Introduction to The Evil Axis of Finance

The US-Japan-China Stranglehold on the Global Future – Published on Dissident Voice, by Richard Westra, October 6, 2012.

… The capitalist economy may appear to be orchestrated with an “invisible hand,” to take Adam Smith’s much used metaphor, or to function like a “fetish,” endowed with extra human powers before which we prostrate ourselves, as Karl Marx famously put it. But ultimately it is our human agency or the purposive actions of real people that set “the economy” in motion. This basic understanding then permits us to easily envision human agency of other sorts stopping Smith’s hand dead and discarding the fetish along with our habit of prostration, freeing us to transform our economic life in fashions which better engender genuine human flourishing. 

Of course, in class divided societies, some humans and their organizations have much more “agency” or power than others. This holds as well for a world divided into political entities we call states. Therefore, if we really want to get to the bottom of what is happening to us and provide the most complete answers to the questions raised above we need to explore the asymmetric structures of agency and power at the national and international levels of our polity and society.

The question here involves the quarter ton gorilla in the room that no one wants to see or talk about: Under what global conditions is it possible for the US and Wall Street to play a central role in international political, economic and financial affairs when the US has the world’s largest national debt, fast approaching $15 trillion, an annual trade deficit of around $400 billion, a capital account deficit (where the value of foreign claims on the US exceeds that of all US-originated investment abroad) of close to $3 trillion, a budget deficit zooming past $1.5 trillion and—this is the kicker—where personal savings in the US economy as a whole has been hovering near zero for over a decade?4 So, if we rephrase this economics textbook defying question in language used by the characters played by Cuba Gooding Jr. and Tom Cruise in the film Jerry Maguire, “show me the money!” the response should be a resounding, None! But there is money. And it flows from a sinister, rigged global game based on the role of the US dollar as world money or hub currency. A game where, for the cost of running a printing press, the US parlays dollar seigniorage benefits5 into a mode of domination more total than the jus primae noctis right of medieval lords in ages past. However, for this game in particular, major committed supporting players are required. These are first Japan, and later, with a vengeance, China. Together with the US, they form the evil axis of finance.

Now the US-Japan-China evil axis did not spawn the bloated ocean of funds sloshing from Wall Street across the globe. How these funds agglomerated and the changes in major global economies, their business systems and government policies, as well as in the character of international investment and trade flows at the root of hypertrophic finance are dealt with in the early going of this book. Nor is the US-Japan-China evil axis the progenitor of US dollar seigniorage. That stage was set following World War II (WWII) in the emergence of the US as the world’s paramount benefactor and architect of the brave new “free world.” The seigniorage play itself, however, debuts in the 1970s though its major acts really open only in the 1980s and 90s. Through no coincidence, these periods correspond to the respective ascendency of Japan and China in the world economy. But the lead in the play is always held by the US. With an economy accounting for over 25 percent of global GDP during the period in question it is common sense to expect that any significant changes in the US economy would drive changes across the globe in both other major economies and international institutions that the US had assumed a primary role in creating. And so they did. And the US, particularly its corporate and financial elites within the top 5 percent of households,6 along with the political class they bankroll into office to do their bidding, rode shotgun over the wave of change to a windfall from the new dollar seigniorage global game cemented by financial machinations.

How does the evil dollar seigniorage game work? Well, in the simplest terms it works like this. Imagine a country, the US in this instance, ensnared in the economic predicament the truth-telling figures cited above capture: its citizens dependent on the world for the goods ranging from televisions to toothbrushes they voraciously consume (and with little to trade in return given how much of its own industry has been sliced, diced and shipped abroad); its businesses facing a dearth of investment funds, in part due to woefully inadequate domestic savings, and also because outflows to foreign claimants of domestic assets exceeds the take from US international investments; its government not only with a debt almost equal to GDP but with domestic and international spending commitments which outstrip its annual tax and other revenues by well over a trillion dollars. Add to this picture the fact that the currency of this country is not only its money, but world money (bracketing for later discussion a host of other reasons pools of dollars are accumulated by foreign banks); money that is the lingua franca of international transactions and thus necessarily held by all for that purpose.What then if one country, Japan, hones its economy into a competitive efficiency machine in producing everything from sophisticated factory equipment to automobiles and electronics. As US businesses and individuals buy these (with little to trade in return) Japan accumulates dollars. While Japan uses some of the dollar booty to purchase major globally traded commodities like oil, the price of which is rising, it is still saddled with a huge surplus. Surplus dollars can only problematically be exchanged into Japanese yen to fuel domestic investment because Japan’s hyper-productive economy rapidly spawned burgeoning overcapacity with respect to domestic demand and even international demand for many goods. So commencing in the late 1980s and spiking upward through the 1990s Japan, faced with US arm twisting compounded by narrow vision among its elites, saves the dollars—the global reserve currency and lingua franca of international transactions—in dollar denominated securities.7

For the US, this is Manna from heaven. First, it acts as an auto-borrowing mechanism for the US to finance its budget deficit. Aggregate spending in the US economy is thereby spurred under the most charmed conditions. On the one hand, US government spending increases in a fashion that does not “crowd out” private sector borrowing. On the other hand, it does not compel a rise in interest rates even though domestic savings as we have noted hover close to zero. And, in the end, the US is able to spend significantly more than its economic wherewithal—its domestic savings plus collected taxes—without instigating price inflation.

