Tag Archives: globalization

Should we blame Richard Nixon for the financial crisis?

images3Here’s an interesting idea: we can blame Tricky Dick Nixon for the financial crisis. Well, that’s one way to get at the historic roots of the credit market and banking collapse that we are still experiencing, all the current optimism coming from the Obama Administration about a retreat from the brink notwithstanding.

And this historical exercise has real policy implications for the current situation because it highlights the difficulty of resolving the current crisis with either market choices or government intrusion.

Here’s the story: until roughly 1971 the US dollar was backed by gold. And since all other currencies in the world were pegged to the dollar it meant that as long as the US government was willing to pay someone gold for their dollars there was a certain kind of stability in the global currency markets.

Specifically, as part of the Bretton Woods agrements set in place in 1946, the USG agreed to pay out an ounce of gold for 35 US dollars.  But by the time Nixon took office this commitment had become largely a dead letter.  The US, frankly, was running out of gold and France, of all countries, began to sell its dollars for gold thus increasing pressure on the dollar.

images-1(First lesson for today: instead of France we fear today China and Japan may decide that their accumulation of dollar based assets (largely US Treasuries) are too risky and could lead a similar global sell-off.)

France was exploiting a problem caused by deeper problems afflicting the US: LBJ and Nixon had spent huge sums on defense, in particular fighting the Vietnam war, as well as social spending to head off a restive black population energized by the civil rights movement as well as an increasingly restive working class that was responding to declining living standards with absenteeism, lower productivity and strikes.  In other words, the New Deal era social contract with organized labor was unraveling.

So, President Nixon closed the gold window in 1971, in a single stroke devaluing the US dollar by nearly half its previous market value.  Whatever dollars the French had not already sold off were suddenly worth a lot less. Take that, DeGaulle!

What is the link to the current crisis?  With the end of tie to gold, capitalism lost an anchor that gave it some real sense of the value of its cash flows!  A huge amount of uncertainty was now part of the global economy as currencies began to float in ever more volatile swings.

When the dollar was exchangeable for gold it told you something: a certain amount of labor power went into producing an ounce of gold and that labor was “worth” 35 US dollars an ounce.  That became a global, universal metric for world currencies and commodities, from tea to coffee, from steel to cars.

Once the gold window was closed that assessment of value was no longer available to business to determine the value of their investments.

How to cope? Create a range of hedging instruments that allow you to insure against the possibility that you have guessed wrong about the future price of supplies, inputs, raw materials, consumption goods, bank savings, etc.  

Today we know those hedging instruments as “derivatives.”

Derivatives, in other words, emerged as a substitute for the destruction of the previous anchor of value, gold.  Gold, of course, was a commodity, a physical asset that could be fairly easily and reliably priced in global markets.  The substitute for gold as an anchor of value – derivatives – is not so easy to understand or value.

What critics like George Soros and Warren Buffett warn are financial WMDs are in fact central to the survival of modern capitalism!

Clearly the market creation of derivatives – an ultimate example of private ordering – has failed.  But can government intervention with a new regulatory framework, such as forcing all derivatives to trade on an exchange, do a better job?  There is little evidence of that!

As long as we are dependent on a system of abstract value to anchor basic business decision making – the only way for capitalism to function – we are likely to oscillate between anarchic and volatile private ordering and bumbling government intervention.

Tian’anmen – Then and Now…

bodies-of-dead-civilians-0011

Around the world this week millions will remember the brave Chinese students and workers who stood up to the Chinese “communist” autocracy in May and June of 1989 and paid for their courage with their lives. Thousands were likely murdered in the streets around Beijing, while many thousands there and elsewhere throughout China ended up in prison.  The picture above was taken in the days after the crack PLA troops went on their bloody offensive on June 4 – only after regular troops refused their orders to shoot on unarmed Beijing residents.

Influenced by the uprisings of Polish Solidarity the Chinese protestors thought that China, too, could emerge from the era of neo-stalinist authoritarianism and join the global community.

The party/state apparatus that controls China had other ideas. Their implicit alliance with global capital has provided that apparatus with a new lease on life – as long as Chinese workers are willing to comply with the cheap labor/non-union regime imposed by the alliance.

In the west policy makers and intellectuals bend over backwards to justify the alliance with arguments about “progress towards democracy” and an “emerging rule of law.”  Some like David Brody, the eminent American labor historian, contend that the state controlled labor organization can evolve, as did some American company unions, into genuine labor unions. Others, such as labor educators Ken Jacobs and Katie Quan of the UC Berkeley Labor Center, Kent Wong of the UCLA Labor Center and Elaine Bernard of Harvard’s trade union program, work hand in glove with the regime itself in various exchange and “education” programs. They seem to think the American labor movement can actually learn something from the Chinese regime.  You can watch me debate these issues with Brody and Jacobs as well as labor historian Nelson Lichtenstein here

Some US labor leaders such as Andy Stern of the bureaucratically controlled SEIU buy the line of Brody et. al and believe an alliance with the Chinese regime offers a chance to counter balance the power of global multinational capital. He seems oblivious to the impact of the alliance that has already been established between capital and the Chinese regime.

