The Historical Antecedents
Part I
Part I
One of my Associates raised the question the other night: is there any manufactured products that American capitalism can produce that China cannot produce better and in greater quantities and considerably cheaper?
This is not fanciful speculation. It therefore follows whether American capitalism in its current state of indebtedness, mass impoverishment and financial disintegration will be able to compete internationally. Or put it another way: how and by what means will it pay for its imports, for what it consumes? Will it be able – on present evidence it is not – to shave and ultimately to eliminate its trade deficit by exporting more than it imports? Further, can the dollar be an acceptable medium of payment and exchange given the battering to which it has been unrelentingly subjected for many years? The observation by Iran’s Mahmoud Ahmadinejad that the Greenback is worth less than used toilet paper is ungracious, but it is shared by many leading spirits in the world of finance capitalism.
In subsequent lectures we shall explore the ramifications of these issues. Suffice it to say that it is a matter of life and death that takes us into the deepest reaches of the conflictual contradictions within world capitalism and the imperialist lethal that I have will give you more than an idea of what is meant when we say that China has become the industrial hub of our planet; as well as an idea of what we mean when we speak of financial imbalances. Of that more later.
The Ramifications
Some of you have evoked the possibility of a world conflict in the course of 2009.. I shan’t say that this prediction is far-fetched; or remote. Doubtless, many of you do not mean a regional conflict as in Ossetia and Gaza . Nor do I exclude the possibility of the US / Israel on Iran . In the making of war, madness can never be excluded. Let us keep in mind that the US caste oligarchy (USCO) and its trillion dollar militarist appendage is at war on several front in areas engulfing tens of thousands of kilometers: It is pursuing a war in Gaza via its surrogate; it is pursuing a war in Iraq; and of course it is escalating its military drive in Afghanistan; it has extended its killing fields to Pakistan. Recall that Pakistan has a frontier of 2,500 kms with Afghanistan .
Such a possibility cannot be ignored. How does one approach the subject? What is the most appropriate method? I am aware that itemizing the potential flashpoints gives us individual dots but the dots are not connected. They remain separate and cannot provide an insight of the detonator. I am sympathetic to your speculation. The historian must select his facts This is a matter of personal choice. But how and to what purpose he selects his facts stems from his principle of selectivity that is a part of a process of abstraction.
His selection and his interpretation of events are thereby conditioned by his ideological and philosophical predilections. His class affiliations. His personal experience. One may itemize a list but itemizing single events do not give us a handle to comprehend these complex phenomena.. The assassination of Kronprinz Franz Josef by a young Serb nationalist was certainly the detonator but it tells us very little without disentangling the complex of nationalist convulsions and economic and dynastic rivalries that shredded the vitals of the world economy. Nor can we ignore the military naval buildup of the German empire that challenged the centuries old supremacy of the Royal Navy. As David Lloyd George - the shrewdest of imperial artisans and a paramount Hatchet man the Great War noted : “if 1914 had not come when it did it would have inevitably come later”. The key words are ‘come later’. What Lloyd George had in mind was that the power politics of finance capitalism and imperialism, and the carnage it irrepressibly incubated, was inherent in the evolution of world capitalism given its ceaseless lunge for territorial and financial spheres of aggrandizement. And its wars were confirmatory.
The Arms Race.
Many of you have emphasized the fact that the USCO is likely to boost expenditures to offset the fall in demand in the private sector thereby raising the level of employment. It is not a new recipe but the thesis has a defect in the present context of international relations. The U S CO is already spending more than twice or three times what the rest of the world is spending on arms. SIPRI in Stockholm that you’ll find on the Internet provides the exact numbers. But I am not momentarily concerned with such numbers.
The USCO and its military lackeys has been at war since 1945 non- stop. And that includes its role in the Chinese Civil War that ended in 1949, in Indochina since 1945, in Korea , in Iraq twice over.etc. Its colonial wars fought exclusively against peoples of colour have driven the US economy into a state of bankruptcy.
