Re: China

["Henry C.K. Liu" <hliu@xxxxxxxxxxxxxx>]

There is increasing evidence that the threat to China is not democracy or market
economy but the peculiar US version of these institutions. The 19th century
industrial capitalism that Marx observed no longer exists.  Finance capitalism is
a system in which capital is only a notional value upon which to build a gigantic
mountain of debt.  Representative democracy in the US mode is a legalized
constitutional device to disfranchise the poor and weak.

This is acknowledged in the testimony of Chairman Alan Greenspan Federal Reserve
Board's semiannual monetary policy report to the Congress, before the Committee
on Financial Services, U.S. House of Representatives on February 27, 2002:

"From one perspective, the ever-increasing proportion of our GDP that represents
conceptual as distinct from physical value added may actually have lessened
cyclical volatility. In particular, the fact that concepts cannot be held as
inventories means a greater share of GDP is not subject to a type of dynamics
that amplifies cyclical swings. But an economy in which concepts form an
important share of valuation has its own vulnerabilities.

 As the recent events surrounding Enron have highlighted, a firm is inherently
fragile if its value added emanates more from conceptual as distinct from
physical assets. A physical asset, whether an office building or an automotive
assembly plant, has the capability of producing goods even if the reputation of
the managers
of such facilities falls under a cloud. The rapidity of Enron's decline is an
effective illustration of the vulnerability of a firm whose market value largely
rests on capitalized reputation. The physical assets of such a firm comprise a
small proportion of its asset base. Trust and reputation can vanish overnight. A
factory cannot.

 The implications of such a loss of confidence for the macroeconomy depend
importantly on how freely the conceptual capital of the fading firm can be
replaced by a competitor or a new entrant into the industry. Even if entry is
relatively free, macroeconomic risks can emerge if problems at one particular
firm tend to make investors and counterparties uncertain about other firms that
they see as potentially similarly situated. The difficulty of valuing firms that
deal primarily with concepts and the growing size and importance of these firms
may make our economy more susceptible to this type of contagion.

 Another, more conventional determinant of stability will be the economy's degree
of leverage--the extent to which debt rather than equity is financing the level
of capital. The proper degree of leverage in a firm, or in an economy as a whole,
is an inherently elusive figure that almost certainly changes from time to time.
 Clearly, firms find some leverage advantageous in enhancing returns on equity,
and thus moderate leverage undoubtedly boosts the capital stock and the level of
output. A sophisticated financial system, with its substantial array of
instruments to unbundle risks, will tend toward a higher degree of leverage at
any given level
 of underlying economic risk. But, the greater the degree of leverage in any
economy, the greater its vulnerability to unexpected shortfalls in demand and
mistakes.

 Indeed, on a historical cost basis, the ratio of debt to net worth for the
nonfinancial corporate business sector did rise, from 71 percent at the end of
1997 to about 81 percent at the end of the third quarter of last year, though it
is still well below its level at the beginning of the recession in 1990. The
ratio of interest payments to cash flow, one indicator of the consequence of
leverage, has crept up in recent years, reflecting growth in debt. However, owing
to lower interest rates, it remains far below its levels of the early 1990s.

 Although the fears of business leverage have been mostly confined to specific
sectors in recent years, concerns over potential systemic problems resulting from
the vast expansion of derivatives have reemerged with the difficulties of Enron.
To be sure, firms like Enron, and Long-Term Capital Management before it, were
major players in the derivatives markets. But their problems were readily
traceable to an old fashioned excess of debt, however acquired, as well as to
opaque accounting of that leverage and lax counterparty scrutiny. Swaps and
 other derivatives throughout their short history, including over the past
eighteen months, have been remarkably free of default. Of course, there can be
latent problems in any market that expands as rapidly as these markets have.
Regulators and supervisors are particularly sensitive to this possibility.
Derivatives have provided greater flexibility to our financial system. But their
very complexity could leave counterparties vulnerable to significant risk that
they do not currently recognize, and hence these instruments potentially expose
the overall system if mistakes are large. In that regard, the market's reaction
to the revelations about Enron provides encouragement that the force of market
discipline can be counted on over time to foster much greater transparency and
increased clarity and completeness in the accounting treatment of derivatives.

 How these countervailing forces for stability evolve will surely be a major
determinant of the volatility that our economy will experience in the years
ahead. Monetary policy will have to be particularly sensitive to the possibility
that the resiliency our economy has exhibited during the past two years signals
subtle changes in the way our system functions.

 Our most recent experiences underscore this possibility, along with the
persistence of a long list of older, well-tested, economic verities. Inventories,
especially among producers and purchasers of high-tech products, did run to
excess over the past year, as sales forecasts went badly astray; alas, technology
has not allowed
 us to see into the future any more clearly than we could previously. But
technology did facilitate the quick recognition of the weakening in sales and
backup of inventories. This enabled producers to respond forcefully, as evidenced
by output adjustments that have resulted in the extraordinary rate of inventory
liquidation we experienced late last year."

Henry C.K. Liu

Warren Mosler wrote:

> Their risk is that their 'Western Educations' block sound policy.
>
> w
>
> "Henry C.K. Liu" wrote:
>
> > The most encouraging part is the government's decision to continue to raise
> > wages by 30% a year.  Also, anticipating a contraction of export, a new
> > ecoomic policy to stimulate domestic consumption and development will keep
> > growth above 7%.  A record deficit of 309 billion yuan ($36.68 billion) is
> > projected for 2002.
> >
> > Henry C.K. Liu
> >
> > Warren Mosler wrote:
> >
> > > China's Zhu Vows to Keep Up Government Stimulus Spending, Create More
> > > Jobs
> > >                      Chinese Premier Zhu Rongji said the government will
> > > keep up a spending campaign to stem rising
> > >                      unemployment, boost farmers' income and sustain
> > > growth in Asia's second-largest
> > >                      economy. More...
> > >
> > > Fyi,
> > >
> > > This could be how China passes us by.
> > >
> > > w