Why China Flourishes While The USA Declines

It's Shimomuran Economics, Stupid

The Chinese seem to understand economics to a greater depth than the US Treasury or the Fed does, or the economics faculties of the US universities do.

Where does the money come from? Why is the system stable? How does China do it?

First, the people’s Bank of China creates large flows of investment credits, funding all the investments from small and medium sized enterprises level (SMEs)up to major projects. All of the Chinese investments, from the very smallest in China’s tens of millions of SMEs right up to the mega-industries which (from the year 2000 to 2020) have constructed and continue to build 20 new Chinese cities annually, each with a planned population of a million people each, and right up to the biggest construction project in the world — the Three Gorges Dam — are mainly funded by no-cost new investment credits. No foreign borrowing, just the creation of credit by the people’s bank of China for investment purposes.

Second, the cost of borrowing in China is set at (or above) the best estimate of the Chinese inflation rate, so borrowed money becomes a counterpart of real resources. That makes the value of the debt constant in real prices, for the inflationary fall in the value of the loan is counterbalanced by the payment of the interest rate. That makes the monetary system stable. No credit is created for speculation: it is targeted at providing productive investment. And the signal to borrowers is: Don’t borrow unless you can create greater real wealth than the amount borrowed.

Third, investment credit created loans are partly guided into providing what the Chinese state wants. The 11,200 km of high speed railway network, the new Chinese aircraft carrier, the transfer of skills involved with the relocation of key industries to China’s new “Chinese Dream” inland cities, many on high ground (just in case rising sea levels destroy the magnificent new cities rebuilt on China’s coastal strip) and China’s space programme, are all examples of that.

Fourth, the creation of investment credit for all businesses is so large that there is very high liquidity in all enterprises. That very high credit-created liquidity is the true source of the high Chinese business confidence — there’s nothing like money in the bank to inspire confidence in taking business risks. And that high liquidity reduces the risk of over-trading immensely by financing large stock-holdings.

Fifth, consumer demand — the major source of inflation — can be effectively controlled through the forced saving of the payment of part of the annual increase in wages and salaries in delayed lump-sum November bonuses. These lump sums are much more likely to be saved, providing a greater security for workers, and these savings can assist more enterprise lending, and sometimes provide the funds for the purchase of larger consumer items.

There are two words which describe these policies: Shimomuran Economics. What a shame that Obama’s economic advisers don’t understand high-growth economics as well as FDR’s did. The great American personal inventiveness and the enormous business innovation that flows from it are both being stifled at local level by an obsolete financial system. It is such a pity that the 26.2 million US SMEs do not have access to the low-cost investment funding their Chinese counterparts have, for the American people would be much more prosperous if they did. It is a pity that monetarism has converted much of Detroit and many other industrial areas of the USA into a devastated wasteland. If the US motor industry had received the funds annually available as investment credits to the Chinese motor industry, motown would have continued to prosper, and much of America with it.

After all, Franklin Delano Roosevelt’s USA invented Shimomuran economics. Between 1938 and 1942 the USA doubled the real size of its economy. Such a pity American neoclassical economists and the pope of the Chicago boys (“Milton, thou shouldst be living at this hour”) have never appreciated that.

And understand this: when the USA borrows, say $1 trillion from China, the money is coming from Bank of China created credit, out of nothing, and the USA is agreeing to repay China future real resources when it need not have done so if it had understood Shimomuran economics. The same goes for the EU and the UK. The cost of economic stupidity is very high, not just in money terms, but in the loss of present prosperity to families, the loss in comfortable lives and the needless impoverishment of the lives of our children, who are constantly aware of their credit crunch predicament.

I intend that one day the Americans will once again understand the generous economics of greatness and will once again practice it for the benefit of all their people.

But I can’t do that alone. How could this sea-change in economic thinking best be brought to pass? And this fresh economics can produce economic miracles in virtually all of the less developed world, as it has so far in Japan, South Korea, Taiwan, and China.

Necessity may be the mother of invention but the father of prosperity is innovation. It is never enough that people understand, they must practice what they know.

Shimomuran economics enables a great escalation in economic understanding and practice, but the old ways have a terrible poverty-preserving inertia. I have recently attended a couple of “Rethinking Economics” seminars in London where the inertia from the platform and sometimes in the audience was almost palpable.

That too must change.

© George Tait Edwards 2014

Note: George Tait Edwards has published a book about “Shimomuran Economics” at http://www.lulu.com/shop/george-tait-edwards/shimomuran-economics/paperback/product-21688864.html and much else elsewhere during the last four decades.