Internet Nugget

It was gratifying picking up on the Internet an excellent analysis – "Global Economy the Economic of a Global Empire" by Henry C.K. Liu, chairman of the New York-based Liu Investment Group ( On many important matters our readers will recognize that Mr. Liu coincides with our point of view, and he provides further fruitful evidence of these common views. The Editor.

"The productivity boom in the US was as much a mirage as the money that drove the apparent boom. There was no productivity boom in the US in the last two decades of the 20th century; there was an import boom. What’s more, this boom was driven not by the spectacular growth of the American economy; it was driven by debt borrowed from the low-wage countries producing wealth. Or, to put it less technically, the economic boom that made possible the current US political hegemony was fueled by tribute from vassal states kept perpetually at the level of subsistence poverty by their own addiction to exports. Call it the New Rome theory of US economic performance."

We would only note that rather than an addiction, the frantic drive of the Third World is debt-imposed, and the terms to the indebted countries are dictated by the IMF.

"True, exports can be beneficial to an economy if they enable that economy to import needed goods and services in return.... In the current international trade system, however, trade surpluses accumulate dollars, a fiat currency of uncertain future value. Furthermore, these dollar-denominated surpluses cannot be converted into the exporters’ own currency because they are needed to ward off speculative attacks on the exporter’s currency in global markets.

"Aside from distorting domestic policy, the export sector of the Chinese economy has been exerting disproportionate influence on Chinese foreign policy. China has been making political concessions on all fronts to the US for fear of losing the US market from whence it earns most of its foreign reserves, which it is compelled to invest in US government debt. [As a result] the Chinese economy will see no benefit from exports as more goods leave China than come in to offset the trade imbalance. True wealth is given away by Chinese exporters for paper. But China cannot afford a balanced trade, let alone a trade deficit, because trade surpluses are necessary to keep the export sector growing.... Since the drivers of trade imbalances are overvalued currencies of the importer or undervalued currencies of exporters, obviously the one-sided trade can only end when the exporter has wasted away all its expandable wealth, or the importer has run deficits to levels that exceed the willingness of the exporter to accept more of the importer’s debt. Interest rate policies of central banks are usually the culprit in this matter as they drive investment flows in the direction of high interest economies, making necessary the trade imbalance. Other forms of waste, such as pollution, low wages and neglect of domestic development and rising poverty in both are penalties assumed by the exporter."

Currently Chinese wages are reported about one-tenth of those in Japan, and one fifth of those in Taiwan and Thailand.

"Imports from China are resold in the US at a greater profit margin for US importers than that enjoyed by Chinese exporters. In part, this has to do with the inflated distribution costs in the US because of overvaluation of its currency, and the higher standard of living in the US…. Thus a $2 toy leaving a Chinese factory is a $3 part of a shipment arriving at San Diego. By the time a US consumer buys it for $10, the US economy registers $10 in final sales, less $3 in imports, for a $7 addition to GDP. The GDP gain-to-import ratio is greater than two....The $1.25 trillion of imports to the US in 2000 are directly responsible for some $2,5 trillion of US GDP, almost 28% of its $9 trillion economy.

"The 4% productivity rise cited in net productivity is much smaller, on the order of 1.8%, since the technology revolution began affecting the economy a whole decade earlier. Much of the rest of the improvement has to do with normal cyclical behavior of productivity, the result of normal rise in capacity utilization during boom times.

"One need only focus on the broad trade-weighted dollar index being put in an upward trend, as highly indebted emerging economies attempt to extricate themselves from dollar-denominated debt through the devaluation of their currencies. The purpose is to subsidize exports, ironically making dollar debts more expensive in local currency. The moderating impact on US price inflation also amplifies the upward trend of the trade-weighted dollar index, despite persistent US monetary easing also known as money printing.

"The transition to offshore production is the source of the productivity boom of the ‘New Economy’ in the US. The productivity increase not attributable to the importing of other nation’s productivity is much less impressive. While published government figures of the productivity index show a rise of nearly 70% since 1974, the actual rise is between zero and 10% in many sectors if the effect of imports is removed from the equation….

"This era of declining reward for manual effort coincided with the Reagan shift to having workers pay for their social benefits, while promoting heavy subsidies of corporations…through pro-business tax policies and regulatory indulgence.

"Inventory management in the current ‘just in time’ manner was not attractive until high US real interest rates made the holding of inventory unattractive. Prior to this, inventory was a profit center, not a cost problem, thanks to FIFO (first in, first out) accounting where inflation would produce an annual statement of higher ending inventory value, a lower cost of goods and a higher gross profit. Now that the world has organized away the inventory that cushions supply disruptions and price inflation, we are quite defenceless against them.

"The result of distortion driven by the monetary system is a decline in real living standards of producers in all of the exporting and indebted world. In the US, reward has been divorced from real effort and reassigned to manipulators. It has been the seigniorage of the dollar reserve system of the US without economic discipline that allowed the import of the productivity from abroad and the superficial appearance of US prosperity.

"Regions like Asia and Latin America should restructure their export policies to focus on intro-regional trade that aims at development instead of those that transfer wealth out of the region.... The purpose of the $30 billion IMF loan of Brazil – an unprecedented figure – is not so much to help the Brazilian economy escape its debt trap as it is to bail out US transnational banks holding Brazilian debt. The net result is to force the Brazilian economy to export more wealth to the tune of $30 billion plus interest on top of the mountains of debt it already has. Brazil would be better off defaulting as Russia did. Economist Paul Krugman lamented in his NY Times column that he mistakenly bought into the Washington consensus." Krugman is not the only one.

— from Economic Reform, November 2002