The global economy is at a crossroads. We can try to muddle through with the existing defective
international financial system, while hoping that minor tinkering will quarantine the devastating
depressionary forces experienced by developing nations and avoid contagion spilling over to developed
nations. Or we can produce a new financial architecture that not only protects all nations from
experiencing the devastation of currency crises but also eliminates the persistent global depressionary
pressures of the current system and therefore makes possible the potential of global full employment.
All prudent nations (except the United States) desire a surplus of exports over imports to obtain a net
positive financial savings position on their internationally earned income. This surplus is added to the
nation's foreign reserves. Since the global economy is on a dollar standard, additions to a nation's foreign
reserves are held primarily in the form of US treasuries.
The effect of all nations attempting to accumulate foreign reserves is to create persistent high rates of
unemployment, and liquidity problems for the global economy - and this is true whether the global
economy is on either a fixed or a flexible exchange rate system. In essence, when any nation runs
persistent export surpluses to accumulate foreign reserves, it is playing a game of Old Maid and passing
the Black Queen of unemployment and indebtedness to its trading partners.
Any nation stuck with the Black Queen must use a combination of previously saved foreign reserves
and/or additional international loans to pay for their current excess of imports and service existing
international debts. As foreign reserves dwindle and international indebtedness increases, a deficit nation
finds it increasingly difficult, if not impossible, to service its outstanding international debt obligations.
To prevent default, the International Monetary Fund can make new loans to the indebted nation allowing it
to meet current obligations by increasing future debt service obligations.
These IMF loans require deficit nations to adopt "Washington Consensus" reforms where (1) all domestic
financial, labour and product markets must be freed of institutional rigidities (including a government social
safety net), and (2) the nation must tighten its belt, by running a primary fiscal surplus and high interest
Belt tightening depresses the nation's economy, forcing impoverished residents to reduce their purchases
of all goods and services including imports. Belt tightening also tends to depress the export industries of
its trading partners, creating unemployment abroad.
Any decline in the deficit nation's exchange rate encourages domestic residents and foreign investors to
move their funds to a safe haven in another country. Almost inevitably, the indebted nation cannot free
itself from the increasing weight of its hard currency international debts except by default. The result is a
moribund economy, for example, Argentina in 2002.
The main failure of the international financial system is its inability to foster continuous global expansion.
The main burden of adjustment to an export-import imbalance is always on the deficit nation.
Nevertheless because the major trading nations have accepted a dollar standard, the US can print dollars
with abandon and avoid this burden.
Since the 1980s the US has happily neglected its huge annual import surpluses, which creates as much
as $500bn (,,290bn) in demand for the export industries of its trading partners.
America's benign neglect of its annual import surplus has prevented the global economy collapsing into a
great depression. Can the rest of the world rely on the world's greatest debtor to continue to promote
demand for other nation's export industries?
If the global economy abandons the dollar and adopts a euro standard, global aggregate demand would
fall by more than $500bn. The US could no longer avoid reducing its import demand to a level of export
earnings as creditor nations no longer extend credit by adding additional US treasuries to their foreign
The cure lies in creating new international financial architecture, as President Clinton called for after the
1998 Russian debt default.
A big financial architectural change will require developing a system where the creditor nations accept a
large share of the responsibility for making adjustments by spending their excessive reserve holdings on
imports or direct foreign in vestment. This will allow the debtor nations to sell more abroad and thereby
work their way out of their debtor position.
In my recent book, Financial Markets, Money and the Real World, I have proposed the creation an
international clearing union that is designed (1) to prevent a lack of global effective demand due to nations
oversaving liquid foreign reserves (2) to induce the surplus nation to contribute to resolving the importexport
imbalance, since the surplus nation has the economic wherewithal and is in the better economic
position and  to encourage debtor nations to work their way out of debt rather than await handouts or
bailouts, or to default on their international obligations.
Some think that this clearing union plan, like Keynes's bancor plan a half century earlier, is utopian.
But if we start with the defeatist attitude that it is too difficult to change the awkward system in which we
are trapped, then no progress will be made.
The health of the world's economic system will simply not permit us to muddle through.