At the latest count, it has 250 military bases outside the United States . It is spending more than it earns. It is the world’s biggest mendicant. It is spending other people’s borrowed money. In Iraq alone, according to the figures of Stiglitz, the number is $3.5 trillion and the wars are not yet over. In these wars it has slaughtered millions. It is fighting wars in Iraq , Afghanistan , Pakistan and Israel ’s attack against Gaza , as in Lebanon , was inconceivable without US support. This is a banality. Let me say that the phosphor bombs used in Gaza were made in Virginia . The uranium enriched artillery shells were manufactured in Tennessee . The bombers were F-18’s of American fabrication. Gaza was one more testing ground for its weapons of mass slaughter. That makes four wars. Some are right to stress that wars, preparations of wars, boosts output and employment. What matters here is the nature of the output and its related employment impact. It is unproductive and does not add to productive capacity.
This was certainly the case of Hitler’s Third Reich in which arms outlays provided a booster that eliminated the ranks of the jobless. And of course the jobless could always find jobs in the Wehrmacht subsequently transformed into cannon fodder. This was true of the U K from 1937 onwards. As you recognize the changes wrought by FDR’s New Deal , admirable but illusory in several ways, did not curtail the Great Depression. What did the job was massive public sector war expenditures bankrolled by debt.
Let me repeat that what ended that satanic slump triggered in 29 was the advent of World War 2. Can it therefore be suggested that war and preparations for war offers a ‘final solution’ for achieving full employment? In the case of the US capitalism the answer is unequivocally no. War expenditures - bankrolled by foreign borrowing and ever swelling debt holes – sets the stage for endemic corruption, national indebtedness and bankruptcy and all its innumerable toxic corollaries. The debts of American capitalism - Federal, corporate and household - will never be repaid. They cannot be repaid. With the economy imploding daily USCO does not have the wherewithal to repay its debts. Frankenstein defaults are on the horizon.
One may contend that it raises the revenues of the arms producers. In what sectors is this true? In what individual enterprises does this hold? If you take pains to examine the share prices of all of the big arms producers i.e. Lockheed at the Standard & Poor's and the Dow Jones Industrial Average (DJIA) you’ll find that their revenues and profits have tumbled as have their share prices .
Given the capital intensity of modern arms output the labour inputs required i.e. employment is sharply reduced. Productivity, (ratio of inputs to outputs) has risen sharply resulting in a cutback in labour requirements with collateral falls in wages. I believe you’ll find that for the most part their balance sheets have been battered although perhaps not as bad as the financial sector .The conclusion appears obvious: stimulus plans, or pumping the prime as it was earlier called, will obviously not do the trick. I return again to the estimates of Stiglitz.
In Iraq alone, it is spending $3.5 trillion. Where is the money coming from? By borrowing. As I said repeatedly in these lectures the world capitalist economy has entered into a deflationary stagnationary phase , or defstag as I’ve called it. The USCO is living off borrowed time and other people’s borrowed money, a parasitical binge that is sustained by 70% of the world’s savings, palpably unsustainable even over the short haul.
Israel and the Middle East .
I suspect that some are correct to surmise that Gaza is too small an area to be considered the likely detonator of a major world conflict. Size, however, is not the only benchmark. Serbia in 1914 was also a very exiguous geo-demographic area. But it provided the detonator and is therefore not the only factor in play; it is the larger forces that are set in motion. Gaza and Israel are segments of a .larger empire writhing in its final apoplexy. The goal of the US/Israeli onslaught is to obliterate Hamas as its onslaught in Lebanon was to eliminate the Hezbollah. They failed miserably. The citizens of the Zio-fascist state applauded the rape of the Gazans. And here we come not to abstract forces but the role of individuals in history. Netanyahu an outright exponent of unrelenting Arab exterminism has succeeded in climbing the greasy pole of a state that itself is riven by ethnic and class divisions. .
His speech in Davos, like that of Olmert , is more than the howlings of a politico bent on the destruction of Arabs, and what his fascist cronies call Hamastan. His utterances, like that of Lieberman, could be translated into reality. Netanyahu/ Lieberman could demolish the entire Middle East and that includes the Hebrew sate. . And by that I mean it could lead to the unmaking of Mr. Obama and , I daresay , to his political destruction given the unquestioned reach of the Zionist lobbies. Mr. Obama is a fragile politician and the untamed capitalist convulsions, nationally and internationally, will shove him into raging cross currents.
