Some of the blogs I read have this idea that China is going to rule the world. They cite the AIIB (Asia Infrastructure Investment Bank), and the Silk Road development and the sea route part of the Silk Road, and all the investment that china is doing around the world. The United States will displace both economically and militarily. Poor America, we will become a second rate power in the world and have to cede our crown to China. I have been reading this crap for the last year. And a lot of the so-called China watchers are so assured that China’s GDP will easily outstrip the US and Europe combined. A mind is a terrible thing to waste and so many seem to indulge in such wasting activity.
Okay, people, let’s go over the basics once again. Currency is not always money. Money is that third party to any transaction between two parties that wish to trade goods and services but cannot barter directly. That is what money does, it acts as a third party in any transaction. You have apples to sell and I have pears. But I want to buy beef and you want chicken. What do we do? We rely on a third party for the transaction to take place. Money arranges the trade of one good for another indirectly. Will you find this in an economics text book? No. Because we are supposedly no longer in a barter society. Then please explain how we can exchange goods and services indirectly wit the use of that third party called money and yet not be in a barter economy? When I go to work and earn an income I am paid in currency. that currency is money in that I am not offering my services to grocer or the electric power company. I offer them money in the form of currency. Economists seem to believe that barter is strictly one good for another and that is simply not true. In any barter economy there is always the arbitrage factor. That is, when two individuals have something to sell that neither wants, then the transaction does not take place or the arbitrage factor finds buyers for our goods so that we can buy what we need or what we wish to buy. Why is it that Paul Krugman can’t understand this point?
Currency is, in a way. money. But currency is something issued by a central government as a substitute for money, that third party to any exchange of goods and services. The central government through an arbitrary ruling,called a fiat, decides what the worth of a currency is. How is that so? Because it will accept the currency for the payment of taxes and fees., If the central government recognizes that the currency is legal and will satisfy the amount owed for taxes or fees, then we may assume that currency is money. But currency is a promise, an IOU given by the central government., That is, currency is a fiat ruling about worth. And since the central government issues the currency, it creates a promise of future value. This future value of a currency is subject to the backing, the ultimate exchange value it can command. It it’s value is denominated in a precious metal such as gold or silver, then its worth can be calculated in the present and future price of that commodity. But if all one has is the government’s word for its value or worth then it will be subject to any number of disturbances in its ultimate worth in the present and future. A currency that trades on confidence will always be subject to the storms of inflation and deflation. Gold itself has little value outside its intrinsic value and scarceness, it is worth what individuals, groups, and governments are willing to pay. One cannot eat gold but it will store for eons of time. Gold is money whose worth is valued in what individuals are willing to measure their acceptance in goods and services. One buys gold using a piece of paper, a currency note. Thus currency is a note of obligation, a promise of acceptance for goods and services. When based solely on the issuing government’s promise of value, it becomes an instrument of debt, albeit a circular debt. The individuals in a nation accept it and trade it for goods and services as well as pay their taxes to the government. he government accepts it as tax revenue and payment in full for such taxes and then spends that currency, placing it back into circulation. God forbid how many economists with all their specialized training can’t seem to grasp these points. They talk over these points as if they did not exist.
