Mr. Angeles is an entrepreneur, and author of books, “The Peso
Exchange Rate: Why Are We So Poor?” and “The Philippine Economy: Do Our
Leaders Have A Clue?” This was published in the October 26 edition of the Business World, page S4/3.
On October 19th Fed Reserves Chairman Bernanke unfolds his thoughts on the US crisis and the news is reported in New York Times and The Washington Post.
As my column last month notes, the US will blame trade imbalances as the cause of the global economic crisis and Fed Chief Bernanke wastes no time in firing the first shot.
Let’s analyze his points.
Bernanke warns trade imbalances between the USA and the rest of the world played a central role in the development of the crisis.
He describes the so-called imbalances as “huge inflows of cheap money to the USA from countries like China that were trying to recycle dollars from huge trade surpluses”.
China made money on international trade and then loaned this money to deficit-ridden USA. Financial institutions lent this money to people, businesses in the USA who in turn could not repay them.
He warns that these imbalances could widen as Asian countries recover and the USA increases its deficit spending.
Bernanke proposes the following solutions.
One, the US should reduce its deficit and increase its national savings rate. Second, Asian countries must spend more on consumption, raise domestic demand and rely less on exports.
Bernanke, however, avoids discussing the US dollar.
Still so much to do
The US policy makers still have a lot of thinking ahead.
First, it is a superb idea to reduce fiscal deficits and borrowings. Now, there is nothing left to do but to get it done.
The Obama government is bent on expanding healthcare program coverage. Where will the money come from?
The government can increase taxes. Or it can borrow from China, Japan and Taiwan – the surplus economies!
Second, the Bernanke idea on China importing and consuming more lacks common sense.
It is like asking an eagle to walk. For those who care, this idea is discussed in length in my September 28th column.
Third, Bernanke talks about increasing the US national savings rate.
We normally identify savings as decreasing expenditures.
But savings is a simple arithmetic formula: Savings = revenue – expenditures. This formula shows the other effective way to increase savings is to increase revenues.
How should Americans increase their savings rate? Americans should work harder, be more competitive and export more. By increasing revenues from its business with the world, the US is able to save more.
But we won’t hear those thoughts expressed by Bernanke or Geithner! Why? Except against the Yuan, they want the US dollar strong but this results in uncompetitive US exports.
Being simple and direct does not seem to be a function of being on top of the US financial markets.
Balance of Payments – No imbalance
Fourth, the idea of the trade imbalance as a reason for the economic crisis is grounded on amateurish knowledge of international economics. It is plain name-calling, an escape for those who refuse to think of root causes of problems.
There is no imbalance in international financial economics. Economic principles of Balance of Payments (BOP) and Current Accounts Balance (CAB) tell us that international transactions are always in balance.
It is similar to an accountant’s statement of sources and uses of funds or the balance sheet.
If a businessman fails to pay his suppliers what he owes, he cannot tell his suppliers: “Look, you are to be blamed for my failure to pay you because you delivered more than I can pay. You should not have produced those goods for they create imbalance!”
The questions to ask are: “Why did I order goods I cannot pay? Could I have produced them instead and save money?”
International Economics and the Dollar
Here is another reason. You have to be focused to pick this up.
In international economics no physical money is transferred across the seas to pay for export and imports. Have you heard of planes carrying US dollars to pay for China’s exports and imports with the USA?
These transactions are merely debited and credited as assets and liabilities in the books of banks!
When China exports US$10 million worth of goods to the USA, China gets paid not in physical US dollar but in an increase of US$10 million in its cash balance in its US bank accounts.
When China imports US$2 million worth of goods from the USA, again US bank simply deducts US$2 million from China’s bank balance reducing it to US$8 million.
Multiply these by the number of export transactions made by China through the years and China’s bank balance in the USA may result in more than US$1 trillion.
What is China to do with US$1 trillion in US banks? Keep it as a savings deposit? They are smarter than that. Yes, invest it in forms that earn –Treasuries!
What happens if China instructs its US banks to remit the entire US$1 trillion to China? Well, the US banks just deduct the amount from their books and ask correspondent banks in China to record US$1 trillion for the account of China.
What if, instead, China instructs the US bank to convert its US$1 trillion to Yuan? You can be sure that the value of the Yuan will SOAR and the US Dollar will lose value!
China will end with up with its high value Yuan assets and the USA with devalued US assets.
Real Economy and Financial Markets
Shouldn’t China be happy with Yuan assets increasing in value? It should, but is it?
Here is the China paradigm Bernanke, Geithner, Paulson, Martin Wolf and all leading US investment bankers will never understand: China is interested more in the growth of its real economy than in the growth of its assets in financial markets.
Growth in the real economy helps people and increases employment.
On the other hand, when financial markets grow, they enrich a few investment bankers and derivatives players at the expense of the greater number of people in the real economy.
Example? Investment bankers and players who enrich themselves by speculating on oil in the commodities markets and raising its prices at your expense and mine!
For this reason, China keeps its trillion US dollars in US hands and maintains the value of the Yuan steadily tied to the value of the US dollar.
The root cause of all evils
Now using the excuse of trade imbalance, the US government demands China’s revaluation of the Yuan.
Can this revaluation be done? Yes, of course! China pulls out its US dollar assets and converts them to Yuan. Believe it or not, it is the only way!
Should the US insist China revalue its currency?
If yes, where will the US get the money for its healthcare programs and endless deficit spending?
And where will US banks get the US dollar to pay for the withdrawal of China’s US$1 trillion from the US economy and to prevent a bank run?
If you say No, how can the US economy ever recover?
I tell you again as I have done as early as last year – the US dollar is the greatest source of instability in the world economy and it needs to be replaced by a new world currency!