The Statistics of Financial Growth Elbow Out Those of Human Survival

William Krehm

The subprime mortgage shakeout in the US is crossing oceans as though with super-daddy longlegs, giving rise to some second thoughts where doubts have rarely lurked. The Globe and Mail (23/10, "IMF gives warning of greenback’s fall" by Barrie MacKenna) assembles some of these: "Washington – International Fund Chief Rodrigo de Rato has done what the Group of Seven would not: issue a dire warning about the economic fallout of the faltering greenback.

"A much weaker US dollar which touched a new low against the euro yesterday could inflict damage on other countries, said the Spaniard, who is in his final week as IMF managing director."

That in itself is a novelty. The IMF was engendered at Bretton Woods to reflect the interests and whims of the US. Even economists of the prestige of John Maynard Keynes – heading the British delegation – had to bite their tongues and let the IMF, which they had conceived as a means of reconciling the interests of creditor and debtor nations, be set up as a creature of Wall Street to whip the debtor nations – those of unrepayable debts and hopelessly flagging currencies – into line. And now a retiring Spanish head of that organization speaks his mind about the growing US international debt and the drooping dollar!

Mr. Rato used no euphemisms: "A much weaker US dollar, which briefly touched a new low against the euro yesterday, could inflict damage on other countries, including much of Europe, said Rato. ‘There are risks that that an abrupt fall in the dollar could either be triggered by, or itself trigger, a loss of confidence in dollar assets,’ Mr. Rato told the IMF’s Board of Governors.

"Mr. Rato raised the spectre of a protectionists backlash in Europe if the slide isn’t halted soon.

"‘There is a risk that exchange rate appreciation in countries with flexible exchange rates – including the euro area – could hurt their growth prospects, and in these circumstances protectionist pressures could worsen,’ he said on the final day of the annual meetings of the IMF and the World Bank. "That is a degree of threat and frankness that no power at the founding Bretton Woods Conference dared utter, or for decades thereafter. By its own abuse of the role, Washington has compromised as never before its role as lone superpower.

"Over the weekend, US Treasury Secretary Henry Paulson stymied European efforts to address the weak dollar in a joint statement from the G7 leading industrialized nations." And here the IMF, of all places, had become a pulpit for pouring out the contempt and resentment that American financial policies have inspired!

On the other hand, the communiqué called on China to speed up the appreciation of the yuan – the only currency named specifically. The finance ministers and central bankers from the US, Japan, Germany, Britain Canada, France and Italy, also agreed to keep a close eye on exchange markets and to "co-operate as appropriate."

"For his part Mr. Paulson reiterated the US mantra that ’a strong dollar is in our nation’s interests,’ adding that the currencies should be set by free markets.

"In his speech, Mr. de Rato did not mention the Canadian dollar, which has appreciated much more rapidly against the US dollar than the euro in recent months.

"On Sunday, Bank of Canada Governor David Dodge argued that the latest spike in the loonie was ‘abnormally’ fast and not justified by economic fundamentals. The Canadian currency hit parity with the greenback Sept. 20 for the first time since 1976.

"The loonie and the euro both retreated against the US dollar yesterday. The Canadian dollar fell to $1.02 (US), down $1.55 cents from Friday’s Bank of Canada close. The fall was attributed to weaker commodity prices. The loonie is up 1918% against the US dollar so far this year, and 65% since 2002, when it slipped below 62 cents. It is also up substantially against the euro and the yen, making life tough for exporters.

"Mr. de Rato is slated to leave office November 1, two years before the end of his contract. He’ll be succeeded by Dominique Strauss-Kahn, a former French finance minister.

"Former US Federal Reserve Board Chairman Alan Greenspan also expressed concern over the weekend about the dollar’s slide, saying there’s growing aversion among foreigners to buy US securities. ‘Obviously there’s a limit to the extent that obligation of foreigners can reach,’ Mr. Greenspan said in a speech in Washington. ‘Central banks and private funds have been turning to [other] currencies including the euro.’

"Total holdings of US equities, notes and bonds fell a net $69.3 billions in August, after an increase of $19.2 billion in July."

