Currency Wars and the RMB Strategy (Part 2)
2006/3/7 13:29:45
(Continued from Part 1)
Explaining exchange rate formation mechanisms and America's monetary strategy in the most accessible language possible.
First, a note: since last month was spent arguing all the time, I didn't get to say much of what I wanted. Someone asked whether this lady has a more serious pseudonym, so here it is. As for the one specifically for arguing—that's the one related to bad men, which anyone with basic intelligence should have figured out. So this pseudonym doesn't argue; that one does the arguing. Take your business there.
Some bookworms, the moment exchange rates are mentioned, rattle off a bunch of definitions—but that's useless. It's like citing P/E ratios in the stock market—all tiresome tricks. Exchange rates, put bluntly, are a game among great powers, no different from a market maker manipulating stocks. Some might say the daily trading volume of currencies is so enormous—how could it be manipulated? If you think manipulation always requires money to push prices up, that's the dumbest method. Manipulation is ultimately about manipulating human psychology. As long as there are people, there's manipulation. Not understanding this in financial markets—losing money would be the strange thing.
America is a master of exchange rate manipulation, but manipulation still serves its overall interests. The greatest crisis currently facing the American economy is its bubble-ization, and America's current negative savings rate makes its economy more dangerous than ever. In a sense, the stock called "America" has been played to dizzying heights. Like a manipulated stock, the current priority is preventing massive capital flight—otherwise there will be cascading crashes. Because the 2000 decline was so fast, most hot money couldn't effectively exit, so large-scale capital flight hasn't occurred yet. The current large-scale rebound is creating the opportunity for capital flight. Once the rebound is complete, the anticipated large-scale capital flight will truly begin.
To prevent the above scenario, America's only viable monetary strategy is to depreciate the currency to a correspondingly low level before this major rebound is complete. This way, dollar capital that cashes out can't escape at a high exchange rate. In a sense, this is adding a lock on dollar capital at the currency level, so that cashed-out dollar capital's resolve and intensity to flee will be greatly reduced. This is America's only viable non-military option to prevent the great stock called "American economy" from crashing.
But this strategy has one Achilles' heel: if there's an enormously capacious currency tightly pegging to the dollar, then the dollar depreciation scheme won't work. And the RMB is precisely such a currency. The RMB-dollar peg gives dollar assets a smooth escape route after liquidation. The biggest advantage of the RMB economy over the dollar economy lies in its extremely low bubble-ization and extremely high savings rate—this is a fatal threat to the American economy. As long as the RMB strategy is maintained and the pool is well-built, the dollar depreciation strategy will be completely foiled. Once this strategy fails, the American economy will face the most enormous shock—this is also the realistic foundation for the prediction of the 2019 90-year great cycle world economic crisis in previous posts. A correct RMB strategy will accelerate and deepen this process.
Explaining in the most accessible language for the woefully ignorant left: the relationship between monetary growth and economic growth, and the sinful background of the dollar.
For ordinary people, it's probably quite clear where the RMB in their hands actually comes from—very simply, it's printed, not grown or produced by other means. For the RMB, there's only one legally authorized printing location. If anyone else tries to print some, what awaits them is also quite clear. Of course, printing RMB is not like printing anything else—there must be a standard. If everyone printed like the Gold Yuan Certificate, we'd all be carrying big sacks of money to buy rice again. So let me discuss the printing standard here.
Roughly speaking, currency value can be seen as an economy's total output divided by total monetary supply—meaning currency value represents the economic quantity per unit of currency. For a normal closed economic system, to maintain stable currency value, monetary growth must correspond to economic growth, keeping the ratio stable. Even elementary school students can figure this out from the proportional relationship defined above. In other words, printing money should be based on economic growth. Once this standard is departed from, everything falls apart. However, in reality, there's no truly closed economic system. Once two or more economic systems interact, the issue of comparing currency values between different currencies inevitably arises. What most people usually discuss is the latter—like how many dollars per RMB—and this type of value emerges from interactions between two different economic systems, fundamentally different from the single-system value discussed earlier. Yet ordinary people, misled by common sense, often confuse the two.