Paul Davidson is editor of the Journal of Post Keynesian Economics
(copyrighted - all rights reserved - firstname.lastname@example.org ) A Question of Limits — System Costs… A warning:You will understand none of this without abandoning conventional thinking, and adopting a theoretical stance of non-conventional thinking.
What are system costs? They are the costs it requires us to run capitalism beyond its natural state costs. What is capitalism’s natural state? That’s a rather difficult question and should be better phrased as; “What would be capitalism’s best natural operating state?” Now, that’s more answerable. Capitalism’s best natural operating state should be a state of pure equilibrium of global prices and resources according to contained value of each resource and product. O.K., but that poses a further problem when all nations have different amounts of individual resources and populations, how would we ever achieve pure equilibrium? I could see writing new dynamic laws to equilibrate prices, but not resources and populations. Wait a minute, we could also write dynamic sliding time scaled ratio-balancing laws to even balance out unequal resources and populations per GDP’s, as long as all currencies are also dynamically sliding time scale balanced to all internal and external prices and resources to GDP ratios. Such ideas must always respect the core necessities of incentives, supply and demand not be disturbed.
Now, let’s get back to the initial question — What are system costs? Since a perfect state of capitalism would be a pure and true equilibrium state of global prices and resources, system costs would be the costs incurred by and beyond any initial state balance into imbalances in prices and resources from its initial pure state model, and these costs would be proportional in a direct ratio to such imbalances, i.e., the further capitalism became imbalanced to its initial pure state balance of prices and resources, the higher the excess system costs would become, of running such a system. That’s a pretty straight-forward probability matrix, is it not? So, why all the problem of global political-economics, of the present imbalances and excessive costs, being laid back on the many by the few? Is it a problem of education? Is it improper education or possibly a learning disability? Are we all intellectually dyslexic? What gives here, when the problem seems so simple to solve? Have we not ever tried to solve the real problem of “excess system costs”?
It seems this is the problem. We have never even entertained the question about the problem of “excess capitalist system costs”. Why? I don’t know. Is it possible no-one has ever thought of posing the simple question? Quite possible, as it easily seems to answer it-self as soon as it’s posed.
How exactly are excess system costs/debts incurred, above normal market debts? Global computerized speculation has excessively imbalanced markets; therefore, global computerized arbitrage is now required to rebalance markets. Since excess computerized speculation (all speculative short and long positions combined) exceeds natural market arbitrage, written law computerized arbitrage must now be instituted to even begin to rebalance global markets. Natural market arbitrage falls far short of what is required to naturally rebalance markets. These inertial market changes have taken place so subtle over the last several decades, we simply haven’t noticed the massive growing imbalance’s true causes, as most do not understand computerized speculation and arbitrage dynamics for the imbalancing damage it’s truly doing, when these two necessary market states are out of balance as severe as this state of affairs has become. The laws of nations must change to better govern the speculation-arbitrage dynamics of modern computerized supply and demand.
How can excess system costs be resolved autonomously? 7 new systems of laws must be emplaced to solve our excess system costs problem autonomously:
