Concerning macro-control in the past decade (Part 48)
The reasons of financial crisis lie in the seductive effects of microeconomic policies and their implied and profound historic root causes.
The pattern of global “New Three Kingdoms” (the three kingdoms symbolize catching-up countries, developed countries and the host countries of resources) has been given great significance, while it also has implied profound conflicts. The prominent problem is that in the beginning of the new century, unprecedented external imbalances intensified in the country leading the world’s market—the US, resulting in immense risks for globalization. Statistics have shown that American tangible goods trade and rebalancing constituted 4.6% ($454.7 billion) and 4.3% ($417.4 billion) of the GDP in the year 2000. In 2006, these numbers reached 6.4% and 6.0% of the GDP or $838.3 billion and $788.1 billion dollars.
The immediate cause is the soaring deficit budget and fall of household savings rates. Because of the prosperity of the Internet, a rare budget surplus was recorded in the US in 2000. However, in 2004, it shifted to a deficit of more than $160 billion. Household savings rates dropped down from 20.8% in the beginning of 2000 to 16.5% in the end of 2007.
Spending on a deficit means an increase of foreign debt. America’s total foreign debt increased to $13.4 trillion at the end of 2007 from 6.6 trillion in 2003, which unexpectedly doubled in four and a half years.
America’s overdrawing requires other countries to provide deposits, highlighting the financial aspect of “New Three Kingdoms”. Host countries of resources provide a large quantity of deposits. In the first decade of the new century, the rise in price of bulk stock allowed resource-exporting countries to gain surplus receipts of 10 trillion dollars, transforming them from “underground resources” to huge “on-the-ground resources”. Much of these deposits are loaned to developed countries, such as America and European countries.
The East Asian Economic Community, including China, also made quite a large contribution. From 2000 to 2010, the global foreign exchange reserve increased to $9.6 trillion from $2 trillion. The increase of foreign exchange reserve from China’s mainland constituted 35.7% of the global increase, while the Greater China (including other territories in addition to mainland China) accounted for 42%. Further, the East Asian Economic Community made up half of the global increase.
The real significance of the recent imbalance aggravation in America is presented much more clearly against a background of Second World War economic history. After the damage caused by the Second World War, the great nations of that time were reduced to ruins to which only America truly survived. Due to this, the US easily became the greatest economic power. Trade surplus and equity earnings reached between 5% and 6% of the GDP from 1943 to 1944. At this time, most of the gold reserve had been used up by America. American enterprises had limited opportunities to make investments abroad, so the international balance of payment (Bop) was reflected by the hedge trade surplus of external assistance.
The US international balance of payments revealed that the “unilateral transfer” of current accounts from 1943 to 1944 added up to $13-$14 billion, which constituted 5%-6% of the GDP. Foreign assistance on a large scale provided important resources for allied countries in the Second World War. The Bretton Woods system was also established. It set the prerequisite for the upmost position of the dollar, after which the dollar could be considered a replacement to the gold standard.
America could barely maintain their absolute advantage in the early years after the Second World War when the Marshall Plan and Dodge Line were carried out. Afterwards, Western Europe and Japan recovered, and growth in productivity of their trading departments’ surpassed America, shaking the foundation of the Bretton Woods system. Statistics showed that from 1950 to 1970, growth of labor productivity in Germany and Japan’s manufacturing industries was 2.1 times and 4.5 times that of America’s; export growth was 4 times and 15 times that of the US, respectively; GDP growth was 2.8 times and 6.2 times that of America’s as well.
The huge amount of trade surplus plunged nearly to 0 in 1959, leading to the first discussion after the Second World War in the American government on International Payment Crisis . The result of weakening the strength of the dollar was irreversible. It was estimated that from 1945 to 1960, 16 billion dollars left the country and was used worldwide. This amount of US dollars was enough to buy 460 million ounces of gold when considering the official price was 35 dollars an ounce. This was equal to more than 60% that of the American gold reserve at its peak of 700 billion ounces. Between 1961 and 1970, 48.4 billion dollars again left the US into the international market. This amount was twice the American gold reserve. America was incapable of realizing its initial promise, and President Nixon had to close the gold window in August 1971.
In the last 30 years of the 20th century, overall, the external deficit tended to expand in America with the exception of the second half of the 1980s. However, it was a different story in the 1990s. Against the background of the IT revolution that initially started in America, private investment and prosperity of consumption propelled the expansion of the current account deficit. Attracted by better investment opportunities in America, a large amount of foreign capital flowed back into America, which raised capital for the deficit. Meanwhile, American public finances improved in stages, and by the turn of the century, it was hard to come by a fiscal surplus. This deficit was considered as economically rational and sustainable.
Good times don’t last long. Objectively speaking, after the burst of the Internet bubble, America needed to accept low economic growth to adjust external deficit. However, the government of George W Bush carried out easy monetary and fiscal policies, resulting in the persistent rise of the external imbalance. Before the crisis, American political and academic circles were suspicious of it. However, mainstream views held that because America has the financial advantages of being the world’s leader, as well as Wall Street being the center of the world for finance, foreign capital inflow was rational in nature and there was no need to worry about current account deficits.
The remaining issue is how to allow financial systems to create subprime mortgage loans, subordinated debentures and magically created derivatives, as well as accepting foreign savings to flow into America. After a break in the crisis, American elites realized that the fault lied in an underestimation of systematic risks. Politicians rushed to curse greediness of insiders. The criticism made sense. However, don’t forget the seductive influences of macroeconomic policies and the hidden and profound historical root causes.
The American Balance of Payments Structure reflected historical changes of global economic structures after the Second World War. The imbalance characteristics of the new century are out of the ordinary. As the biggest developing country, why can China become the biggest country to provide financing, overturning the “Two Shortage Model” of traditional economy?
Besides carrying out reforms concerning exchange rate and factor distortion, what else can China do to achieve the goal of becoming an active power for change in the global economic structure? How can American self-interested policies provide opportunities for emerging countries? All these questions will be discussed in a subsequent article.
