What does a 21-year-old Foxconn factory worker socking away her meagre savings in Shenzhen have in common with an artist drowning in mortgage debt in Philadelphia?
According to a new book by Michael J. Casey, a managing editor and columnist at Dow Jones and the Wall Street Journal, both are suffering from — and unknowingly reinforcing — a deeply dysfunctional world financial system that is inherently stacked against them.
In the aftermath of the recent recession, critics have often observed how cheap credit disadvantages ordinary people while rewarding a privileged few. But in The Unfair Trade: How our Broken Global Financial System Destroys The Middle Class, Casey links the familiar argument about “too big to fail” banks in the U.S. to the glut of savings in China to show how globalization is contributing to the current economic maelstrom, and deepening wealth imbalances in countries around the world.
“Globalization is an unstoppable train and we’re all on it. It’s manifest in the goods that we buy, in the financial system that dictates the shape of our economies,” he told The Huffington Post. “We need to have our political systems updated to that structure. We can’t just imagine that globalization doesn’t exist, and keep on going about these political debates as if it doesn’t.”
The first chapter of your book, which traces the evolution of the global financial system since the “Nixon Shock” to the recent worldwide economic crisis, reads like a slow-motion train wreck. Can you briefly explain how we got here?
Casey: There’s two key points. One is the rise of China, which just radically distorted the competitive framework within which countries produced goods and competed in the global economy, and also created a huge pool of excess savings. What that did was to drive down the cost of credit [in the U.S.] in a way that was unrealistic.
China has $3.2 trillion in reserves, and that money flows into the U.S. treasury market and drives down interest rates to levels that were unseen before, and that makes everything cheap, and inspires what we call a hunt for yields. You’ve got excess money coming in, and that money has to go out in search of better deals, hence the subprime crisis. That was a way to find returns that were going to earn more money than the pitiful yields you were now getting on bonds.
The ... other big plank to this [is] what we did to our financial system in the West, and particularly in the U.S. It was the end of the old local banking system where you had commercial banks that had relationships built upon individuals. We merged that commercial banking exercise with investment banking, and hence we created the big mega banks, the “too big to fail” banks.
It was that, combined with this big flow of money [between the U.S. and China] that created a treadmill, a kind of merry-go-round of money that got the risk well out of touch with the actual safeguards in the system. So we had investors seeking out higher returns everywhere, but without the kind of backstop that’s needed to keep it in place. We had these banks that became “too big to fail,” the systemic risks rose, and in that environment we allowed this thing to get out of control.
You focus a lot on the unintended consequences of the financial relationship between the U.S. and China, as Chinese savings are used to purchase American debt, and those funds are poured into cheap Chinese goods. What part does the middle class play in reinforcing “Chimerica,” as it has come to be known?
At the end of the day, every interest rate comes down [in the U.S.], so credit becomes cheap and everybody’s getting access to it. Credit cards are being dished out willy-nilly because every bank is trying to get a return.
With that cash, you are then encouraged to spend it. That’s what a credit card is. That’s really what refinancing was all about. So the funds are coming from China, and into our bank accounts in the form of credit, and that credit is then being used to purchase the goods that are coming from China.
It sounds like it’s one-sided, as if China has benefited from all this, but the flipside of it is that the ordinary folks in China are bearing the cost of it there. In a system where your economy is growing as fast as [theirs is], you actually want to be able to improve your material well-being, but there, you’re working long hours and essentially being forced to save, and then being remunerated at interest rates that are less than inflation. You’re actually subsidizing those who are benefiting from that structure.
[As Casey explains in The Unfair Trade, policies that limit the ability of migrant Chinese workers to access health care, education and social security have prompted the 220 million people who have left their rural villages to work in coastline factories in recent years to sock away their earnings in state-owned banks, which pay very low government-mandated interest rates.]
So savers in China, workers, the middle class, are subsidizing exporters and large industry. Here in the U.S., middle-class Americans, effectively without realizing it, were subsidizing “too big to fail” banks.
I was expecting the book to focus on the American middle class, but you’re really talking about average people in countries around the world.
The middle class is a bit of a slippery word, but as a concept I think it’s useful. If you just think about the middle class as being the broad base of the economy, the group that sustains it in terms of the savings and the spending, then it applies regardless of whether they are as well-to-do as they are in the U.S. or as up-and-coming as they are in China.
You’re still getting this broad base being the ones that are subsidizing the benefits that are flowing to an elite privileged few.
Is that what the wide variety of ordinary people you introduce us to throughout the book have in common?
They have in common the fact that they are making sacrifices for a global financial system that works to the benefit of different groups. To say that they have actually something in common in terms of their position within that [system] is not accurate. They’re at very different phases. The Chinese are the ones who are working long hours and saving. The Americans are the ones that have had to lose their jobs, that have had their income challenged, and have left themselves in debt as a result of that system.
