In responding to China’s concern about the safety of the dollar investment, President Obama gave the assurance that China should have “absolute confidence” in the American economy. “Not just the Chinese government, but every investor can have absolute confidence in the soundness of the investment in the United States,” Mr. Obama said. President Obama made that statement one week after the U.S. Navy surveillance ship, the Impeccable, confronted with the Chinese vessels while on a spying mission by intruding into China’s exclusive economic zone.1.

       The issuance of such a soothing statement on the part of U.S. president raises more questions than answers about the American economy, as United States is experiencing the worst financial crisis since the Great Depression.

       Indeed, the economic and financial situation in the United States is so dire that invokes the spectre of the Great Depression. To Bernanke, the U.S. Federal Reserve Chairman and a disciple of Milton Friedmen, “the source of the Great Depression was monetary and could have been combated almost exclusively in monetary terms.”2. Accordingly, Mr. Bernanke and his colleagues at the Fed, in their efforts to rescue the financial market, opened the monetary flood gate to the tune of trillions of dollar. Much to the dismay and astonishment of Mr. Bernanke and his colleagues, “no amounts of liquidity infusion were able to overcome the insolvency in which institutions were mired.”2. Consequently, the market entered a liquidity trap; financial institutions in America were simply hoarding cash and not renewing loans or commencing fresh lending.

       This raises the question of what is responsible for the current crisis. Many explanations other than the monetary terms were offered, and they include deregulation as a result of the repelling of the Glass-Steagall Act; the lowering of the interest rates by the Fed immediately after the Internet bubble; the sub-prime mortgage crisis; the housing bubble which resulted in a massive foreclosure, and the use of derivatives in the “structured finance” in the U.S. financial market.  Unfortunately, many economists including Washington’s key economic policy makers overlook or refuse to recognize the fundamental cause of the U.S. economic malaise that has been fermenting for several decades. 

      The root cause of the current economic and financial crisis was the stagnation of a mature capitalist economy, resulting in the lack of profitable investment opportunities that led to financial speculation, the ballooning of debt and asset inflation.

      The financial speculation was especially prevalent in the U.S. banking sector, as banks have ceased to be just a simple intermediary between the borrowers and depositors. “Financial institutions of all types now accumulate huge quantities of debt as they attempt to make money with borrowed money.”4. Unfortunately, the borrowed money was not channelled to the productive sector of the real economy due to the lack of attractive investment opportunities, but rather to engage in speculative activities. Not surprisingly, speculation of such magnitude could generate huge short-term profit for the financial institutions. Consequently, American financial industry experienced a period of prosperity and exerted increased political influence in Washington. Financial capital became the dominant force in the U.S. economy, as “while in the 1960s financial profits account for about 15 percent of all domestic profits in the United States, by 2005 it accounted for close to 40 percent of all profits.”6. Unfortunately, the increase in profit comes with the accumulation of enormous amount of debt in the U.S. economy, especially in the financial sector.

      Consequently, debt as a percentage of the U.S. economy increased rapidly from 150 percentage of GDP in 1970s to 350 percent in 2005. Not surprisingly, since the 1980s the financial sector experienced the greatest increases in debt, as its debt grew from 22 percent in 1981 to 42 percent of the GDP in 1988, then to 100 percent by 2005. Similarly, albeit in a slower pace, the household debt also grew to 92 percent in the same period. This was due to housing boom and increased credit card debt. Non-financial corporations go into debt for leveraged acquisitions and share buybacks.4.

    Leveraged acquisitions generally involve the use of debt—junk bonds to acquire other companies. In order to maximize profits, the acquired companies would go through the process of restructuring with cost cutting measures such as lay-offs, enforcing longer working hours and reducing wages and benefits. In the name of increasing productivity, which is the essential feature of a mature capitalist economy, the numbers of employees in a given enterprise are correspondently reduced. This is a war against labour. Consequently, “living standard for the working and middle class and the urban poor have declined substantially over the past thirty years (1978-2006) to a point where one can point to bourgeoning crisis. While real hourly wages in constant 2005 dollars have stagnated, health care, pension, energy and educational cost have skyrocketed.”5.

     Indeed, the impoverishment of the working class, middle class and the urban poor is one of the root causes of the U.S. economic crisis; as the U.S. economy would not be able to generate increased demands to stimulate the economy. By 2006, there’s evidence that U.S. households have difficulties meeting their debt obligations, as they spent “$1.1 trillion more than they earned. This negative personal saving rate is unprecedented in the years since the Great Depression.”4.  Thus, the impoverishment of the American people together with the investment capital channelled to the financial sector, which contribute little to the growth of the real economy, eventually lead to financial explosion and result in “a deep and prolonged crisis”4.

