Consider John Maynard Keynes’s coalmine experiment. On the theory that having people employed for no purpose at all can help to stimulate economic activity during times of demand collapse or output shock, he proposed having a government fill old bottles with banknotes, bury them in coal mines, and encouraging private enterprise to compete to dig them back up again. The process would employ many more people in jobs, albeit pointless ones, and thereby spread wealth around. Keynes argued it would naturally be more sensible to have these people employed in building houses or something else more useful. But the economic effect would be the same.
In many ways, what White is arguing is that China is actually running the greatest Keynesian coal-mine thought experiment of all time, building and producing not for the sake of what was produced but rather to take advantage of a global capital surplus. This gave China the opportunity to empower its citizens on the condition that underwriting the capital could woo it in the first place through this massive social experiment. It did so, of course, by means of foreign-exchange manipulation—an important precursor to the quantitative easing (QE) used by the U.S. Federal Reserve postcrisis—that ensured that every dollar invested in China would offer a better payoff than a dollar invested at home. It could guarantee this because not only would there always be a superior Chinese bid for the capital in question but it would be coming from the government directly.
It is only because the government is putting up the bid rather than private enterprise—which in emerging markets is thought of as risky and suffering from corruption and other principal-agent problems—that the capital suddenly becomes free-flowing to the country in question. If it wasn’t the government providing the bid, it would be seen as too risky to invest. But since the government can print money ad infinitum, and this is what Chinese currency manipulation really consists of (buying dollars with newly printed yuan), that bid remains competitive for as long as the Chinese government wants it to be.
The Western version of QE sees the Federal Reserve printing money in order to absorb underperforming assets and U.S. Treasury bonds into its coffers in a way that effectively underwrites their performance no matter what and squeezes the market at the same time. The Chinese FX manipulation version of QE saw the government printing money in order to absorb abundant dollars out of the global system, in a way that effectively kept the dollar overvalued no matter what. This meant investors could be sure that their dollar denominated investments in China would always result in real returns.
The reason the Chinese government felt comfortable underwriting bids for foreign investment, meanwhile, is probably because its socialistic disposition allowed it to see what the West couldn’t: namely, that in the West, capital was no longer scarce enough to justify a truly competitive bid for it and all China had to do was provide some sort of guarantee in order to benefit from it.
At the end of the day, the much discussed “savings glut” is just another way of saying capital surplus. For years nobody really understood what was fueling it, but more recently Larry Summers speculated that it was the first clear symptom of “secular stagnation,” a trend that arguably started in the early 1980s. In a secular-stagnated economy, we end up with a capital rather than labor bias, which sees rents and returns flow to owners of capital in favor of labor, to the detriment of the wider economy.
Unless that surplus could be redistributed to new pockets of demand, all roads consequently lead to a demand collapse, because eventually all wealth becomes concentrated in the hands of technology and capital owners rather than in labor’s hands. This creates a vicious demand circle that impoverishes the economy overall.
For China to benefit from that capital surplus, all it needed to do was draw the capital over and keep it there, creating a self-enforcing capital scarcity—or savings glut—for the world. With its socialistically minded economy that didn’t mind investing capital for public purposes regardless of return, China prevented that capital from returning to the West. This is important, because if the capital was allowed to flow back to the West, it would have less of a distributive wealth effect than it would in China, where it would make more people feel more rich. In the West, it would more than likely end up concentrating in the hands of capital owners, who would be ever keener to employ robots than human beings. (...)
As White argues, this is why it’s wrong to assume that China is pursuing capitalism as we know it. Its real aim is to create a hybrid model of public investment and very aggressive market-based competition with the hope of creating consumer surpluses rather than economic rents. This would distribute wealth more widely than if it was passed exclusively to rent seekers alone.
Capital is allocated consequently not on the basis of whether the asset created can provide a return but whether it serves a greater social purpose. The Chinese government will consequently fund contractors to develop public infrastructure and other massive social projects, as well as backstop private enterprise that has potentially overinvested in private developments. Even if the projects don’t yield a monetary return, they improve the social infrastructure, Chinese mobility, and the general standard of life. By contrast, in the United States, the lack of guaranteed returns has created a major underinvestment problem in public infrastructure, which is now falling apart or becoming ever more dangerous as a result.