We know who the Netanyahu/Lieberman duo is . There is nothing nebulous in their blueprint. “My highest priority” Netanyahu thunders “is Iran ”. Need we say more? Has Obama plumbed the meaning of that statement? There is nothing cryptic about it. The duo’s unrivaled standing in the Zionist lobbies and in the dominant spheres of the USCO the US is high. Hence we cannot ignore the possibility that in their desperation they could trigger a wider war. Such a course could not be confined to the region.
The goal of US imperialism, conflated with that of Israel , is the destruction of Iran , the ally of both Hamas and Hezbollah. This is not speculation. It is stated policy. The Iranian prime minister has pushed his pawns. The game has started. The launching of their satellite into space injects into our calculations new and terrible variables.
Can Israel reconcile itself to coexist with Hamas and an increasingly militant anti-American and anti-Zionist world? The change in tone of the Arab world seen in the unambiguous article of a member of the Saudi Royal family – and a powerful intellect – in The Financial Times - suggest a turning of the tide. The Arab street is a reality. It is angry and getting angrier with each passing day. It is unemployed. It is poverty stricken but Al Jazzera with a 140 million viewers reaches them. A stooge like Mahmoud Abbas is a ghost and his power is eviscerated. He too was in Davos and his speech like that of Karzai was written by his American touts. The Israeli leadership sounded out Bush (whose administration turned them down) for overflying Iraq to bomb Iran ’s nuclear facilities.
It appeared in The New York Times. They were turned down by the Bush cabal not because of humanitarian reasons but because they understood for once the far-reaching consequences. You will also recall H. Clinton current mistress of State Department had the gall to proclaim that she would obliterate Iran during her electoral jousts. It is not the moment to discuss the implications of that projected genocidal act. The position of Bush and Obama on the attack against Iran are identical.
Iran has made it clear that it intends to pursue nuclear enrichment for civilian purposes and Russia will complete this year the building of the nuclear facility at Bukwear. In chess, it is not sufficient to decide what your is but to foresee that of your opponent . Let me proceed to a no less significant flashpoint. The relationship between China and the USA which have scaled new heights of trade tensions despite the mellifluous babbling to the contrary.. Protectionism or call it economic nationalism if you prefer in a multiplicity of guises is omnipresent. And that I shall deal with presently.
China and the US
Before I proceed, however, to examine whether mounting trade and payment tensions could lead to a deadly military confrontation we should remind ourselves of the nature of the trade rivalries and weapons deployed in those economic wars in the thirties. The speech of the Chinese president lambasting the United in Davos , as did Putin, is indicative of the drift of economic war. Davos is the pivot of globalization. It is the cockpit of corporate power, of world leaders and aspiring leaders. Davos underlined the penurious fragility of financial institutions once regarded as the bedrock of the system.
Words as stability and confidence have been wiped out from their slate. The debacle of U B S and of The City and the ongoing tremours in Wall Street , matched by such spectacular swindlers as Madoff and Stanford The anger can no longer be dissimulated nor more than it can be concealed in the mass labour demonstrations in Paris and all French cities and in the neo-colony of Guadeloupe. The tensions are mounting. They go beyond beggar-my-neighbour policies first created by Joan Robinson of Cambridge University in the thirties’.
No where was the nature of these conflicts more clearly delineated than by Sir Percy Bates, chairman of the Cunard Steamship Company (April 1935) at a moment when the Great Depression raged. Its relevance to our times is all too obvious:
“We are going through a war…The arms that are being employed are not battleships, armies, aircraft, but tariffs, quotas and currencies. No international monetary standard is recognized, and every time that a tariff, quota or a currency varies, one is confronted with a manoeuvre, a hostile manoeuvre, a war manoeuvre. The worst of all is the reluctance to admit officially the existence of a state of war.”Capitalism as the present crisis lumbers on is no longer able clamber out of its defstag pit. A predicament that worsens by the hour. The war for world markets and market shares continues at an undiminished tempo. This is mirrored in the relative economic performance of the United States and China that has become the hub of world manufacturing. The USCO in contrast is caught in the throes of the dis-accumulation of capital and a rapidly wilting industrial base. As in the U K, its once mighty industrial base has been hollowed out. Let us cast a glance at these numbers to grasp their divergences and which highlights the tensions that could lead to war.