Because there are different economic entities, there are different money-printing centers, and these entities are interconnected. If one printing center goes rogue—printing far beyond its economic growth—and since this currency is widely accepted, i.e., a so-called world currency, it can be realized in the latter sense of currency value. And this realization is based on exploiting the interests of other economic entities. The dollar is exactly such a currency. Because the dollar is a quasi-world currency, it can print wildly without consequences—the excess is borne by countries worldwide. This is a great secret of American economic prosperity. But the current problem is that this excess printing has exceeded the world's capacity to absorb it. The dollar is merely a beautiful bubble whose true nature has been exposed.
Modern society is a global capitalist society, and monetization is its most important aspect. The invisible plunder through currency is the upgraded version of the visible plunder of earlier colonialism. The dollar, bluntly put, is a blood-sucking machine and material foundation built on an ideological apparatus. But for the woefully ignorant left, they don't even know how they're being exploited by America. In reality, as long as you're on this earth, as long as the dollar exists as a quasi-world currency, anyone in any non-dollar system is being exploited by America. This is the true global enslavement.
Starting from Greenspan's sudden statement on the RMB and America's enormous deficit.
Federal Reserve Chairman Alan Greenspan said Tuesday that China's central bank buying dollars to prevent RMB appreciation could cause inflation problems for China in the long run. There's also a related piece of news: the US fiscal year 2003 budget shows a government deficit reaching $450 billion, 50% higher than previous estimates. These two seemingly unrelated pieces of news are actually closely connected.
Old Green is of course not Laozi, but the great and famous idol of countless economics practitioners. But in this lady's view, he's nothing special. Thanks to his series of blunders since 1998, the American economy has finally reached its current state. Here's hoping he continues making bad moves—that would be China's fortune. But his remarks on the RMB are no blunder—they're part of the global chorus for RMB appreciation. As for why such a big gun has been brought out: it's mainly because Americans themselves know all too well how rotten their economy is. What does a $450 billion deficit mean? And next year it will inevitably continue to surge through inertia, building more ammunition for the ultimate bursting of the American bubble. Of course, if other currencies appreciate together, this crisis can be passed on. But in this era, nobody's stupider than anyone else—you Americans created your own mess and want the whole world to bear it. Is that possible? Whoever bears it is the fool.
Japan's bubble burst over 10 years ago, and it's still barely alive. Japan's advantage over America is its consistently high savings rate, while America's is below zero. I don't want to imagine what the spectacle will be like when this bubble bursts—and I don't need to. It'll definitely be spectacular. Currently, the forces building toward this burst include not just the stock market and the virtual economy, but will additionally include the bond market and the real estate market—other related areas go without saying.
The inevitability and historical significance of the American economic collapse have already been clearly stated in my posts under the "sneezing sneezing" pseudonym: the ultimate end of the 250-million economic level, followed by a great collapse and then rebuilding—the beginning of the 1.25-billion economic level, which will be a new era.
Explaining in the most accessible language: what are the Japanese most afraid of right now?
In the most accessible language: what are the Japanese most afraid of right now? In one sentence: the RMB firmly pegging to the dollar. In previous articles I've said many times that the yen's ultimate fate is extinction, and I even gave a specific time: around 2025. That post was titled "2025: A Choice Japan Must Face—Be a US State or a Chinese Province." The RMB's firm peg to the dollar would make Japan's economy, already devastated by over a decade since the bubble burst, even worse. The Japanese understand this better than anyone, which is why in the global chorus for RMB appreciation, Japan was the earliest and most enthusiastic participant.
To ultimately decouple the RMB from the dollar, the Japanese have many methods. But the simplest is still to feed the Chinese a dose of sweet-talking potion, after which the Chinese themselves will liberalize the RMB. As mentioned many times before, under the current objective reality of the dollar as a quasi-world currency, liberalizing the RMB and decoupling from the dollar are the same thing. But the cunning Japanese certainly won't directly clamor for RMB liberalization—that would be too obvious. Instead, they clamor for an equivalent proposition: decoupling the RMB from the dollar. This way they can secretly advance their real agenda. The Japanese have studied the "Romance of the Three Kingdoms" far more thoroughly than most Chinese—they have plenty of tricks.
