speaking intelligence alliance comprising Australia, Canada, New Zealand, the United Kingdom and the United States.)
In plain sight is the physical cost of resources the US and Transatlantic Alliance have had to bear in managing quid-pro-quo arrangements among feuding tribes under dictates of a global shadow banking system. (3)
What to conclude from this survey, which China’s policy teams analyze in depth? That zero-sum does not work. Zero-sum argues that, for there to be winners, there must be losers. But what does it really mean to win, and to lose? Does the winner have a free hand to rule, no opposition in sight, no cost of overriding opposition? Does the loser just give up and die? Not play nice while stabbing you in the back? Not harass you with irregular warfare operations?
For the past decade, China’s leadership has toyed with the prospect of a partnership of winners, what Pres. Xi Jinping calls “win-win” cooperation as the best aim of foreign policy. This is not as altruistic as it sounds. We have sometimes broken with zero sum thinking, without having to think about it, when opportunity or common defense necessitated employing resources beyond the capacity of one people or nation. COVID-19 presents one impulse in this direction. Traveling into space presents another.
In China’s case, it started with the need to improve its immediate neighborhood, through partnerships and arrangements in which participating states become more interrelated with each other to create, what China’s policymakers call a “Community of Common Destiny.” (4)
A New Economy
Suppose the engines of economy were redirected to stabilizing the neighborhood and raising the standards of living of its peoples? And suppose China, as superpower, was to try out a new approach: not winner subjugating loses, but winners all sharing in the blessings of prosperity?
Well, China is mindful of sharing both burden and opportunity with the United States. After all, it moved into the forefront of economic power through the free-trade architecture initiated under post Soviet American-British financial system dictates. Employing its economic power for domestic aims of raising its standard of living, China has, nonetheless, hooked into American finance, steadily accumulating U.S. Treasury securities over the last few decades. As of January 2020, China owns $1.1 trillion, or about 5%, of the $23 trillion U.S. national debt, which is more than any other foreign nation. After all, whether you’re an American retiree or a Chinese bank, American debt is considered a sound investment. And the China’s yuan, like the currencies of many nations, is tied to the U.S. dollar.
Of the $23.4 trillion in U.S. government debts, more than $6 trillion (a little less than one-third) is actually owned by the federal government in trust funds. These are accounts dedicated to Social Security, Medicare and other entitlements. In other words, the government wrote itself a really big IOU and bankrupted one account to finance another activity. These IOUs are formed and financed through the joint efforts of the U.S. Department of the Treasury and the Federal Reserve. Much of the rest of the debt is owned by individual investors, corporations, and other public entities. This includes everyone from retirees who purchase individual U.S. Treasurys to the Chinese government. Japan and China own about 5.2% and 4.6% of the U.S. debt, respectively.
A dollar-pegged yuan helps keep down the cost of Chinese exports, which the Chinese government believes makes it stronger in international markets. This also reduces the purchasing power of Chinese earners. Dollar-pegging adds stability to the yuan, since the dollar is still seen as one of the safest currencies in the world. This is the second reason the Chinese want Treasurys; they are essentially redeemable in dollars. Consider what the current arrangement means: The Chinese buy up dollar bills in the form of Treasuries. This helps inflate the value of the dollar. In return, American consumers get cheap Chinese products and incoming investment capital. The average American is made better off by foreigners providing cheap services and only demanding pieces of paper in return.
But what does China want to do with its Treasury investments? It wants to build. In other words, it wants to translate financial investment into physical investment. If this means physical investment in U.S. infrastructure, fine. What it does not want is to have investment directed into a shadow-banking-dominated financial system that it has no reason to trust.
Tactical Challenges
No matter what, China still has to operate in the minefield of those who insist that, if China wins, the US loses. So it must factor this into its deliberations. An assortment of elite players in American politics take hold of any pretext, real or imagined, big and small, to persuade the American population that China is a prime threat today to life liberty and the pursuit of happiness under the austerity dictates of the shadow banking practitioners.
Here’s a sampling
Founder of Open Society Foundations, hedge fund billionaire George Soros, told Germany’s daily newspaper Augsburger Allgemeine that:
[China is ruled] under the domination of a dictator. Many well-educated Chinese are deeply angry at the party leadership for hiding the coronavirus for so long. When Xi abolished term limits and named himself, in essence, president for life, he destroyed the political future of the most important and ambitious men in a very narrow and competitive elite. It was a big mistake on his part. So, yes, he is very strong in a way, but at the same time extremely weak, and now perhaps vulnerable.
Sen. Marco Rubio, since losing the GOP presidential nomination to Donald Trump four years ago, has been methodically fleshing out a retrofitted platform of post-Trump conservatism, challenging the excesses of free-market fundamentalism, decrying stock buybacks, ripping business schools for teaching “shareholder primacy theory” as gospel, but keeping intact a frontal assault on China:
The U.S. has never faced a near-peer competitor in the industrial, technological, geopolitical, and military realm, so this is an enormous challenge, and it’ll define the 21st century. We’re late. We don’t have time to spare.