1. Honest mandated specialty education.
2. External exchange clearing.
3. Internal exchange clearing.
4. A new triply entry “Bank of the U.S.” under Treasury control.
5. A P.X. leisure age employment stabilization system.
6. Computerized rebalance arbitraging against excess speculation.
7. New dynamic sliding time scaled laws instituting all systems.
Are both external and internal exchange clearing required? Yes. The entire system will be governed by a new dynamic incentive law system. External exchange clearing will be instituted to handle the excess derivatives and foreign exchange speculations, where all transactions will pass through either its computerized monitoring section or its live people (specially mandated educated) governed board of directors. All foreign transaction must be processed through this new clearing system, for global balance of payments, currencies and prices rebalancing processes. This will be instituted by such suggested new laws as per Paul Davidson, or Keynes’ older “bancor” and international bank clearing system, also much the same as Plato 1st suggested millennia ago. This system will be a best practices combination of all three. (see reference links below)(must also include all Keynes’ inter-governmental papers ideas about bancor, mainly in Skidelsky)
What are the major elements of internal exchange clearing? Internal exchange clearing is a dynamic incentive law structure, consisting of a 1/5 P.X. social contract paradigm change, a new triple entry banking system with an autonomous self-managing printing press — Only — when the entire system of laws and institutional changes are fully implemented. The system is an 80%/20% inverse wage social contract eco-legal and banking system — Completely Marketized — As a national Or global capitalist system. The P.X. is then capable of functioning as a crude-printed public works system — Instituted — Only — after complete social contract overhaul — Top to bottom. The 1% to 20% P.X. is a total dynamic pricing mechanism of all commodities, goods and services — Within This Sector Only — Designed to prevent inflation and reflate deflationary periods, if ever necessary, and with all official exchange markets left untouched. The manufacturing sector of this system will have total quality control laws to prevent junk inflation — Legally computer monitored, with strict legal enforcement of the total structure. The entire structure is designed to create a price-downward pricing mechanism, which dynamically prevents unwanted inflation, yet can also be used for fast emergency reflations.
Internal exchange clearing is a total solution. We claim “Internal Exchange Clearing” is the only feasible answer for the future — The final answer to most all of our financial problems. It is a system offering an all-encompassing solution to most national and international problems and conflicts. This is a monetary system proposal to rebuild America and the entire world — A scientifically quantifiably provable system, with math, graphs and counterfactual logics. We claim this to be an answer to everyone’s wishes — from environmentalists to financial tycoons — All are satisfied by “Internal Exchange Clearing”, as it has the rare ability to solve such massive problems, from the environment to science, technology and high-finance.
How does triple entry banking function? This will be an entirely new “Bank of The U.S.” legally instituted as a public enterprise bank, as per Hamilton’s first “Bank of The U.S”, fully separate from the existing FED, even though it can be run out of the same buildings, with new law mandates. Triple entry banking is simply negative reserve banking, governed by its own new set of laws and management. Triple entry banking is an entirely new expansion of the existing banking system, allowing the nation to move from national debt obligation, to national debt sovereignty. It’s a banking system balanced on world transactions ratios to national debt levels, with complete computerized oversight and semi-philanthropic management. It is a monetized debt system of triple entry banking — dynamically adjusting percentage wise, debt to GNP, amongst participating nations. Of the 100% to 80% free market to the 1% to 20% dynamically price-semi-managed market, only the 100% to 80% free market needs repayment. The 1% to 20% dynamically semi-managed semi-philanthropic market needs no repayment; but — Only — After full system implementation, and this point can-not be stressed enough — Only — After full system implementation. Every piece of the entire system must be in place — First.(see reference links below)
How does triple entry banking accomplish being a self-managed printing press? The 80%/20% market law structure’s J-curve actions automatically control all inflation, deflation, exchange rates and competition, etc., upon full implementation. The entire 1/5 P.X. market dynamics automatically self-autonomizes the entire system within reasonable financial bounds, through its dual-action supply and demand dynamics between the two percentage systems. These dynamically semi-managed prices automatically supply and demand balance exchanges, inflation, wages and debt ratios, etc. — The entire system through. The whole systems’ dynamics are fully quantifiable by the simple formula of E = 1/5 X, clear concepts and graph mechanics’ logic.
How does the P.X. leisure age labor stabilizer function? This involves placing the public sector P.X. labor market stabilizer in a dual-mode supply and demand competition with the existing free-enterprise sector of the economy — One semi-managed and one free as it presently is. The semi-managed P.X. is a 1% to 20% maximum sequester of all means of resources, goods, services and production, to be sequestered only as the evolution of the 100% to 80% free-enterprise side of the economy closes outdated and outmoded businesses, companies and corporations, through its natural economic attrition processes, unless emergency economic mechanics and conditions mandates a necessary acceleration of more full institution, even to the high emergency level of 20%, its maximum public support limit of dynamic mechanics — Which must be used if a full blown global depression befalls us all, before institution of this new capitalist system is legally emplaced and functioning. Digital technologies, computers, formal functioning databases and industrial robotics, continued labor market share, will clearly warrant this implementation, sometime in the near future. This new market system will require an extensive law system to fully institute. This will be the largest and most complex law system of all 7 offered, and much of the market moves by authorities will require full secrecy, not to alert speculators to such windfall opportunities. Varied implementation scenarios can easily be applied, secretly.