     The financial explosion was exacerbated by the speculative aspect of the U.S. economy. “Stock markets and currency trading (betting that one nation’s currency will change relative to another) have become little more than giant casino where the number and value of transactions have increased far out of proportion to the underlying economy.”6. By 2006, daily trading of the New York Stock Exchange with an averaged volume of 1,600 million shares amounted to the tune of over $60 billion. What is even more astonishing is that on the currency market, the dollar value of the daily trading equals the entire world’s annual GDP.

      Indeed, the U.S. financial market has become a casino, as there are so many ways to engage in speculations in the financial market. There are the short sellings, call and put options, derivatives, especially the credit default swaps, which have sunk the U.S. insurance giant AIG. Thus, as a mature capitalist economy, the U.S. becomes a casino economy.

      The reason why the U.S. becomes a casino economy is overcapacity, and capital is increasingly unable to obtain a satisfactory return from the productive economy of manufacturing of goods and service. This has long been apparent, especially with the emerging of the new phenomenon called the stagflation in the 70s.

     Stagflation sets the stage for the rise of neoliberalism with the election of Margaret Thatcher in England and Ronald Reagan as president in the United States. Neoliberalism advocates deregulation, tax cut for the wealthy and minimal social spending. Unfortunately, neoliberalism did not deliver the desirable economic growth, as “global growth averaged 1.1% in the 1990s and 1.4% in the 1980s, whereas it averaged 3.5% in the 1960s and 2.4% in the 1970s, when state interventionist policies were dominant. Neoliberal restructuring couldn’t shake off stagnation.”7.

     One of the neo-liberal ideologies is globalization, and the process of globalization was further advanced with the creation of WTO, which allowed Western multinational corporations to penetrate overseas markets with minimum restriction, especially with the agendas of financial liberalization and national treatment for foreign direct investments. 

     In this regard, China was the prime example of a country integrating into the capitalist economy by embracing the agendas of neoliberal globalization for the past 25 years. Accordingly, “many Fortune 500 corporations have moved a significant part of their operations to China to take advantage of the so-called ‘China price’—the cost advantage of China’s seemingly inexhaustible cheap labor. By the middle of the first decade of the 21st century, roughly, 40-50% of the profits of U.S. corporations were derived from their operations and sales abroad, especially China.”7.

    Unfortunately for the global economy, the opening up of China only offers a temporary relief to the inherent stagnation in the capitalist economy. As a matter of fact, the building up of manufacturing facilities further exacerbates the overcapacity in the capitalist economy, which leads to the erosion of profit, as the profit margin of Fortune 500 declined from 7.15% in 1960-69 to 1.32% in 2000-2002.7.

    Consequently, the development of the capitalist economy has come to a full cycle, as diminishing returns in profit lead to neoliberal globalization and financial speculation. Globalization leads to current account deficit and incur ever-increasing borrowings from countries like China, Japan and the Middle East oil producing states. Financial speculation, on the other hand, leads to the accumulation of more debts in all sectors of the economy. Over-indebtedness leads to the financial meltdown and the worst economic crisis since the Great Depression.

     The global economic crisis is especially significant for China. It demonstrates fully the erroneous policy of embracing globalization and integrating into the capitalist world economy. China’s use of export as a driver for Chinese economic development is built on the policy of cheap labour, and thus fails to generate sufficient internal demands. It only serves the interests of Western multinational corporations and a few economic elites in China. Thus, China is developing trade dependency on the global capitalist economy, especially on the economy of the United States, which has suffered stagnation and economic malaise for decades. Notwithstanding President Obama’s repeated assurance of “absolute confidence” in the American economy, it is obvious that it is experiencing a deep and prolonged economic crisis.

      In view of the situation of the global economy, it is equally obvious that China must change its developmental strategy, by turning her attention inward to invest and develop her agricultural sector. China should undertake a massive irrigation project to develop her Northwest, as this will not only provide tens of millions of jobs for her citizens, but with a big potential payoff in food production and increase the size of her agricultural acreages. China must turn away from the integration with the Western capitalist economy, which has malfunctioned and is in dire straits. China must abandon trade dependency and the policy of neoliberalism, and adopt the policy of self  reliance, of independent development, of protection of her national industry from the predatory Western multinational corporations, and of emphasis on independent research and innovation. Thus, China would then be able to concentrate her energy to develop her economy and create her own demands, all for a prosperous China and the betterment of the Chinese people.   

Notes:
1. AFP: “Obama soothes China on U.S. Debt”  March 14, 2009
2. Foster John Bellamy, Magdoff Fred: “The Great Financial Crisis” P 117  Monthly Review Press  2009
3. Ibid:  P 120
4. Ibid:  PP 45-50
5. Petras James: “Who Rules America”  January 13, 2007  www.dissedented voice.org
6. Foster John Bellamy, Magdoff Fred: “The Great Financial Crisis” PP 54-56  Monthly Review Press  2009
7. Bello Walden: “Wall Street Meltdown Primer”  September 26, 2008  www.fpif.org