To achieve this goal, the Japanese can send their proxies everywhere to preach that the RMB-dollar peg will cause international hot money to flood into China like in 1997, creating a crisis similar to 1997—and other such lies. But globalization is fundamentally the globalization of capital, and capital flows are perfectly normal. But there's one thing neither the Japanese nor the Americans will tell everyone: the accumulation of capital is the ultimate destination of capital flows. This is the secret of Japanese and American economic development—one they naturally won't share with others.
Most simply: no matter how capital flows, there will inevitably be a place where the most settles. Right now, that place is America. America's economic development, at its most fundamental, is because America is the country where capital accumulates and settles the most. For China to ultimately defeat America, there's only one path: to replace America as the country with the most capital accumulation and settlement. This is the most core driving force of change in the world economic landscape. Accumulation and settlement first require flows—this shouldn't be hard to understand. Once this capital accumulation and settlement ultimately takes shape, Japan will become China's economic dependency first, and what follows will be easy. This is the most fundamental reason Japanese people can't sleep.
Preventing China from ultimately replacing America as the greatest nation for capital accumulation and settlement—this is the most fundamental reason behind the current global chorus for RMB appreciation. From the frantic efforts of the Japanese, Americans, and others in this regard, the enormous pressure this trend puts on them is clear. What the enemy fears most is naturally what we must persist in doing. The more we persist, the more afraid the enemy becomes—isn't this logic very simple?
Stabilizing the exchange rate: the realistic possibility and substantive significance of making China's poorest 100 million households into 100,000-yuan families.
Today my old pseudonym's old post "Long-term stabilization of the RMB exchange rate: making China's poorest 100 million households all into 100,000-yuan families in the short term" was dug up. At the time I didn't explain in detail the realistic possibility and substantive significance of stabilizing the exchange rate to make China's poorest 100 million households into 100,000-yuan families. Here I'll supplement that.
So-called RMB appreciation is to some extent a virtual phenomenon—a relative concept. Since real economic entities are not entirely barrier-free, measuring currency value through specific commodities is always too bookish. Currency value can actually be seen as an economy's total output divided by total monetary supply, meaning currency value represents the economic quantity per unit of currency. Obviously this is quite rough, but actual reality has a strong positive correlation with it. In a normal closed economic system, monetary growth must correspond to economic growth, keeping the ratio stable. However, no economic system is truly closed. Once two or more economic systems interact, currency value fluctuations inevitably emerge.
That's enough theory. Let's talk about the current RMB issue. So-called RMB appreciation means the economic quantity represented by each unit of RMB has grown relative to the dollar. There's one approach: artificially increase the money supply so that the economic quantity per RMB unit decreases, thereby maintaining parity with the dollar. This neutralizes the RMB appreciation pressure, and there's now more RMB. As for the extra RMB, per my suggestion, distribute it to China's poorest 100 million households to make them 100,000-yuan families. The substance of this method is narrowing the wealth gap—somewhat Robin Hood-esque.
Very simply: when the total economic output is unchanged, before the extra RMB is printed, a person with 100 million in assets represents a different amount of wealth than after the extra RMB. This shouldn't be hard to understand. For the poor, their wealth has increased. And since total economic wealth is unchanged, wealth has flowed from the rich to the poor, with the richer losing proportionally more. However, since individual wealth is infinitesimally small relative to total economic output, the proportion redistributed from each person is actually very small. And since the RMB value is unchanged, relative to the dollar, this wealth is unchanged—while the poor have become wealthier relative to both the dollar and the RMB.
The widening wealth gap in China's economic development is an increasingly serious problem. This RMB appreciation pressure can be used to solve this problem at minimal cost. Once China's poorest 100 million households all become 100,000-yuan families, it will provide great stimulus to consumption and the economy, benefit the businesses of the rich, and ultimately make everyone happy.
The possibility and necessity of creating a uniquely Chinese economic model, as seen from the booming SMS economy.
Economics, stripped bare, is just a game. Games have different ways of being played, different games enjoy different popularity in different places, and the corresponding economic models may differ accordingly. In economic competition, the competition of models is most important—whoever creates the prevailing model reaps the greatest benefits.