How are derivatives markets resolved? The derivatives problem will be resolved through a computerized oversight by the historically well-known yet never instituted external exchange clearing. Derivatives, being the most complex of all capitalism’s market transactions must be carefully and thoughtfully managed, not to disturb the necessary international financial transactions, already in play — This is of extreme importance and interest to the international bankers and major corporations involved, and the entire system is designed not to upset these special interests, but actually compliment their needs, as any form of capitalism can survive by no other method. Even though Warren Buffet called them “financial weapons of mass destruction” he forgot to offer any real world solution, which “Internal Exchange Clearing” does offer, and that is proper monitoring and assistance until global prices and currencies can be fully and truly rebalanced, which will completely reduce the dangers and damages this market has on the real world, even though it presently acts as a real global insurance risk policy for all major international banks and corporations, even if highly flawed. Direct law on derivatives is not the best practice method available to deal with them. Fixing the underlying structural laws and market prices, back to true ppp’s (real purchasing price parities) is the best method, thus automatically solving and dissolving the derivatives problems over enough time — Safely — for all involved, and even to us mere citizens’ joy.
How is debt resolved? Debt is easily resolved through the dynamics set in play by all external and internal exchange clearing, banking and P.X. being fully instituted and implemented. All public debts — Public Debts Only — over enough time, can be fully monetized with no inflationary damage to this powerful system of self-autonomous dynamics. Debt monetization is recommended to take place in exact ratio to implementation percentages, from the 1% to 20% maximum level, as deemed necessary according to real world conditions and needs — This would be to increase debt monetization the same corresponding percentage increases of entire system institution and implementation ratios — This is not set in stone, but only a best recommended scenario of real debt reduction. It may take you some extra time to wrap your conventional mind/brain around this idea, requiring new and expanded highly theoretical thinking, with fully unconventional and totally new theoretic thinking, as we pre-warned at the head of this paper.
How is inflation resolved? The inflation dynamics is a bit more complex to explain than the deflation mechanics below, but basically it’s when the overall dynamic mechanics of the entire system is fully implemented, and as already mentioned above, it becomes a very dynamic dual-purpose and action supply and demand system, with the new P.X. market able to work its downward pricing mechanics on the upward pricing mechanics of the totally free-enterprise side of the economy, thus halting inflation in its tracks, when deemed too costly to the system. This semi-managed dynamic pricing P.X. will be controlled by very strict enforcement of its law structure, to prevent what could easily become an extremely corrupt system, if not done so. This is the major reason this part of the system is so crucial to being properly legally controlled, having stiff penalties for moral and ethical violations of its managers and participants. As long as everyone stays honest, and we can see no reason why they really wouldn’t want to be honest in such an efficient and moral system, as violations should be punishable by ostracization from the awesome benefits of the system, and we feel most people are wise enough not to cut their own throats that bad.
How is deflation resolved? Due to the safeguards of the above 7 systems emplaced, the new triple entry banking system can safely actually crude print, if necessary, and the 20% P.X. labor system can hire all workers laid off in the 80% free enterprise side of the entire system. The entire system mechanics can even create, afford and tolerate a 10% to 15% growth rate per year, without incurring dangerous inflation. All is needed to do is to bump up the dynamics of the sliding time scaled mechanisms’ laws, to its highest efficiency levels, easily employing all who wish to have a real job, even if it’s a leisure-age job of doing one’s own hobby, for a decent wage. The system is capable of creating new jobs at any rates that may be required to revive proper and full employment, thus ending any deflation, unwanted, plus avoiding the looming problems of digital technologies, computers, formal databases and robots further de-employing capitalism.
Is autonomous action best, or is universal action best? Universal action is best, but either will work. We suspect unilateral autonomous action will be the route necessary to take, but once known, any nation can be the first to take unilateral action. I suspect China or Russia just may be the first, unless we act first. Even if they do act first, it’s still no problem for us to act second or later, as “Internal Exchange Clearing” is that capable a system of capitalist revival from the dead.