China’s Plethora of Cheap Dollars Is Leading to Some Basement Bargain Shopping on Wall Street

In the column adjoining the above article, The Globe and Mail offers us an article on China’s sensational progress in entering the financial scene of world high finance: "CITIC’s Bear Stake puts China in middle Wall St." by Marcus Gee: "The latest sign of the tidal shift came yesterday when China’s CTC Securities Co. bought a one billion dollar (US) stake in the famous old US investment firm, Bear Stearns Cos. The deal, the biggest investment for by a Chinese securities firm, would give the state-controlled Chinese company a presence on the main thoroughfare of Western capitalism.

"Under the proposed deal, CITIC and Bear Stearns would invest about one billion in each other and form a joint venture based in Hong Kong. The deal highlighted the reach and sophistication of Chinese institutions. Once saddled with bad loans and derided as shaky wards of the state, Chinese banks and brokerages have made a series overseas investments like China Development Bank’s purchase of a stake in Britain’s storied Barclays Bank in July.

"CITIC seems eager to follow, founded only in 1995, and listed on the Shanghai stock exchange in 2003, it has seen its stock price rise tenfold in the past two years as it profited from underwriting new share offerings on the red--hot Chinese market. CITIC is part of the CITIC Group, a giant conglomerate established in 1979 by China’s ’red capitalist,’ vice-president Rong Yiren, to become a funnel for Western investments in China as it opened to the outside world.

"Now CITIC is funnelling Chinese riches abroad. Chinese leaders are encouraging CITIC and other Chinese outfits to look overseas for better returns.

"Last week another lending financial firm, Industrial & Commercial Bank of China, accelerated it own overseas expansion by announcing it would be setting up branches in Moscow, New York and other global cities. ICBC is now the biggest bank in the world by market value, at more than $330 billion.

"For Bear Stearns the CITIC deal brings an injection of much-needed funds. The 84-year-old firm was hurt this summer by the troubles in the US subprime mortgage industry.

"On top of the banks’ rising wealth, China commands $1.4 trillion in foreign exchange reserves. Some of that money, traditionally invested in safe vehicles like US Treasury bonds, is starting to flow abroad too. China set up a special fund last month to invest the money more aggressively."

The Irreplaceable Function of the Statutory Reserves

Not least of China’s ability to come to the aid of the stressed US banking system is a detail passed over in silence by the reports in Western publications. Much of its financial strategy was actually developed in the US under Roosevelt to cope with the Depression of the 1930s. It used to be explained in all textbooks published up to 1991. But since 1991 it has become one of the great unmentionables, as the banks have essentially taken over our economies. These were the statutory reserves that required the banks to redeposit with the central banks a proportion of the deposits they received from the public. These reserves, that earned no interest, served a double purpose. They made available to the government a seigniorage – the use of money that cost it nothing in return for it surrendering to the banks the modern version of the ancestral monarch’s monopoly of coining – and more important – recoining them with less precious metal content. That has in its modern version become the banks’ ability to create near-money (i.e., interest-bearing loans created as a growing multiple of the legal tender that they have in their vaults or hold with the central bank).

These statutory reserves provided the central banks with an alternative or a supplement to their use of the benchmark interest rate to attempt to lick "inflation." The trouble with the effort to keep prices flat with higher interest rates is that can achieve that goal only by placing the economy at the mercy of the financial sector, in particular encouraging speculative gambles. Higher interest rates also attract foreign money and that pushes up the value of the currency, and discourages sales at home and abroad.

The Chinese government continues to make use of statutory reserve to prevent its currency, the yuan from rising, and cutting off its exports. Much of China’s exports can be traced to its low currency. It is the device of statutory reserves, developed in the United States, but essentially abandoned by it to endow interest rates – the primary revenue of the financial sector – with a near-monopoly position.

This severe handicap in any eventual contest with the Chinese, could well prove fateful. Without it, it is questionable that the Chinese could keep their currency low enough to amass to the positive balance of trade that is the key to their present emergence not only as an industrial giant, but as a major if not the dominant figure in world finance.

William Krehm

– from Economic Reform, November 2007