What is striking about these kinds of defenses of the brutal labor regime in China by westerners is that the Chinese working class itself has been, on and off since 1989, in near open revolt against the Chinese government and spurns its labor arm, the All China Federation of Trade Unions.  One analyst – Ching Kwan Lee – described this as a veritable “insurgency.”

Even official Chinese statistics admit the level of resistance. According to the China Labour Bulletin, the leading independent labor advocacy group based in Hong Kong and led by 1989 workers leaders Han Dong Fang, there has been a huge increase in labor disputes referred to the official arbitration bodies used by the state to resolve labor conflicts.  There has been a similar explosion in the number of lawsuits filed by workers.

In a recent interview with the Financial Times, party dissident Bao Tang, now under house arrest in Beijing, said:

“China has almost erased the memory of Tiananmen by making it illegal to talk about what happened. But there are miniature Tiananmens in China every day, in counties and villages where people try to show their discontent and the government sends 500 policemen to put them down. This is democracy and law with Chinese characteristics.

“The first sentence of the Chinese national anthem goes like this: ‘Arise! All those who refuse to be slaves.’ I believe there will be real democracy in China sooner or later, as long as there are people who want to be treated equally and have their rights respected.

“It will rely on our own efforts, it will depend on when we, the Chinese people, are willing to stand up and protect our own rights.”

So this week, in the words of the American labor radical, Mother Jones, “mourn for the dead, but fight like hell for the living.”

“There Will Be Blood”

images-1I have not been a fan of popularizers like historian Niall Ferguson, but one has to admit that he puts his finger on the depth and complexity of the current crisis in this interview with a Canadian newspaper. He points out that the US is in a relatively privileged position because its currency and economy remain the central pillars of the world economy. But the crisis represents the end of globalization as we have known it since the end of the Cold War.

Ferguson states:

“There will be blood, in the sense that a crisis of this magnitude is bound to increase political as well as economic [conflict]. It is bound to destabilize some countries. It will cause civil wars to break out, that have been dormant. It will topple governments that were moderate and bring in governments that are extreme. These things are pretty predictable. The question is whether the general destabilization, the return of, if you like, political risk, ultimately leads to something really big in the realm of geopolitics. That seems a less certain outcome.”

We’ll see.

Global slowdown hits China hard

For awhile some advocates of globalization contended that China and other developing countries were immune from the banking crisis hitting the US and other advanced economies. They argued a so-called “de-coupling” thesis which said that an independent growth dynamic was at work in what were once called “underdeveloped nations” and that they could ride out the storm.

Not.

Here is just a snippet of headlines from China in the past week or so, courtesy of Doug Noland at Prudent Bear:

February 2 – Bloomberg (Robert Hutton):  “Chinese Premier Wen Jiabao said the worldwide economic crisis shows ‘how dangerous a totally unregulated market can be.’ ‘It brings disastrous consequences,’ Wen said… ‘The main causes are for some economies, they have imbalances in their economic structure. For a long period of time they’ve had dual deficits, trade deficits and fiscal deficits.’”

February 4 – Bloomberg (Luo Jun):  “Chinese banks may have offered a record 1.2 trillion yuan ($175 billion) of new loans in January, the China Securities Journal reported… The four biggest state-owned banks completed 20% of their full-year target, with majority of the loans lent for railways, highways, electricity grids and the infrastructure, report said.”

February 3 – Bloomberg (Wang Ying):  “China’s oil refineries posted a loss of 149.3 billion yuan ($22 billion) in the first 11 months of last year because of higher raw material costs… China faced an energy shortage in the first half though supplies became ample in the second half as the economy slowed, the Ministry of Industry and Information Technology said…”

February 1 – Bloomberg (Dune Lawrence):  “China’s retail sales during the week- long Lunar New Year holiday climbed to 290 billion yuan ($42.4 billion), 14% higher than last year’s holiday period, the Ministry of Commerce reported yesterday.”

February 3 – Bloomberg (Chia-Peck Wong):  “Hong Kong’s home sales fell for a seventh month in January…  The number of residential units changing hands last month slumped 67% from January 2008…”

Are there real unions in China? A Debate.

I was part of a debate recently with some other academics on labor rights in China. You can watch it here: Part One and Part Two.  It runs about an hour and a half.  The other participants were labor historians Nelson Lichtenstein and David Brody and labor economist Ken Jacobs.
The panel was chaired by Dr. Arthur Lipow of the Alameda Public Affairs Forum, which hosted the panel.
A helpful background report by Dan Gallin, former head of the International Union of Foodworkers and now head of the Global Labour Institute, can be found here.
(Note: the discussion followed a showing of China Blue, a terrific documentary on labor conditions in China today.)

China labor debate