Is the Main Threat to Washington’s Might Coming from Within?

William Krehm

As the sun sets on a lone empire, particularly one that has used its military technology to alienate rather than seek the friendship of allies, the main threat to its preeminence is likely to come from within rather than from without. Imperial might, under such circumstances, comes to find its chief foe in the very viscera of empire, and greed of the upper caste seals its doom. While Washington’s security concerns have concentrated on frontiers and illegal Mexican immigrants, it’s the law courts that have been clogged with top corporate cooking of the books. Yet the greatest damage was done by the official suppression of the brilliant work of American economists by the authorities themselves. No Bin Laden could have succeeded in so freezing the wits of the great American empire. The job was done by suppressing just about everything learned at a shattering cost during the Depression of the 1930s, and embodied in the Rooseveltian Bank Act of 1935. Every reminder of it has been expunged from the university textbooks. University staffs have been purged to that end. Publication is denied in the scholarly reviews in which publication can decide whether an academic thrives or perishes.

And lo who are today the beneficiaries of this self-immolation? The Chinese, who with all the obstacles of a tyrannical machine, are making the most of the US dependence on an exponentially expanding economy, of their own immense population, their millennial cultural background and discipline, and sheer native talent, to challenge the Americans at their own game.

The US Fed 17th straight quarterly application of its "one blunt tool" – higher interest rate for the 17th straight ¼ percent increase of its benchmark plunged the stock markets of the world into panic. Meanwhile China is making intelligent use of the alternative to that one blunt tool – increasing statutory reserves, as provided by the Rooseveltian legislation. I quote from The New York Times (17/06, "Fearing Inflation, China Tightens Monetary Policy for 2nd Time in 6 weeks" by Keith Bradsher): "Hong Kong – China’s central bank tightened monetary policy on Friday night for the second time in six weeks. Faced with the soaring growth in bank lending, the People’s Bank of China announced that it would require most banks to hold 8% of their loan assets as reserves at the central bank, up from 7.5%. This means that banks will have a bit less money available to lend out for new houses, office buildings, factories and other projects, which could have the effect of slowing economic growth slightly. ‘Although the consumer price index is still relatively low, if credit growth continues at a fast pace it is possible that the economy will heat up and there would be a risk of inflation,’ the bank said in a statement.

"Experts on Chinese monetary policy said that the higher reserve requirement would by itself have little effect on Chinese banks. They pointed out that the new rules would require Chinese commercial banks to keep only an extra $19 billion with the central bank."

However, American experts, having lost familiarity with what has become an un-American practice missed the crucial point. The $18 billion increase in the reserves the banks must put up with the central bank is in legal tender not bank credit. And with the deregulation of our banks that lets them acquire stock brokerage, insurance and mortgage companies under the deregulated banking rules that the US has brought in throughout much of the world, that can serve to increase the banks’ creation of near-money – i.e., interest-bearing bank credit as bank, i.e., interest-bearing near-money of as much as 400 times as its legal tender base. For it gives the banks access to more of the other "independent financial pillars" – the stock market, insurance, and mortgages and the money pools that they keep for their own businesses.

However, the American experts quoted were American experts who have been drilled to ignore this multi-storeyed effect on bank near-money-creation made possible by removing the firewalls between these pillars and banks.

The article continues: "By comparison, the banks are receiving almost all of the $18 billion to $20 billion in foreign currency flowing into China each month and are converting that foreign currency into Chinese currency.

"The new reserve requirement ‘is very modest,’ says Nicholas R. Lardy, a Chinese financial policy expert in the Institute for International Economics in Washington. ‘This will be erased in one month.’"

But the use of statutory reserves – abolished in Canada and in developing countries receiving IMF loans, and mutilated to near meaningless in the US and the UK provides the Chinese government with a technique for the realisation of yet another monetary objective:

"China’s central bank has been buying foreign currency from commercial banks as fast as foreign investment and China’s trade surplus bring money into the country. The central bank has been paying for the foreign currency by printing more of China’s currency, the yuan. The currency purchases are aimed at tempering a rise in the yuan’s value against the dollar that would make Chinese goods less competitive in overseas markets."

The Two Non-blunt Tools Used by Beijing

The Chinese, then have used two non-blunt tools, to achieve two very distinct but in their eyes vital goals: (1) to moderate the inevitable price rise resulting from increased public investment in urbanization, and physical and human government investments; (2) to prevent their currency from soaring because of the influx of foreign currency due to their excess of exports, and thus choking off their exports. The recognition of the need for equating the number of independent policy tools with the number of independent objects pursued. Though Jan Tinbergen got his doctorate in physics, he needed only first year high-school algebra to develop his theorem. Nor was it stolen by the Chinese. They almost literally picked it up from the Western garbage cans where it had been dumped because the financial sector cherishes high interest rates as both its basic revenue and its gambling dice.1 For some decades I know of no one these days apart from COMER that so much as mentions the work of Tinbergen, or the work of a host of other important economists on the same problem.

But continuing with the Times article: "Bank regulators have already moved this spring to discourage loans for real estate ventures and factories in overheated industries like property loans and steel. The People’s Bank also raised its benchmark interest rate on corporate loans by 27-hundredths of a percent on April 27, to 5.85%.

"The question is whether the interest rate increase in late April and now a reserve requirement increase will be enough to prevent higher inflation this year – or whether, as in the past, more drastic measures may be needed.

"When the Chinese economy threatened to overheat with rising inflation in 2003 and early 2004, China raised reserve requirements a full percentage point in August 2003 and by another half-point in April 2004."

Unlike the bone-headed Fed they hesitated to rely on "one blunt tool" and began tempering it with a second policy tool long ago discarded by the West.

That gives China – for all its problems another basic advantage: in addition to its population reserves that are of a higher mathematical order than that of the US or any European country and their millennial tradition of honouring scholarship and education. Of course, it does have its problems, of which corruption is only one. But what is the American purloining of economic theory in the interest of the sporting financial sector but corruption raised to higher systemic scale? We would recommend Washington address that serious threat to US security.

William Krehm

1. See Krehm, William (1975), Price in a Mixed Economy. Our Record of Disaster, Toronto, p. 39, and Krehm, William, editor (1999), Meltdown, Money, Debt and the Wealth of Nations, Toronto, COMER Publications, pp. 156, 184 and 185.

– from Economic Reform, July 2006