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31 October 2010
By Ellen Brown
China may be as heavily in debt as we are. It just
has a different way of keeping its books -- which
makes a high-profile political ad sponsored by
Citizens Against Government Waste, a fiscally
conservative think tank, particularly ironic. Set in
a lecture hall in China in 2030, the controversial ad
shows a Chinese professor lecturing on the fall of
empires: Greece, Rome, Great Britain, the United
States...
"They all make the same mistakes," he says. "Turning
their backs on the principles that made them great.
America tried to spend and tax itself out of a great
recession. Enormous so-called stimulus spending,
massive changes to health care, government takeover of
private industries, and crushing debt."
Of course, he says, because the Chinese owned the
debt, they are now masters of the Americans. The
students laugh. The ad concludes, "You can change the
future. You have to."
James Fallows, writing in the Atlantic,
remarks:
"The ad has the Chinese official saying that America
collapsed because, in the midst of a recession, it
relied on (a) government stimulus spending, (b) big
changes in its health care systems, and (c) public
intervention in major industries -- all of which of
course, have been crucial parts of China's
(successful) anti-recession policy."
That is one anomaly. Another is that China has
managed to keep its debt remarkably low despite
decades of massive government spending. According to
the IMF, China's cumulative gross debt is only about
22% of 2010 GDP, compared to a U.S. gross debt that is
94% of 2010 GDP.
What is China's secret? According to financial
commentator Jim Jubak, it may just be "creative
accounting" -- the sort of accounting for which Wall
Street is notorious, in which debts are swept off the
books and turned into "assets." China is able to pull
this off because it does not owe its debts to foreign
creditors. The banks doing the funding are
state-owned, and the state can write off its own
debts.
Jubak observes:
"China has a history of taking debt off its books and
burying it, which should prompt us to poke and prod
its numbers. If we go back to the last time China
cooked the national books big time, during the Asian
currency crisis of 1997, we can get an idea of where
its debt might be hidden now."
The majority of bank loans, says Jubak, went to
state-owned companies -- about 70% of the total. The
collapse of China's export trade following the crisis
meant that its banks were suddenly sitting on billions
in debts that were clearly never going to be paid.
But that was when China's largest banks were trying
to raise capital by selling stock in Hong Kong and New
York, and no bank could go public with that much bad
debt on its books.
The creative solution? The Beijing government set up
special-purpose asset management companies for the
four largest state-owned banks, the equivalent of the
"special purpose vehicles" designed by Wall Street to
funnel real estate loans off U.S. bank books. The
Chinese entities ultimately bought $287 billion in bad
loans from state-owned banks. To pay for the loans,
they issued bonds to the banks, on which they paid
interest. The state-owned banks thus got $287 billion
in toxic debt off their books and turned the bad loans
into an income stream from the bonds.
Sound familiar? Wall Street did the same thing in the
2008 bailout, with the U.S. government underwriting
the deal. The difference was that China's largest
banks were owned by the government, so the government
rather than a private banking cartel got the benefit
of the arrangement. According to British economist
Samah El-Shahat, writing
in Al Jazeera in August 2009:
"China hasn't allowed its banking sector to become so
powerful, so influential, and so big that it can call
the shots or highjack the bailout. In simple terms,
the government preferred to answer to its people and
put their interests first before that of any vested
interest or group. And that is why Chinese banks are
lending to the people and their businesses in record
numbers."
In the US and UK, by contrast:
"[B]anks have captured all the money from the
taxpayers and the cheap money from quantitative easing
from central banks. They are using it to shore up, and
clean up their balance sheets rather than lend it to
the people. The money has been hijacked by the banks,
and our governments are doing absolutely nothing about
that. In fact, they have been complicit in allowing
this to happen."
Today, Jubak continues, China's debt problem is the
thousands of investment companies set up by local
governments to borrow money from banks and lend it to
local companies, a policy that has produced thousands
of jobs but has left an off-balance-sheet debt
overhang. He cites economist Victor Shih, who says
local-government investment companies had a total of
$1.7 trillion in outstanding debt at the end of 2009,
or about 35% of China's GDP. Banks have extended $1.9
trillion in credit lines to local investment companies
on top of that. Collectively, the debt plus the
credit lines come to $3.8 trillion. That is about 75%
of China's GDP, which is proportionately quite a bit
smaller than U.S. GDP. None of this is included in
the IMF's calculation of a gross-debt-to-GDP figure of
22%, says Shih. If it were, the number would be
closer to 100% of GDP.