8. What the numbers say: These comparative figures are indicative. Recall that China has now shoved aside Germany in world GDP rating tables to become the third world largest country. Preceded by Japan and the USA . With the crumbling of indebted Japanese capitalism hovering at zero growth rates it is set to shovel Japan into the backwaters of history. Let us deal first with some of the major indicators (2008) of the USA and compare them with China :
USA : G D P (0.9%); Trade Balance ( -$833bn); Current Account Balance ( -$697bn); Industrial production ( -7.8%)These numbers highlight their mounting economic disparities. I must confess at this point that I am not sure that in the near future the abyss will ever be bridged Let us focus simply on the foreign trade sector. U S. imports are growing faster than its exports. The US capitalism is in a downward deflationary spiral that bears similarities with Japan ’s so-called ‘lost decade’ in the 1980s.. True, China ’s growth is adversely affected by the world slump, but it is growing several times faster than the US . Compound growth rates are at once constructive and destructive forces . This is a point you’ll recall that I noted in my discussion of the US balance of payments in my book on Cuba and I would suggest that you consult that section again. The ratio of its imports to its exports is about 1:5
CHINA : GDP (9.1%) ; T B ( + $295BN); C A B ($371bn.)+ I P (5.7%)
That gap is unbridgeable.. Hence the USCO must borrow to finance its imports. Borrowing is debt. And debt must be repaid at compound interest rates or defaulted.. China recycles its trade surplus by buying US securities and Treasury bonds. This is a familiar story. Whether the Chinese political elite will continue to recycle their foreign exchange earnings to prop up US deficits remains problematical.
American capitalism has been the world’;/s biggest debtor for more than two decades. Its biggest lender is China . The size of the figures are important. China ’s almost $2,000 bn in foreign exchange reserves are the world’s largest. Much of these reserves are being directed to the purchase of U S Treasuries. ` According to the estimates of Brad Selser the real figure is nearer $2,300bn.. or equivalent to $1,600 for every Chinese citizen.
Of this sum about $1,700bn is invested in dollar assets, making China the biggest creditor of American capitalism and the single largest purchaser of US Treasury bonds. It is entirely addicted and dependent on Chinese money. Never in its history has the USCO been so dependent on any foreign creditor. The opposition within the leading echelons of China’s power elite are aware that such massive capital flows going to a stricken economy, that is in the throes of an ever deepening crisis and with low-yielding dollar assets, is perilous. China has already lost billions And this is so given the depreciating dollar stemming from its rising level of indebtedness, low savings, zero interest rates and a GDP that hovers around zero . Without this avalanche of Chinese money the USCO would not be able to pursue its militarist expansion abroad.
But what we can say is that the dollar’s status as the world’s reserve currency which has conferred extravagant power ( that was the designation of de Gaulle on US imperialism can obviously not endure. Chinese misgivings are present but they have made a pact with the devil and can do little to alter this state of affairs. “Except for US Treasuries what can you hold” asks Luo Ping, a director-general at the China Banking Regulatory Commission. “You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China , it is the only option”. This in my view is the tragedy of China ’s power elite presiding over a capitalist economy that has shed all pretences of being socialist.
It is deliberate policy choice that reveals its class and ideological alignments. They have already paid a terrible price for such a policy choice of being the savior and supreme benefactor of American capitalism. . With capitalism’s crisis now howling in its agony and the dollar’s continued slide the costs to the Chinese workers and peasants that the Chinese elite have long ceased to represent the losses to China rise to even greater heights. To put it in non-technical jargon the masters of China ’s money box has so much money that it does not know where to invest that money save in wretchedly low yielding US Treasuries.
The battle over exchange rates is fought on the killing fields of foreign exchange markets.
The Big Mac Index
To understand, in my view why there can be no amicable resolution of the Sino-American trade war and rivalry it is well that we should say a few words on the nature of foreign exchange markets. That is where money is bought and sold and is the object of ferocious speculation on international markets. Money we must not forget is the commodity of commodities . It is the King of commodities. The market on which these money transactions are carried out is the Forex market.