In many ways, what White is arguing is that China is actually running the greatest Keynesian coal-mine thought experiment of all time, building and producing not for the sake of what was produced but rather to take advantage of a global capital surplus. This gave China the opportunity to empower its citizens on the condition that underwriting the capital could woo it in the first place through this massive social experiment. It did so, of course, by means of foreign-exchange manipulation—an important precursor to the quantitative easing (QE) used by the U.S. Federal Reserve postcrisis—that ensured that every dollar invested in China would offer a better payoff than a dollar invested at home. It could guarantee this because not only would there always be a superior Chinese bid for the capital in question but it would be coming from the government directly.It is only because the government is putting up the bid rather than private enterprise—which in emerging markets is thought of as risky and suffering from corruption and other principal-agent problems—that the capital suddenly becomes free-flowing to the country in question. If it wasn’t the government providing the bid, it would be seen as too risky to invest. But since the government can print money ad infinitum, and this is what Chinese currency manipulation really consists of (buying dollars with newly printed yuan), that bid remains competitive for as long as the Chinese government wants it to be.
The Western version of QE sees the Federal Reserve printing money in order to absorb underperforming assets and U.S. Treasury bonds into its coffers in a way that effectively underwrites their performance no matter what and squeezes the market at the same time. The Chinese FX manipulation version of QE saw the government printing money in order to absorb abundant dollars out of the global system, in a way that effectively kept the dollar overvalued no matter what. This meant investors could be sure that their dollar denominated investments in China would always result in real returns.
The reason the Chinese government felt comfortable underwriting bids for foreign investment, meanwhile, is probably because its socialistic disposition allowed it to see what the West couldn’t: namely, that in the West, capital was no longer scarce enough to justify a truly competitive bid for it and all China had to do was provide some sort of guarantee in order to benefit from it.
At the end of the day, the much discussed “savings glut” is just another way of saying capital surplus. For years nobody really understood what was fueling it, but more recently Larry Summers speculated that it was the first clear symptom of “secular stagnation,” a trend that arguably started in the early 1980s. In a secular-stagnated economy, we end up with a capital rather than labor bias, which sees rents and returns flow to owners of capital in favor of labor, to the detriment of the wider economy.
Unless that surplus could be redistributed to new pockets of demand, all roads consequently lead to a demand collapse, because eventually all wealth becomes concentrated in the hands of technology and capital owners rather than in labor’s hands. This creates a vicious demand circle that impoverishes the economy overall.
For China to benefit from that capital surplus, all it needed to do was draw the capital over and keep it there, creating a self-enforcing capital scarcity—or savings glut—for the world. With its socialistically minded economy that didn’t mind investing capital for public purposes regardless of return, China prevented that capital from returning to the West. This is important, because if the capital was allowed to flow back to the West, it would have less of a distributive wealth effect than it would in China, where it would make more people feel more rich. In the West, it would more than likely end up concentrating in the hands of capital owners, who would be ever keener to employ robots than human beings. (...)
As White argues, this is why it’s wrong to assume that China is pursuing capitalism as we know it. Its real aim is to create a hybrid model of public investment and very aggressive market-based competition with the hope of creating consumer surpluses rather than economic rents. This would distribute wealth more widely than if it was passed exclusively to rent seekers alone.
Capital is allocated consequently not on the basis of whether the asset created can provide a return but whether it serves a greater social purpose. The Chinese government will consequently fund contractors to develop public infrastructure and other massive social projects, as well as backstop private enterprise that has potentially overinvested in private developments. Even if the projects don’t yield a monetary return, they improve the social infrastructure, Chinese mobility, and the general standard of life. By contrast, in the United States, the lack of guaranteed returns has created a major underinvestment problem in public infrastructure, which is now falling apart or becoming ever more dangerous as a result.
by Izabella Kaminska, TNI | Read more:
Image: uncredited