Proportionately, then, China may be more heavily in
debt than we are. Yet it is still managing to invest
heavily in infrastructure, local businesses and local
jobs. Its creative accounting scheme seems to be
working for the Chinese. It may be sleight of hand,
but it was a necessary ploy to harmonize their
economic realities with Western banking standards.
For China to join the World Trade Organization in
2001, it had to revise its accounting methods to
conform to Western requirements; but before it joined,
it did not consider grants to its state-owned
enterprises to be "non-performing loans." They were
what the IMF calls "contingent grants." If they paid
off, great; if they didn't, they were written off.
There were no creditors demanding payment from the
state-owned banks. The creditor was the state;
and the state, at least in theory, was the people. In
any case, the state owned the banks. It was lending
to itself, and it could write off its loans at will.
It was better to sweep the "NPLs" into "SPVs" than to
cut back on services and impose heavier taxes on the
people. The Chinese government did cut back on
services and raise taxes, to the detriment of the
struggling masses, but not to the extent that would
otherwise have been necessary to balance their books
by Western standards.
While the rest of the world suffers from an
unrelenting credit crunch, today China's banks are on
a lending binge. The rush to make new loans is a
direct response to the government's economic stimulus
policy, which emphasizes infrastructure and internal
development. The Chinese government was able to get
its banks to open their lending windows when U.S.
banks were being tight-fisted with their funds,
because the government owns the banks. The Chinese
banking system has been partially privatized, but the
government is still the controlling shareholder of the
Big Four commercial banks, which were split off from
the People's Bank of China in the 1980s.
We might take a lesson from the Chinese and put our
own banks to work for the people, rather than making
the people work for the banks.
We need to get our dollars out of Wall Street and back
on Main Street, and we can do that only by breaking up
Wall Street's out-of-control private banking monopoly
and returning control over money and credit to the
people themselves.
We could also
take a lesson from the Chinese and dispose of our debt
with a little creative accounting: when the bonds come
due, we could pay them with dollars issued by the
Treasury, in the same way that the Federal Reserve has
issued Federal Reserve Notes to save Wall Street with
its "Quantitative Easing" program. The mechanics of
that process were revealed in a remarkable segment on
National Public Radio on August 26, 2010, describing
how a team of Fed employees bought $1.25 trillion in
mortgage bonds beginning in late 2008. According to
NPR:
"The Fed was
able to spend so much money so quickly because it has
a unique power: It can create money out of thin air,
whenever it decides to do so. So . . . the mortgage
team would decide to buy a bond, they'd push a button
on the computer – ‘and voila, money is created.'" If the Fed can do it to save the
banks, the Treasury can do it to save the taxpayers.
In a paper presented at the American Monetary
Institute in September 2010, Prof. Kaoru Yamaguchi
showed with sophisticated mathematical models that if
done right, paying off the federal debt with debt-free
Treasury notes would have a beneficial stimulatory
effect on the economy without inflating prices.
The CAGW ad is correct: we have turned our backs on
the principles that made us great. But those
principles are not rooted in "fiscal austerity." The
abundance that made the American colonies great
stemmed from a monetary system in which the government
had the power to issue its own money – unlike today,
when the only money the government issues are coins.
Dollar bills are issued by the Federal Reserve, a
privately owned central bank; and the government has
to borrow them like everyone else. But as Thomas
Edison famously said:
"If the Nation can issue a dollar bond it can issue a
dollar bill. The element that makes the bond good
makes the bill good also. The difference between the
bond and the bill is that the bond lets the money
broker collect twice the amount of the bond and an
additional 20%. . . . It is a terrible situation when
the Government, to insure the National Wealth, must go
in debt and submit to ruinous interest charges at the
hands of men who control the fictitious value of
gold."
China's government can direct its banks to advance
credit in the national currency as needed, because it
owns the banks. Ironically, the Chinese evidently got
that idea from us. Sun Yat-sen was a great admirer of
Abraham Lincoln, who avoided a crippling national debt
by issuing debt-free Treasury notes during the Civil
War; and Lincoln was following the lead of the
American colonists, our forebears. We need to reclaim
our sovereign right to fund the common wealth without
getting entangled in debt to foreign creditors,
through the use of our own government-issued currency
and publicly-owned banks.
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