In a very illuminating but non-technical language we perceive that the index of The Economist is based on the idea of purchasing power parity (PPP). This says that currencies should trade at a the rate that makes the price of goods the same in all countries. The Big Mac that costs $3.54 cents in the USA becomes the benchmark for evaluating whether another currency is under-valued or over-valued.
In China , the price of the Big Mac is $1.83. Thus it is 40% cheaper. In Switzerland ( we use foreign exchange rates prevailing on a specific date) $5.75 i.e. it is 60% higher. This is the crude test of undervaluation or overvaluation. Hence the conclusion we draw - (and I repeat that this is not only the basis of comparison for measuring foreign exchange disparities but it is certainly the simplest and the most ingenious) is that China’s Renminbi or Yuan is 40% higher than the Greenback which gives supposedly gives it an export trade advantage by the calculus of the US Treasury .The U S government has already imposed tariffs on China, and accuses it of currency manipulation. A charge that we hear with a grain of salt given the fact that US government and all its works has never been a custodian of morality. .
The problem of China ’s competitive advantage goes of course beyond foreign exchange rates . Comparative wage labour rates are no less important. China ’s wage rate in manufacturing is 10% that of the US rate. But we are not only dealing with a disparity in labour costs. Let us add that China ’s industrial productivity has been remarkable .
China as you are aware is present in all world markets and its foreign trade and direct investment has rocketed in the last decade strikingly so in Latin America and Africa, Australia all Asian markets ,not to speak of Russia . A single example clinches what I am saying. The Chinese/Venezuelan economic development fund will now double from $6bn to $12bn in just over a year. The role of the USCO, the European Union and Japan are of peripheral importance in Venezuela . The conquest of world markets and market share is continuing at unstoppable speeds. The leading ten capitalist countries are already in recession. Let there be no ambiguity on this score. The goal of China ’s policy makers and their capitalists is market aggrandizement .
Dynamics of Overproduction .
One of the traits of the current defstag, and I don’t exaggerate when I use that word, means that there are too many goods chasing too few buyers, too much money chasing too few profitable investment outlays, too many workers chasing too few jobs; too many banks chasing too few impoverished savers and depositors. etc. This is true not only of capitalism’s current cyclical slump but applies to all facets of the crisis. The essence of the crisis of capitalism is overproduction. Or over-accumulation.
What is overproduction? What are its properties? At what stage in the cycle of capital-accumulation does it emerge? What is its cyclical duration? What is its role in capitalism’s business cycle? Milton Friedman , one of the major propagandists of free market fundamentalism and a vulgar apologist of capitalism , put this succinctly when he shoved aside the nostrum of social responsibility on the part of the capitalist: “ a company’s only responsibility is to increase profits for shareholders”. Capitalism defines the relationship between a possessing / exploiting class whose incomes are profits, dividends and rents, and an exploited propertyless class whose income is wages.
It defines the relationship between the oppressor and the oppressed. Hence capitalism’s overriding objective, its alpha and omega, and the masters of capital is not the provision of goods and services to the workers it exploits. That is a surface phenomenon. That is a fetishism. The goal of capital accumulation is to expand and ensure an ever rising mass of profits for a class of propertied owners. The overriding goal is profit and profit maximization. Overproduction is thus not an aberration of the system but inherent in its operation. And this goes back to the beginnings of capitalism’s first Great Depression of 1873, as noted by the Royal Commissioners in their final report. in words that are superbly relevant to the crash of 1929 and our present slump.:
“We think that…over-production has been one of the most prominent features of the course of trade during recent years; and that the depression under which we are now suffering may be partially explained by this fact....The remarkable feature of the present situation, and that which in our opinion distinguishes it from all previous periods of depression, is the length of time during which this over-production has continued …We are satisfied that in recent years, and more particularly in the years during which the depression of trade has prevailed , the production of commodities generally, and the accumulation of capital in this country, have been proceeding at a rate more rapid than the increase of population.”
The insight of these findings underscore not merely the nature , genesis and rationale of the business cycle that we shall explore in subsequent lectures , but its relevance and kinship to other great depressions that have devastated world capitalism such as the Great Depression of 1929 and the current economic depression we are now traversing. What it is important to recall are the consequences of that great depression that lasted , with its rises and falls, until the start of the 1890s.