How is political action achieved? Local political action is best achieved by education — Education first of all for the economists needed to educate the political scientists, other economists and politicians, and finally mandatory academic logic, math and economic courses meriting their metal of thought, comparable to our present real world needs for this system’s integration and operations.
These ideas should be further clarified, simplified and fully understood by as large a group of knowledgeable economists as possible by distributing this work as widely as possible amongst them and others. We ask for the help of as many economists, historians, mathematicians, physicists, chemists, biologists and logicians as we may possibly attract, as we feel the fast approaching robotic de-employment of capitalism is a very close reality, with its far more than presently thought, rapid spread, making time of a primary essence. We feel it best to pre-implement before a real and dangerous financial collapse is fully upon us, even though this system has the power to raise the entire capitalist system, even from the dead extreme liquidity trap it most certainly will face, some time out into the future, with all the increase of debts, trouble-spots and de-employments by robots and other techs, we see upon the horizon. This is just a message to be persuaded to heed. It is not a dire warning, but it could easily become one.
How is international political cooperation achieved? In the existing climate of non-international cooperation, education is our best foot forward. Next would be to institute the system unilaterally, as it is capable of autonomously functioning completely unilaterally, independently. If any nation were to do so, other nations would most likely competition-wise need to follow suit, as the efficiencies would be irresistible, not to do so, as they’d be so economically punishing. Another method of achievement would be to simply realize a very similar system is already functioning globally at present, by way of China’s mercantilist practices of its manipulated low value currency and market system actually presently clearing all capitalist world exchanges of inflation, by its low export prices, due to its highly undervalued labor arbitrage forces upon the existing capitalist system. One only needs to look to see these facts. If China were to implement first, then the rest of the world would be forced by competition to copy. It’s really that simple.
Are there limits to credit/debt expansion? Yes. In general terms, the limit of credit/debt expansion would be; “Nations can only print until the costs of repayment of debts exceed the limits of the printing press gains”. In other words, nations can never exceed the pay-back abilities of total costs, where excess printing only destroys the economy with capital flight and hyper-inflation, as that’s the guaranteed limit of any nation exceeding its limit of repayment abilities. This number is always dynamic and must be figured according to the total data of the date figured. The IMF, World Bank, Bank of International Settlements, Clearing House of International Payments System, Federal Reserve, U.S. Treasury, Comptroller of Currency and The Congressional Office of Management and Budget can all be consulted for the numbers needed. The CIA World Fact Book is also highly useful, for quick global facts.
We kindly request help from as many professionals as may offer.
Q: What about after you’ve destroyed philosophy, though? What about once trolling has destroyed everything but trolling itself…. leaving nothing but a desolate wasteland haunted by the howling winds and the ghosts of extinct disciplines. Is that what you really want?
– J. Elson
A: Yes, but you forgot the lamentations of their women.
(Note: These days the wreaker of havoc obviously must also be willing to accept male lamentations, but analytic philosophy is notoriously dominated by married feminist dudes.)
With the collapse of the world economy and Western Civilization generally, my vendetta against academic economics is now less likely to be ascribed to eccentricity, mental illness, or a grudge, but for most, my vendetta against philosophy is still suspect.Why should something as “quixotic”, “mostly harmless”, and null as academic philosophy rouse any strong feelings whatsoever?
Because of the opportunity cost. Harmless-and-null philosophy is crowding out something better, and has been doing so since 1950 or so. Philosophy did not have to be what it is today; it was made what it is by purposeful, destructive action. The social institution of philosophy (the biz, the forms of production) has distorted philosophy itself. The job has destroyed the work. Philosophy could be a resource for the educated, thoughtful adult, but it isn’t.
