The Great U.S. Recession

The 2008-2009 financial meltdown in the U.S. is shaping up as the Great Recession. With job losses rising, credit facilities diminishing and the billions of rescue dollars to save the pillars of capitalism failing, it is the longest U.S economic recession since World War II ─ and the worst may be yet to come.

This recession, which officially began in December 2007, is not only the longest and most severe, but the most devastating. More than half a million Americans, from financial analysts to factory workers, lost their jobs in November 2008 alone. Another 681,000 were added to the jobless rolls in December. Rarely has a labor downturn affected such a broad swath of income levels ─ and the worst is continuously coming in slow kill mode in 2009. Some economists predict that the U.S. economy could lose as many jobs in the first six months of 2009 as all of 2008. Nearly 2 million jobs have been lost since the start of the recession in 2007, two-thirds of them since September 2007.

The longest economic slumps since 1945 were the 16-month downturns that ended in March 1975 and November 1982. The Great Depression lasted 43 months from August 1929 to March 1933 and the world experienced a two-thirds shrinkage in trade in that period. The combination of housing market, credit market and financial market collapses is a rare and unprecedented combination. Unemployment topped 8 percent in February 2009.

How do the two countries with the most to lose cooperate to make sure they and the rest of the world minimize the financial pain and make sure everyone benefits globally? They cooperate more with each other in the lead of global and regional organizations ─ and in bi-lateral dialogue ─ to learn from each other and build together as partners.

The fact is that China is already helping the global financial situation by holding onto U.S Treasury debt. Not only holding on, but also continuing to quietly buy, even as late as September 2008, knowing full well that doing so could bring great losses. This is solidarity. China’s foreign reserves have already been invested ─ more than half in U.S. Treasury issues and other American bonds and much of the rest in euro-denominated assets ─ and it isn’t easy or practical to transfer hundreds of billions, or tens of billions of dollars without causing serious disruption to the currency market, which wouldn’t be in China’s self-interest either. If it sells the U.S. Treasuries it holds, global interest rates would go up and the dollar would collapse. On the other hand, the fewer Treasuries China buys as a result of the 2008 financial tsunami, the sooner America will see the end of its money-printing spree.

Confucian Capitalism

America and China have more in common than either side wants to acknowledge. Neither trust freewheeling capitalism and when it comes to the crunch, both governments take over industries for the political protection of the governing parties and the economic stability of their countries. Government intervention and ownership of private companies is very Confucian ─ a belief that public-private partnership of the wise ones will benefit the people. I don’t for a moment believe in this model as I believe government should be kept out of business and should be shrunk, not expanded by getting involved in the private sector. Getting government involved in business only benefits greedy self serving capitalists at the expense of the people.

Before I address Confucian capitalism, I want to give an example that best supports my argument to keep government out of business at all costs. I’m not referring to the fact that they can’t run a government profitably and without deficits, but a business that is easy to make a profit in America ─ a legal whorehouse and bar.

The Mustang Ranch in Nevada is a legal whore house and bar that is very profitable. It was busted for a variety of racketeering charges and the government took over its daily operations. After trying to run the whore house that sold sexual services and a lot of liquor to its clientele for a couple of years, the ranch was put into receivership because the government operators lost money. Now I don’t want to speculate as to what happened with the profits, but if the government can’t run a simple whore house and bar how the hell is it going to run the complicated financial services industry of America?

I personally witnessed and lived through a sneak preview of the U.S. government intervention and bailout of the pillars of U.S. capitalism during the Hong Kong stock market crash of August 1998. On a much smaller and broader scale, to counter the short sellers and speculators that had battered Hong Kong stock prices, the Hong Kong government, with China’s approval, decided to intervene in the battered stock market ─ and I want to emphasize stock market and not individual companies or the financial sector ─ with public money. It spent $15.1 billion to acquire 7.3 percent of the companies in the blue-chip Hang Seng Index. At the time, the Hong Kong government was severely criticized by free-market advocates for its intervention as a dangerous precedent. The fact is, it helped stabilize the market and then sold the stock at a substantial profit once the speculators left.

Seeing that the U.S. model of capitalism has bankrupted a few countries, Iceland and Hungary being the only two willing to admit to that fact by the end of 2008, there is no reason to believe developing countries will even attempt to embrace Western capitalism anymore.

The Hong Kong example of Confucian capitalism is a far cry from the U.S. quasi-nationalism with taxpayer dollars of the world’s bankrupt leading banks, insurance companies and automobile industry because of institutional incompetence. What is clear is that America’s corporate democratic capitalists who repeatedly lecture China on how to run its Confucian capitalist economy, have capitulated to Confucian capitalism on a humongous hypocritical U.S. scale.

G-20 Just Another Expensive Talkfest

The G-20 summit in London on April 2 is a $30 million taxpayer paid extravagant talkfest. The G-20 was created in the wake of the Asian and Russian financial crisis of 1998. It is a group of developed and developing nations that coalesced to prevent future global financial crisis from developing ─ something they have obviously failed to do.

Because China holds the biggest inventory of foreign exchange reserves in the world, and because it looks to be one of the few major economies to show significant growth in the near future, it is being urged to boost the resources of the International Monetary Fund. Pressure was brought to bear on China because Japan, which holds $1-trillion in foreign reserves ─ the second-largest cache of foreign reserves ─ pledged $100 billion in loans to the IMF.

China is reluctant to give huge loans to the IMF because some of the European countries that would benefit from China’s contribution have been outspoken critics of China.

China is ranked 100 out of 192 U.N. members in terms of per-capita GDP despite the fact that it is the third biggest economy in the world after the U.S. and Japan. Many of the troubled countries the IMF wants to rescue have a per-capita income that is much higher than the average Chinese. They have also enjoyed at least one decade of economic prosperity and their living standards are still far higher than China’s. Even if China decides to inject a large sum of money, it is pointless to merely increase its weight in the organization. That is because the U.S. still holds veto rights in the decision-making process of the IMF. That has to change.

The voting rights of Brazil, Russia, India and China in the IMF are 9.62 percent of the total, together accounting for about half of the voting rights that the U.S. holds in addition to its sole veto power.

The IMF, like the World Bank, is a relic of World War II, created at the Bretton Woods conference in 1944, as the foundation cornerstones of the postwar world financial system. I advocated the abolition of both bodies along with the United Nations, or at the very least, their restructuring in my last book Custom Maid Knowledge, to give China and other developing countries greater say than the founding European nations and America now dependent on China have. The bank’s management structure reflects the world of the 1950’s, with Belgium having more voting power than China.

A new global central bank relevant to the 21st-century is long overdue. The world can no longer depend solely on the U.S. Federal Reserve to single-handedly micro-manage the global financial system with the IMF and World Bank playing second and third fiddle as its sidekicks. That is the only way to make sure that financial institutions doing business globally never again accumulate debt that is more than 30 times their capital and to make sure all central banks impose rational leverage ratios on their national banks.