Second, the fact of the dollar as global reserve currency, drawing global savings into US denominated savings instruments, largely Treasury Bills in what I refer to elsewhere as the T-bill IOU standard of global reserves,8 helps maintain well lubricated and practiced financial markets in the US (these, of course centered on Wall Street). It is well to note here how prior to the recent meltdown the US coveted approximately 70 percent of all international financial flows to finance its deficit which constitutes over 1.5 percent of total global GDP.9 Looking at this from another angle, between 1999 and 2006 US borrowing of over $4.4 trillion equaled 85 percent of net external financing emanating from the totality of states with surplus “savings.”10

Third, the interest paid by the US on what amounts to conscripted loans to it is low in international terms. Thus Wall Street finds itself in a privileged position of being able to leverage these funds across the globe through both private financial intermediaries headquartered there as well as conduits such as the World Bank (WB) and International Monetary Fund (IMF), both essentially managed by the US. We will have occasion in this book to examine the insidious way in which what has been dubbed the Washington Consensus utilizes Japan’s and China’s dollars to bludgeon weaker economies of the world into submitting to wholesale reorganizations in facilitation of the evil axis game.

But now, let us further imagine another country, China in this case, bursting onto the global trading scene to increasingly monopolize supply for US demand for low cost consumer goods. The rise of China offers solace for Japan as an investment locale for Japan’s burgeoning overcapacity and market for Japanese technological expertise and high value added exports. And the low cost goods that this international investment in China propels toward the US keeps US consumers well stocked with all the gadgets they have become enamored with, even as wage levels in the US stagnate. Put succinctly, the “American way of life” is presently made, low cost, in China. But, where China exponentially augments Japan’s Manna from heaven to the US in the rigged seigniorage game is not through the simple equation of a lopsided trade imbalance, as remarkable as that is. Rather, it is due to the trillions of dollars of surplus savings that flood into US financial markets largely via T-Bill IOU’s, and the $100s of billions in “hot money”11 bound for other domestic US assets as well. This surplus can only perilously be converted into Chinese yuan, partly due to the appreciation of China’s currency such a move will spur, though it is questionable whether that alone would completely compromise China’s export bonanza. Indeed, the Chinese yuan has appreciated 55 percent since 1994. And as it appreciated 20 percent between 2005 and 2008 alone, the US trade deficit with China leaped from $202 billion to $268 billion.12 Of greater significance, however, as dealt with in Chapter 6, is the fact that should China abdicate its holding of US dollars and assets its core current economic structure and brutal authoritarian polity would unceremoniously unravel … //

… And let us also not be misled into viewing the global meltdown of 2008-9 as a harbinger of progressive change. Meltdowns, this book makes abundantly clear, are an integral aspect of the evil axis of finance dollar seigniorage game. And despite public wrangling among evil axis members on matters of currency appreciation and depreciation (a largely spurious debate as we shall see) there is scant diminution in appetites among axis members for the T-Bill IOUs which undergird the global financial architecture and the rigged Wall Street centered game. The vaunted G-20, with its hop-scotch around the world where much of this currency charade has played out of late, is but a clone of US Treasury Secretary and consummate Wall Street insider Timothy Geithner.31 And we still see China and Japan vying with each other for the top holder of US Treasuries spot.32 It can further be remarked in passing that Japan has actually reaped a net gain from its US dollar holdings of $280 billion over the years. China, on the other hand, as it plunged into the business in a serious way between 1999 and 2007, actually lost (through successive currency devaluations) over $300 billion from its US dollar “nest egg”;33 that was estimated by 2009 to be $2.3 trillion reserves and $1.5 trillion asset holdings34 (yet China preservers in building these as we will see)! Remember, we noted above how the US-China nexus alone accounted for between 45 percent and 60 percent of global growth across the first half of the opening decade of the 21st century (let us offer a compromise figure for future reference of “well over 50 percent”): This figure significantly exceeding the combined US-China 38 percent share of world output during the same period. Prior to the meltdown 40 percent of China’s exports went to the US. Of Japan’s total exports 24 percent go directly to the US and another 14 percent to China (and we know where most of the latter’s output ultimately ends up).35 One will therefore be hard-pressed to construct an argument for dominant forces within the evil axis of finance seeking to opt out of the game (and that is the operative word) whatever the short term losses or rifts … (full long text).

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