Thursday, June 7, 2012

State-Financed Capitalism and the End of Western Hegemony

According to the CIA World Factbook, the United States has the World's largest economy with a GDP of $15.0 trillion, unless that is, you count the EU economy (GDP, $15.4 trillion) as a single entity. The US is followed closely by China (GDP $11.3 trillion), if you measure GDP on the basis of purchasing power parity, with India a long way behind at $4.4 trillion, the same as Japan.

The numbers seem to suggest that despite the extraordinary dynamism of the Asian economies, the West, with its Asian ally Japan, is still comfortably on top of the heap economically, and thus presumably, in technology and military power.

Things look rather different, however, if you consider rates of investment and growth. China, again according to the CIA, invested 54% of GDP in 2011, versus 18% in the European Union and 12% in the US. Converting those percentages to dollar amounts at purchasing power parity shows that China's total investment was $6.1 trillion in 2011, one third more than that of the US and the EU combined.

What does this mean for the future? The answer depends on how investments in China and the West are deployed. On the one hand, China, it is said, is a highly corrupt country where investment capital is channeled via government-controlled bank lending into all kinds of unprofitable businesses and infrastructure boondoggles, the loans being rolled over indefinitely, with new loans being made to cover business losses and infrastructure project overruns.

In the West, on the other other hand, we are supposed to have the most efficient and incorruptible capital markets, so our relatively low investment rate is more than sufficient to maintain competitiveness with China. Trouble is that China's economy grew at the astonishing rate of 9.2% in 2011, according to the CIA, whereas America's grew by only a paltry 1.5% in the same year, albeit a great improvement over the contraction of 3.5% in 2009.

A difference in growth rate of 8% in economies of comparable size, means a doubling of the one versus the other within a mere 9 years. Let me put that another way: in less than a decade, China's economy could be twice as large as that of the US, and equal to that of the US and the EU combined.

If the CIA and the US administration are not worried about that, then Western global hegemony will surely end sooner than later.

And even if the CIA and the US administration are thinking about it, what can they do about it?

One possibility is to emulate China, by redirecting 30 or 40% of the nation's GDP from consumption to investment.

But how?

China, it appears, ensures a massive rate of capital investment in two ways. First, through direct control of major industrial concerns, income from which can be reinvested, rather than paid out, in whole or in part, as dividends to investors, as would be the case with privately owned companies. Second, by printing renminbis, thereby imposing an inflation tax on workers, which can be directed through state-controlled banks into private or public investments. Such arrangements, we may call state-financed capitalism.

How, in the West, can a similar result be achieved? After the failure of the Soviet Union and Britain's post-war experiments with state ownership of the means of production, there is no faith in the West in the capacity of the state to run anything sufficiently well to generate consistent profits for new investment. Which leaves money printing and the inflation tax as the only apparent means to institute a system of state-financed capitalism in the West.

So how is the inflation tax to be deployed to this end?

One way is to print money and give it to those who will invest it. Europe's large scale investment in windmills and solar power is an example of this method in action. The result is to despoil the landscape with thousand of highly unprofitable windmills that do little to lift the GNP.

Backstopping banks and other entities that engage in risky financial engineering with massive public bailouts is another method of injecting capital into the private sector. But in this case the aim is merely to make up losses rather than to generate new profits, so the impact on the GDP must be limited.

Last, but not least, the Western states can use money printing to hold interest rates at or below the inflation rate. That is what they are doing and have vowed to continue doing. The result is essentially the same as that achieved by the Government of China. For those who wish to invest, capital is essentially free. The cost of borrowing is less than the rate of currency depreciation.

In the US, cheap credit in the early years of the millenium led to a property bubble, i.e., a consumption boom. However, since the property crash, the chief beneficiaries of cheap credit in the US appear to be corporations with plans for investment.

The risk remains, however, that cheap money will increasingly flow into the stock market, creating a financial bubble that will have the effect of directing resources into consumption, not productive investment. The creation of a climate of fear about investment must help prevent this. So bring on the crash books and wind-up the frenzy for "physical gold," the price of which can be deflated by financial manipulation at anytime to further enrich the financial corporations.

A further benefit of large scale money printing is that it makes it more difficult for China and other cheap labor exporters to the West to maintain their virtual currency peg against the dollar and the Euro. In other words, it allows Western wages to more rapidly approach parity with those of the Rest. Such wage reductions, create opportunities for import substititon in the West and hence promote investment. They also increase corporate profits, which increases the availability of capital for investment.

How successful this Western version of state-financed capitalism will be remains to be seen, but several major obstacles to its success are evident. One is the attitude of worker entitlement bred of decades of liberal-leftist propaganda, which generates huge resistance to economic adjustment to reality as abundantly demonstrated in Greece. Another is the attitude of ruling elites in the West who maintain a genocidal contempt for their own people, preferring to replace the indigenous working class with Third World immigrants less attuned than the native population to the rights of man. Such a neo-feudalist approach to leadership will result in increasing social unrest.

In view of these difficulties, it seems probably that rather than kickstarting a new round of investment, innovation and economic growth in the West, the Western version of state-financed capitalism will lead to more not less off-shoring and outsourcing of jobs and production, with a consequent reduction, not increase, in the economic output of the West. Moreover, it seems unlikely that the social conflict that current policy generates will be indefinitely contained. Instead, the US/EU seem headed for internal disintegration and a transition to a treasonous form of plutocratic tyranny.

No comments:

Post a Comment