They’re different but their commonality is the fact that they are making sacrifices in a way that is serving these more elite groups.
Not everyone believes that Chimerica is unfair. Some critics of your work argue that this is a natural progression of globalization, not unlike the transformation that fuelled the industrialization of the U.S. Do they have a point?
I want to be absolutely clear myself that I’m a believer in globalization. I’m a believer in the power of having capital re-allocated to where it is most efficiently used. In manufacturing, there’s no doubt that emerging market countries, and China among them, are just more efficient users of that capital. They have more competitive labour rates, and I don’t dispute that you can’t grow a country without exploiting that. I’m also a believer in the free market and in that sense, you’re absolutely right, China is just going through what other countries did.
The problem is twofold. One is it’s not a free market, and largely that’s because of the practices that China engages in. It’s not about labour costs being low. That’s always going to be the case. It’s about this phenomenal distortion in the global system, which was their exchange rate being so low for so long. I don’t think people grasp how much that just changes the dynamics. If you can keep the exchange rate fixed the way that they did at a level that is just way too low for the kind of growth that you have, you create massive distortions in the price of goods that you’re producing, and therefore the competitive role of others.
You crisscrossed the world to research this book. What surprised you most?
The thing I wasn’t prepared for — and this is a very depressing point — is just how much confidence had been destroyed amongst ordinary people. In a lot of places that I went to, certainly in the West, [in] Spain, Guernsey, Australia, there are people who thought that they had it all, that this is the good life, the future is a bright one for them and their kids. And now feel as if they’re not quite sure where to turn.
People don’t know what to do with their investments, and so they buy gold [or] put it into piddly earning treasury bonds. There’s a serious fear of investing for the long-term because of what’s happened. There’s no trust in politicians. We’ve seen our political systems upended. That was quite striking everywhere I went to see how much we’ve seen this breakdown in confidence in the state.
Here in the U.S., of course, [there’s] the rise of the Tea Party or the Occupy Wall Street movement. These are forces that represent a serious breakdown of trust between the electorate and those who govern. I think that’s a manifestation of these sweeping changes [in the global financial system] and the inability to control it.
You don’t spend a lot of time on Canada in the book, but although we emerged from recession in relatively decent shape, we are facing serious imbalances within the country, a hollowing out of manufacturing and a possible housing bubble. What’s in store for us?
Canada did most things right in terms of its financial system. We know that it managed to look after its banks in a much more prudent way than the U.S. did, and it maintained strict rules on mortgage lending so it didn’t have the same financial nightmare that the U.S. went through.
But it’s at risk of being caught up in this global maelstrom of volatility, precisely because of this commodity boom and the distorting in domestic prices that arise from that, housing being a key example. Australia is going through exactly the same thing. They’re both commodity countries, middle-tier wealthy places that have had this commodity boom create these distortions.
I actually think Canada’s probably in a better spot than Australia because it’s not entirely dependent on commodities. The presence of the U.S. across the border as a huge market for goods is there, and at some point, if the Canadian dollar would weaken, it would improve this hollowing out of manufacturing that you’re referring to.
Canada needs to approach this current moment where there is a windfall in the oil and gas sector from [...] a sovereign wealth management perspective, to think of ways to use that wealth to save for the inevitable downturn that will come when commodity prices fall.
If the global financial system is broken, what will it take to fix it?
We have to focus on the multilateral solutions. We have to place things — as dysfunctional as they seem — like the G20 to a higher level of importance, and realize that it’s just not good enough to have the treaties and the agreements that are supposed to be made in that forum fail as they are now. Every time we fail to agree on something like … consistent banking rules around the world or … a model for rebalancing the global economy from those who save too much to those who spend too much, that kicking that can down the road is extremely dangerous and just making things worse.
So it’s going to get worse before it gets better?
That’s sadly where I’ve come to now as I’m watching the way Europe is handling itself. I’m becoming more pessimistic, unfortunately. The politics that are built around nation states are so powerful and so [short-sighted] at the same time that it’s very hard for people to get outside of that framework and see that taking sacrifices on the one hand can on the other produce long-term benefits that break us out of the cycle of volatility that we’re currently in.
But my optimistic spin is that we’ve done this in the past. We are capable of pulling international agreements together and making them work.
The World Trade Organization is a remarkable success in many respects. I think we tend to focus too much on how little we have achieved in terms of free trade and not enough on what we’ve actually done in the enforcement of the agreements that we have in place. We built a multilateral enforceable system around trading rules. The same thing can apply to the financial sector, and needs to apply to the financial sector.
Every time I talk about this, people look at me like I’m a naive idealist, and I’ll say I’m definitely an idealist but I’m also a realist in the sense that if we don’t, we’re in deep trouble.
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