Economics isn't always American-style economics, and profit-making models differ across countries. For example, most simply: SMS never became popular in America or Europe, but succeeded in China first—a perfect example. This happened because of a combination of culture, economic development level, and other factors. First, SMS suits the Chinese temperament—relatively reserved, concerned with face even at personal cost, a bit lazy, preferring to copy rather than create, favoring standardized expression, and so on. Second, SMS is quite fool-proof—as long as your brain cells aren't entirely dead and you have one or two fingers remaining, you can basically manage. Third, the entry price is low—one session usually costs just 0.1 yuan. And Chinese people love joining the crowd. Given that mahjong became a national pastime, this reasoning is obvious—most people can't stand being seen as too "out," so they all join the frenzy.
A bunch of so-called economists are always deifying economics. In reality, economics works the same as mahjong—it's just a game. Deifying something inevitably produces idols—in economics, this means idolizing the American model, which is merely a symptom of dehydrated brains. Just as mahjong will never become America's national pastime, most Chinese people don't care for American football either. National particularities in many specific economic models are inevitable. As for how far such particularities can be extended—that's a practical question having nothing to do with theory. So those who drone on about sacred laws are just jokes.
The possibility and necessity of creating a uniquely Chinese economic model is also a practical question. The key is daring to break all deification and idolization. The American economy is merely Americans' big game—nothing magical. For a while, some sea turtles paraded around with American and European versions of the game, just as some local bumpkins paraded with Confucian or Daoist versions. Games are time and place dependent—divorced from that, please step aside.
Large-scale national investments must absolutely not be commercialized or politicized—but they must be strategized.
Recently there's been much argument about the Beijing-Shanghai high-speed railway, but it boils down to two approaches: pan-commercialization or pan-politicization. What's being conveniently ignored is the most important: pan-strategization. I believe large-scale national investments must absolutely not be pan-commercialized or pan-politicized, but must absolutely be pan-strategized.
From a pan-commercial standpoint, something like the Beijing-Shanghai high-speed railway is just an investment—as long as it's commercially profitable, nothing else matters; without commercial returns, nothing has meaning. From a pan-political standpoint, the key is political correctness—not letting the Japanese benefit, for instance, or as long as it's politically correct, squandering money is fine. Both approaches are utterly tiresome. First, a country is not a business—if everything is judged by profitability, then a country is no longer a country. Second, political factors are often the most unreliable. Wind and clouds shift constantly; basing a major investment purely on politics is too frivolous.
Some might say nothing should be "pan"-anything, expressing thoroughness by refusing all pan-ification. But this claim is itself a game—not being "pan" is precisely its own form of pan-ification. Isn't this obvious? I have no interest in thoroughness. I explicitly advocate pan-strategization, but the premise is for large-scale national investments, not trivial matters.
Pan-strategization means that large-scale national investments must be built upon a grand international strategic vision. Without this, everything is nonsense. I oppose the construction of the Beijing-Shanghai high-speed railway from this perspective, and I express deep skepticism about the current international strategic vision. Moreover, from the perspective of inter-state games, even if this project is to be invested in, it should be linked with the current RMB strategy. This is like a good topic that can absolutely be played into a great drama in the game of nations. If it's treated purely as a commercial or political act—isn't that a bit wasteful of resources? In the game of nations, the topic itself is the greatest resource.
As for those who babble about "operations"—even more tiresome. Operations depend on perspective. Different perspectives yield different operations. Operations are secondary; perspective is key. There's no fixed "how things are" or "what to do"—everything depends on perspective. At the national level, it's about pan-strategization. A grand international strategic vision is the key of keys.
China's foreign exchange reserves must and will inevitably continue to increase dramatically—this is the inevitable path for the RMB to ultimately defeat the dollar.
Recently, besides the global clamor for RMB appreciation, an undercurrent has been promoting the idea that foreign exchange reserves are too large—that if the dollar becomes worthless, what then? This rhetoric actually complements the RMB appreciation clamor, simply trying to achieve the same goal from a different angle.
