The Thought of Chairman Liu

World trade is now a game in which the US produces fiat dollars of uncertain exchange value and zero intrinsic value, and the rest of the world produces goods and services that fiat dollars can buy at “market prices” quoted in dollars. Such market prices are no longer based on mark-ups over production costs set by socio-economic conditions in the producing countries. They are kept artificially low to compensate for the effect of overcapacity in the global economy created by a combination of overinvestment and weak demand due to low wages in every economy. Such low market prices in turn push further down already low wages to further cut cost in an unending race to the bottom. The higher the production volume above market demand, the lower the unit market price of a product must go in order to increase sales volume to keep revenue from falling. Lower market prices require lower production costs which in turn push wages lower. Lower wages in turn further reduces demand. To prevent loss of revenue from falling prices, producers must produce at still higher volume, thus lowering still market prices and wages in a downward spiral. Export economies are forced to compete for market share in the global market by lowering both domestic wages and the exchange rate of their currencies. Lower exchange rates push up the market price of commodities which must be compensated by even lower wages. The adverse effects of dollar hegemony on wages apply not only to the emerging export economies, but also to the importing US economy. Workers all over the world are oppressed victims of dollar hegemony which turns the labor theory of value up-side-down..

In a global market operating under dollar hegemony, the world’s interlinked economies no longer trade to capture Ricardian comparative advantage. The theory of comparative advantage as espoused by British economist David Ricardo (1772-1823) asserts that trade can benefit all participating nations, even those who command no absolute advantage, because such nations can still benefit from specializing in producing products with the lowest opportunity cost, which is measured by how much production of another good needs to be reduced to increase production by one additional unit of that good. This theory reflected British national opinion at the 19th century when free trade benefited Britain more than its trade partners. However, in today’s globalized trade when factors of production such as capital, credit, technology, management, information, branding, distribution and sales are mobile across national borders and can generate profit much greater than manufacturing, the theory of comparative advantage has a hard time holding up against measurable data.

Holy Dollar Empire

Echoing the Holy Roman Empire, the global economy has been operating as a global Holy Dollar Empire with the Federal Reserve as the Holy Dollar Emperor. Similar to the Holy Roman Empire which disintegrated from the rise of Lutheran nationalism, this Holy Dollar Empire will eventually disintegrate from progressive centrifugal forces of a new populist economic nationalism. This new populist economic nationalism is not to be confused with regressive trade protectionism. The formation of the new Group of Five (G5 - China, Brazil, India, Mexico and South Africa) in the 2008 Group of Eight Summit in Tokyo (G8 – US, UK, Germany, France, Italy, Japan, Russia and the European Union) is a sign of this new trend of progressive new economic nationalism. The 2008 US presidential election may herald in a new populism in US history to reform the structure of US debt capitalism. In his speech to the G5 leaders, President Hu Jintao said: “It is necessary to take into full account the issue of food security in tackling the challenges in energy, climate change and other fields.” Apart from calling for the setting up of an UN-led international co-operation mechanism and a global food-security safeguard system, Hu said all countries should strengthen co-operation in grain reserves, a process of proven success in China but not recommended by the UN Food and Agriculture Organization which views such scheme as a distortion of trade. Liberation from this Holy Dollar Empire of dollar hegemony can only come from sovereign nations withdrawing from the global central banking regime to return to a national banking regime within a world order of sovereign nation states to put monetary policy back in its proper role of supporting national development goals, rather than sacrificing national development to support global dollar hegemony through wage-suppressing export-led growth. In a world order of sovereign nation states, the supranational nature of central banking will render it inoperative, as it can be and has been used as an all-controlling device for the world’s rich nation to neutralize the sovereign rights of financially weak nations. In a democratic world order, central banking is also inoperative within national borders, as it can be used by a nation’s rich as a device to deny the working poor of their economic rights. Central banking, in its support of dollar hegemony, operates internationally in opposition to the economic interests of sovereign nation states and domestically in opposition to the economic rights of the working poor by discrediting enlightened economic nationalism as undesirable protectionism.

The once-dynamic US economy has turned itself into a system in which it is difficult to find any institution, company or individual not over their head in speculative debt. Undercapitalized capitalism, also known as debt capitalism, has been the engine of growth for the US debt bubble in the last two decades. This debt capitalism cancer is caused by a failure of central banking

The backing of the GSEs enabled securitization of "ninja" mortgages (no income, no job or assets), loans that no one would buy if they were not guaranteed by the government. Thus the fault did not lie with mortgage originators, for they would not be able to issue shaky mortgages unless there was a market for them. GSEs' abuse of their alleged government guarantee had rendered market discipline inoperative, allowing the system to go on a wide joyride that was bound to crash of a cliff. Because of their complexity and broad distribution, when securitized debts default, restructuring is almost impossible. There is no effective fire break once the fire begins and quickly engulfs the whole market

In 1968, then president Lyndon Johnson, as part of his Great Society program, turned Fannie into a shareholder-owned company as part of a national housing policy to make finance capitalism finance the nationalization of housing. It was the beginning of corporate market socialism in the name of populist economic democracy. The public could only benefit if corporate and financial institutional interests could profit first. And the public must pay if market capitalism fails systemically, absolving the losses of wayward corporations and financial institutions.

In 1970, the savings and loan industry, envying the huge profit made by commercial and investment banks from Fannie Mae, called for and received congressional approval for a GSE of their own and Congress created Freddie Mac. Like the Urban Renewal program of the 1950s, the GSEs served a coalition of interest that included liberals who wanted to help low-income households, real state developers that wanted guaranteed demand, home builders that wanted a guaranteed market, local politicians who wanted tax revenue from redevelopment, banks that wanted lucrative risk-free loan proceeds and congressmen who wanted campaign contributions from mortgage lenders.

The GSEs have been financially successful because they combine private sector appetite for profit with access to government-backed credit at below market rates. It was a way to nationalize housing through the free market capitalism. The problem was that financial manipulation cannot replace the need for adequate income growth. The mismatch of income with asset price is the definition of a financial bubble. People were buying homes with cheap credit at prices that their income could not afford. The more home prices rose due to cheap credit, the more homeowners fell into the debt trap. Yet in all the current talk about finding ways to deal with the crisis, not one single voice is heard from official circles about the need to increase worker income. Instead, false hopes on one-time stimulant tax rebates are hailed as the magic bullet.