Steve Bannon, an officer in the United States Navy for seven years, a Goldman Sachs investment banker, an executive producer in Hollywood, and co-founder of Breitbart News, (a far-right website), hammers away at any US-China rapprochement with messages like this:
The Chinese Communist Party is going to have to pay. I think the world’s going to hold them in judgment, and that judgment is not going to be very pretty. They owe trillions, if not tens of trillions of dollars. (4/3020 CNBC)
On May 7th, Sec. of State Mike Pompeo told CNBC:
If they want to engage in the world, if they want to protect property rights, if they want to conduct fair and reciprocal trade, if they are interested in that, which they tell us they are, then yeah, I think there’s a path forward to do that. If they choose a different path, if they choose a path where they continue to operate in the way that they have operated in the last 25 years, President Trump is going to say, [with my prodding] “No, that doesn’t work for the American people or the American worker, and we’re going to head down a different path”
The COVID-19 Front
The new strain of coronavirus was first reported to the World Health Organization (WHO) in late December after an outbreak in the Chinese city of Wuhan. Experts widely believe the virus originated earlier in one of the city’s wildlife markets, known as wet markets.
There is no better example of China’s demonization than criticism of it throughout the Covid-19 crisis for a lack of transparency and mishandling the initial outbreak. The WHO has cautioned against blaming individual countries for the spread of Covid-19, warning that pointing fingers at nations with a high number of cases could discourage accurate reporting on domestic outbreaks.
But is the WHO a reliable source of information, given Pres. Trump’s declaration that the WHO has become a front for China’s international lobby?
That depends on whether Trump’s is an informed view. To ascertain that, we would have to know who’s feeding him the pipeline of information. In politics, swaying the public rules. If evidence exists supporting you, it will serve as a pretext. If evidence rules against you, suppressing it is an option. If no evidence exists, get your mouthpiece to amplify some hearsay in a propaganda campaign. The London-based Economist Intelligence Unit claims that the coronavirus crisis could accelerate a shift in global power from the West to the East. This concern with tilting the balance of power away from Washington to Beijing might indicate that, for Washington-London thinkers, geopolitics overrules world health concerns.
The U.S. Election
In contrast to China’s view is a U.S. concept that still can play well in election politics — that of American Exceptionalism, which translates to: the U.S. must lead, others must follow, because we have the moral high ground. Whether dominated by high-tech economy or shadow banking, liberal and conservative proponents see this Exceptionalism as a benefit to people worldwide. And for the U.S. foreign policy elite, the need for American leadership in the world is a matter of settled conviction.
“American pre-eminence safeguards rather than impedes global progress,” former U.S. Secretary of State Condoleezza Rice asserted.
So, how will this play out? Will Biden and Trump take this ball and race for a touchdown, egged on by frenzied political sports fans?
“Trump rolled over for the Chinese,” a narrator intones on a recent Biden campaign ad “Trump praised the Chinese fifteen times in January and February as the coronavirus spread across the world.”
Not to be outdone, on May 29th, Donald Trump gave this campaign speech:
The world is now suffering as a result of the malfeasance of the Chinese government. Countless lives have been taken, and profound economic hardship has been inflicted all around the globe. China has total control over [the World Health Organization]. We have detailed the reforms that it must make and engage with them directly, but they have refused to act because they have failed to make the requested and greatly needed reforms. We will be today terminating our relationship with the World Health Organization and redirecting those funds to other worldwide and deserving urgent global public health needs.
This week, two U.S. states, Missouri and Mississippi, filed lawsuits against China, alleging that the nation failed to take appropriate actions to stop the spread of the coronavirus.
Will an impoverished US citizenry take part in this rumble?
A Final Word
Autocrat or not, China’s President Xi Jinping appears to be neither reckless, nor foolish, in steering his ship of state. Trust him or not, he speaks a truth that would benefit us, if taken to heart.
Xi Jinping to the Boao Forum for Asia, headquarters in Beijing, China:
Countries may differ in size, strength or level of development, but they are all equal members of the international community with equal rights to participate in regional and international affairs. Mencius, the great ancient Chinese philosopher, said, ‘Things are born to be different.’ Civilizations are only unique, and no one is superior to the other. There needs to be more exchange and dialogue among civilizations and development models, so that each can draw on the strength of the other and all can thrive and prosper through mutual learning and common development. Let us promote inter-civilization exchanges to build bridges of friendship for our people, drive human development and safeguard peace in the world.
Xi Jinping to UNESCO (The United Nations Educational, Scientific and Cultural Organization, headquarters in Paris, France:
Civilizations are equal, and such equality has made exchanges and mutual learning among civilizations possible. All human civilizations have their respective strengths and weaknesses. No civilization is perfect on the planet, nor is it devoid of merit. No single civilization can be judged superior to another. I have visited many places in the world. What interested me most was to learn about differing civilizations across the five continents, what makes them different and unique, how their people think about the world and life and what they hold dear. An attitude of equality and modesty is required if one wants to truly understand various civilizations. Both history and reality show that pride and prejudice are the biggest obstacles to exchanges and mutual learning among civilizations . . .
Civilizations are inclusive, and such inclusiveness has given exchanges and mutual learning among civilizations the impetus to move forward. The ocean is vast because it refuses no rivers. All civilizations are crystallizations of mankind’s diligence and wisdom. Every civilization is unique. Copying other civilizations blindly or mechanically is like cutting one’s toes to fit one’s shoes — impossible and highly detrimental. All achievements of civilizations deserve our respect and must be cherished. History proves that only by interacting with and learning from others can a civilization enjoy full vitality. If all civilizations are inclusive, the so-called ‘clash of civilizations’ can be avoided and harmony among civilizations will become a reality.