Every country has several laws prohibiting the counterfeiting of its money. Only the government can print currency and mint coinage. Yet the world’s banking system counterfeits money every day and twice on Sundays. Wait, you say, that can’t be true. Let me introduce you to the bank’s best friend, Credit. This is another point in the monetary and financial systems that economists fail to properly understand. Credit is currency because it is denominated in such units. If I apply for a credit card, which will spend just like currency in my pocket, the amount of “Credit” I am given is denominated in currency. To the bank, that credit card is an unsecured loan whose amount depends of the monthly balance. When I use my credit card I am borrowing currency from the bank. Even when I am in another country I can buy goods and services valued in that country’s currency and borrow in units of that currency because the bank will transfer the “money” in terms of foreign exchange. Last year, during my stay in France, the Euro was trading in the foreign exchange market at approximately $1.35. This year it is $1.10, a large difference. Ask yourself why the difference. It has to do with confidence, the Euro is not backed by gold or silver, only to promise to deliver value by he EMU. What will cause a decrease in the confidence of the Euro, or the Dollar, for that matter? Outstanding debt and the perceived ability to repay that debt. The MMT people tell us that the rules that apply to individuals simply don’t apply to governments. These idiots rely on the assumption that since government spending is part of the GDP measurement, the government cannot overspend since the equation remains unaffected. If a government owns all the means of production and employs all the individuals who want to work, then the government is the GDP, excluding any black market (an unofficial exchange of goods and services) As long as that government never has to buy raw materials or unfinished goods from beyond it borders, any currency it may issue is almost meaningless. It’s the same as working for a company had having to buy all you need in the company store with company script. This becomes an exercise in accounting, the keeping of the books. The company sets my wage and sets the prices I pay for any goods and services I have earned from my job. The company can never extend credit so that I may over consume. My only exchange of value is the work I do and it the company that decides how many hours I work. This is how a closed system works. For me to gain more someone else must lose.
But it that sense, our monetary and financial systems assume the existence of an open end system. Economist make this same mistake and never seem to learn. They tell us that growth can continue on forever, that inflation of two percent is good (if 2% is good the 10% must be even better by such reasoning). We do not need to rely on precious metals based currency systems, we can let currencies of other countries float against each other. Except when the peg their official value against the reserve currency, then they can cheat the market. This is what China has done for many decades. It has pulled manufacturing out of the developed countries and into its country. It has kept wages artificially low so as to out bit everyone else for work and trade. But its business plans were conducted at the barrel of a gun. Chinese businesses were favored and foreign businesses were given a take it or leave it attitude. Apple has become a foreign corporation, most of its revenues and assets are held outside the US. Now China wants to be the world’s reserve currency. I’m all for it, all being the reserved currency of the world have brought us has been inflated prices. But what is even scarier for China is that its government has grossly overspent and contracted so many debt obligations as has its private sector and yet has not gained any appreciable accounting over the entire mess. Local governments, regional government, and the central government have spent money with abandon and very little regulation or accounting practices. The Chinese government may be buying lost of gold, but its currency is not backed by that government held gold.
So here’s China’s problem. It wants to spend billions and trillions of new projects that will make it the dominant country, the economic power and the military power of the world. And it is willing to become the reserve currency of the world so that it may be the dominant country of the world. To that end, it is willing it issue as much currency as is necessary, and that includes credit. What do we know about credit? It spends just like the currency in your pocket, but when used it becomes debt. The latest figures I’ve seen on world debt is that collectively amount of debt in the world, most of which is unsecured, is about ten to one hundred times the world’s collective GDP, depends on who does the accounting. Where banks used to lend against their own paid in capital and only issue debt against assets (always at a discounter value of said assets), banks now issue credit that is unsecured. This is the result of the financial “engineering” of the last fifty or sixty yeas. The banks have fallen prey to that idea that the world’s economic and financial system is open ended and thus growth is unlimited. One only need to spend more money to make the money poor in. People, the world is a closed system. It only appeared open ended because we were unwilling to see the effects we had on opening up our systems to others who had remained semi isolated in the past. Now, except for a few tribes in Brazil, everyone in the world is connected to one large and closed economic and financial system. And where does one country’s growth come from? Other countries. One may corner the market on gold and think that one can not extort higher prices for one’s gold. But guess what, the other individuals who need a medium of exchange may decide that they will accept silver instead. What happens when the price of your gold declines, particularly if you borrowed currency to buy your controlling share? Again, so many economists and political pundits have misses the underlying problems to this madness of China’s leaders. China will go broke and endure a few civil wars before normalcy is restored to that country. If they rule the world, it will only be for a brief moment in time and few lessons will be learned. Too many people believe too many false assumptions for that to occur. So in the words of a popular song a couple of decades ago, “Don’t worry, be happy.”