Sunday, November 22, 2009

Laying down a root of war

There are Congressmen complaining about the Chinese government’s monetary policy, again. It’s the same complaint I’ve seen a number of times over the last several years: the Chinese government’s maintenance of a peg of the Yuan to the US dollar is manipulation of the Yuan. By implication, the Congressmen are saying that US monetary policies and practices are all above board.

In fact, both governments are guilty of currency manipulation. The essence of method is the same in both cases, namely the generation of fiat currency from thin air and using it to manipulate a particular market price. The essence of motive is also the same, this being to try to advance their economies. Likewise the immediate consequences are the same, that their respective money supplies are being markedly increased and the value of a unit falling against other currencies. The difference lies in that the price that the Chinese government is targeting is the exchange rate with the US dollar, whereas the price that the US Fed is targeting is the US overnight cash rate.

It would be too quick and easy to accuse these Congressmen of hypocrisy, that someone might note that these Congressmen are saying that it is fine for US government bodies to keep on pumping oodles of fiat currency into the US economy but unfair for the Chinese government to do likewise, simply because of a difference in which price level is being targeted. The accusation would miss the mark because the argument that what both governments are doing is in principle identical would go way over their heads. As a result the charge of hypocrisy would be met with genuine bafflement and taking of offence.

It’s not simply that they are ignorant of a number of particular concretes (such as how the Fed works, and that how both the Fed and the Chinese government are robbing the people in their respective jurisdictions by inflation and interfering with proper valuations) but that these Congressmen are concrete-bound and utterly incapable of identifying similarities or principles. All these Congressmen see is a particular concrete method of controlling an economy, complaining about concrete method A versus concrete method B, and being completely oblivious to the sameness in the essence of each method and to the inherent wrong of any government control of the economy by any method. So long as Congressmen can point to separation between who makes monetary policy and who makes other government policy they get to make their objections with a straight face in defiance of the fact that the essential methods, moral faults and end consequences are the same.

In addition to the immediate basic principles about what these governments are doing being the same, the deeper premises and the longer term consequences of these premises are also the same, and that’s where the real worry lies. At a broader level, both governments are acting on the premise of mercantilism and the beggar-thy-neighbour approach to international trade. Both of them take mercantilism seriously, where the difference between the US and China is that these Congressmen are trying to claim the high ground by eschewing it and expecting others to do likewise as though it were some great act of sacrifice, in complete ignorance of the actual reason why it is wrong and why what the Fed is doing is also blatant manipulation with similar effects on the exchange rates of the US dollar. The Congressmen are oblivious to the fact that if a country is indeed engaging in subsidising its exports then what it is doing is giving a free gift to the rest of the world at their own people’s expense: it makes those people as busy as hell and then robs them of the full value of their efforts. Thus, certainly, what the Chinese government is doing is a colossal wrong, but the real nature of that wrong is not the substance of the Congressmen’s complaints.

There is also a deeper premise that is the same and which is guiding their respective monetary manipulations: both governments are acting on the premise that the economy is collective property to be controlled and managed for the collective good of the nation. Both of them are in denial of individual rights and the propriety of laissez-faire, where again the difference is that the US government is sophisticated about it while the Chinese government is crude and heavy-handed. Both of them, sharing the same evil premises, are acting immorally in the same fundamental way and the consequences will likewise be similar, where only the secondary details will differ.

The concrete consequences include the inflation, price rises, falling standards of living, and the economic distortion that both it and the mercantilist premise engender, but while finer details of numbers and the timing thereof will differ the key principle here is that action upon bad premises will result in damage to the economies of each country and that the combination of this pain with concrete-boundedness, ignorance of the nature of production, a growing sentiment of national-tribalism, and increasing appropriation of value in the name of the collective good, will lead to increasing ill-will between nations. Notice that the article also referenced actual use of force of Chinese origin against US national security and that a report on them was submitted to Congress at the same time as these complaints were aired by Congressmen.

Much of the economics of this is a repeat of how economic-warfare charges were laid against the Japanese and their allegedly mighty MITI during the 70’s and 80’s. The complaints of the day then were as wrong as the complaints of today. The Chinese government is not at fault for the state of the US economy today any more than the Japanese government was for the state of the US economy back then. During the height of the anti-Japan sentiment there were even semi-popular novels set in a near future in which Japan had significantly rearmed itself and had begun wars of conquest – and those kinds of novels came out at time when Japan was (as it still is today, which is the period cast as those novels’ near future) an honourable and peaceful nation. Given that Red China today is not exactly as honourable as modern Japan, has considerable armed forces, is engaging in systematic espionage to obtain military secrets, and at a time when people are reeling from the effects of the global financial crisis (whose origins lie chiefly in the same operations of the central banks that these Congressmen are ignorant of) and in want of someone to blame, a crude militarist sentiment against China amongst Americans is likely to grow far stronger legs than the anti-Japan sentiment ever did. These damn fool Congressmen are feeding that with their incompetence and belligerence.

Here we see evidence of Miss Rand’s claim in her article “The Roots of War” that the lack of laissez-faire capitalism, and, deeper than that, the collapse of reason and the rise of the tribalist premise, is ultimately a recipe for war and destruction. What we are seeing is instances of the mechanism of how those consequences arise, both within a nation economically and between nations militarily. It is not possible to say if and when actual war with China will result, and I am certainly not saying war is likely next week or next year, but unless evil premises in both China and every other major nation of the world are rooted out such a war will increasingly be on the cards, even despite the motive for anti-protectionist complaints being a fear of exactly that.

It is utterly useless to expect the Chinese to conform to idiotic trade rules while doing essentially the same thing they are and hiding behind the western ‘sophistication’ of independent central banks. The complaints about failure to adhere to the rules and mechanisms are in ignorance of the real causes of our economic problems. Similarly, thanks to the same underlying abandonment of reason and rights, these rules and mechanisms are themselves in ignorance of the real reasons why protectionism is wrong. Sooner or later the system is going to collapse, just as Bretton Woods did, by a major player giving up and walking away to pursue more overtly nationalist policies. If that happens without knowledge of the real solution and what ought be done then we’re going to be in trouble. There is only one real solution, and only one long-term preventative against war: promotion of a culture of reason, egoism, and laissez-faire. Nothing less will do.


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