Different forms of assets are similar to different forms of energy. In the grand scheme of global economic circulation, assets are conserved through transformation—provided there's no war or similar disruption, meaning under normal economic conditions. So-called economic collapse is essentially the failure of asset transformation. The so-called "value" of assets is actually only relative. Once society-wide asset transformation fails, it means a systemic collapse, with the greatest impact on the most bubble-ized sectors. Such collapses always begin with capital flight. One country's collapse often means another's rise, because the collapse only occurs in the mid-to-late stages of capital flight. It's like when a computer system crashes—it doesn't mean the computer is trash. Just reformat and reinstall the system. Of course, for an economic system, this reinstallation is a painful process, but it's not irrecoverable.
Economic system recovery comes through different means—military or non-military. Strictly speaking, the military approach is crisis-transference—bluntly put, breaking the pot and throwing the pieces, redirecting domestic crisis contradictions outward, then recovering the system after the fighting. Ultimately, system recovery is always non-military. In a real war, all asset forms become worthless. In a nuclear war, with humanity gone, what assets? So worrying about foreign exchange becoming paper is the same as worrying about the sky falling or nuclear war.
Due to the globalization of capital, asset safety under normal economic conditions doesn't depend on form. In a functioning economic system, capital transformation is normal, and capital can exist in any form without problem. But for large-scale capital holdings, there must be a diversified portfolio across different asset forms—a good way to weather ordinary economic fluctuations. For nations, foreign exchange is one asset form. As national total assets increase, even at a constant proportion for foreign exchange, increasing holdings is perfectly natural. China's foreign exchange reserves must and will inevitably continue to increase dramatically—this is the inevitable path for the RMB to ultimately defeat the dollar. Some worry about accounts being frozen in case of war. Well—don't American companies have investments in China? In today's globalized capital flows, such worries are utterly tiresome. In the globalization of capital, the more open a country is, the safer its capital. America can freeze Iraq's accounts because America has no assets in Iraq. But the more American companies invest in China, the more freezing accounts hurts whom? Think about it.
Additionally, a very important component of my emphasized Southeast Asian strategy is financial markets. There must be a globally significant financial market controlled by Chinese. This will be an inevitable result of the Southeast Asian strategy. Once completed, China's risk resistance will be greatly enhanced. This is the correct direction.
Economics is fundamentally political science: a critique of "Zhang Wuchang: Don't let the RMB float freely!"
Yesterday someone posted "Zhang Wuchang: Don't let the RMB float freely!" in the deep water forum. The most important sentence in the entire post is: "First, stabilize the exchange rate, then abolish all foreign exchange controls, add comprehensive financial liberalization and tax simplification." The "first, stabilize the exchange rate" part is the bait—without it, the purpose would be too obvious; with it, people's attention is diverted.
Exchange rate and exchange controls are different—this is obvious. But this distinction is only academic. In practice, they're often inseparable. Some might cite Hong Kong's linked exchange rate system, but can Hong Kong's situation be compared to all of China's? Even with Hong Kong's highly developed financial system, speculators nearly found a huge vulnerability in 1997. Under China's current conditions, removing exchange controls—isn't that a joke?
Economics is fundamentally political science. For any specific economic phenomenon, there's certainly more than one academic solution. But what gets chosen is a political question. And the choice is what's fundamental—until that final decision, everything is just noise. Take the RMB appreciation issue: there are many academic solutions. Which one is ultimately chosen depends on political stance—which, at its root, is about competing interests. Maintaining exchange rate stability plus exchange controls, then artificial depreciation through money printing, is one solution. The two moves in "Zhang Wuchang: Don't let the RMB float freely!" is another. But the political motives behind these approaches are absolutely different. For the political forces Zhang Wuchang represents, they naturally don't want the first approach, and the second approach they recommend has deadly follow-up moves that won't be revealed upfront. But once you do as they say, you'll have truly swallowed the poison.
In today's globalized capital era, political science is fundamentally economics too—the two are inseparable. From the seemingly impartial, understated argument in "Zhang Wuchang: Don't let the RMB float freely!", one can see that beneath the academic veneer, the same old medicine may still be being peddled. When it comes to cunning, never underestimate the opponent.