Brian Leiter is indeed a crap philosopher of no real intellectual interest, but my struggle is not with him personally. His institutional importance dwarfs his person and his work. He is the Second Assistant Secretary Philosophy Commissar, and despite his lowly philosophical status, he’s in command because he controls the Philosophy Gourmet Report. This system of rankings provides the default standard according to which the philosophical nomenklatura decide hiring, firing, and promotion. By reading this report, philosophers and would-be philosophers at every level down to high school can find out who’s who and what’s what, what’s hot and what’s not. The Leiter Report displays and produces the interlocking, mutually reinforcing hierarchies by which students choose schools, schools choose students, and schools hire and promote.
NOTE: Since my crusade began I’ve repeatedly had to deal with two standard retorts: first, that I don’t enough about contemporary analytic philosophy to criticize it, and second, that the stuff I’m looking for is really out there, but that I just haven’t found it. My recent good-faith efforts to understand analytic philosophy better have been entirely in response to these two criticisms. I’ve never promised to change my ideas about what philosophy can and should be; I’ve just committed myself to verifying that the stuff I’m looking for really isn’t there.
So what’s wrong with contemporary academic philosophy, and what do I think that it should be instead?
1. Philosophers today (like most other scholars) systematically narrow the scope of their questioning in order to get more precise and more certain results. This is analyticity, or a version of it anyway. The process of narrowing iterates repeatedly, until finally you’re discussing sub-sub-sub-questions of original questions which have been long forgotten. Beyond that, often enough the analytic method is further ornamented with fanciful counterfactual hypotheticals which themselves can become independent objects of study. The outcome of all this is a perfect Potemkin village of conditionally rigorous conclusions which are irrelevant to anything actual or actually imaginable.
To systematically broaden the scope of questioning in order to bring in additional factors and produce more realistic descriptions of reality, while keeping as much rigor as possible (but not the maximum rigor) would be an equally valid philosophical strategy — the contextual, constructive or exploratory strategy — but professional philosophers at every level (above all during the Pavlovian early years) are strongly discouraged from doing this.
2. This general philosophy would be readable and usable for thoughtful, educated adults whose training is in non-philosophical fields; in various ways it would help them understand the world better. Philosophy would regain its adjacency to history, literature, maxims, wisdom literature, aphorisms, reflections, meditations, pamphleteering, social criticism, utopias, etc. and would quit pretending to be a expert specialized science (which Aaron Preston has shown it has never been). This philosophy would not privilege proof and science over persuasion, and could be constitutive of persons and peoples.
Historically, some philosophers have been read for pleasure and others not. (It is not a question merely of difficulty). In general, philosophy today models itself on the less readable philosophers: Aristotle, the scholastics, Kant and the Kantians, and the more barbarous writings of the early moderns. Many authors once read as philosophers are now classified by philosophers as mere literature, and others (e.g. William James) are read purely historically with respect to specific contributions relevant to the institutional philosophy of today. (According to Wiki, the philosophy pros blame Russell for giving too much attention to early philosophy in his History of Western Philosophy; I find this highly amusing).
3. The usability of philosophy to which I refer is usability in practice. People go through their lives living mostly routinely, but very frequently they can find themselves facing an unknown, unpredictable future which is to some degree capable of being formed by human initiatives; such cases range from the trivial and purely personal on up to the historically decisive and weighty. At these times they can only rely on the “philosophy” (in the popular sense) which they’ve developed in the course of their lives on the basis of their experience and knowledge. In my opinion, being a resource of for someone forming a personal philosophy is one of philosophy’s primary tasks, but contemporary philosophy minimizes this aspect when it doesn’t aggressively reject it.
4. I do not know how original this next thought is, but in my opinion the situation just described in #3 is the source of ethics and normativity. When facing an open future the questions “What should I do?”, “What should we do?”, “Who am I?”, “Who are we?”, in one form or another, are unavoidable. The practical is the ethical, the ethical is the practical, and both are inextricable from and constitutive of personal being, belonging, and social being. This orientation toward an unknown and open future should be the anchor and reference point for all thinking on normativity, but for most contemporary philosophy it is not. By and large Anglo-American philosophy during the last half-century or more has avoided these questions, or has apodictically declared them to be undiscussable and nonsensical, or has muddied them up with fake precision to the extent that they are difficult or impossible to do anything with.
5. The situation in #3, facing an open, contingent future partly formable by human actions and human choices, renders some traditional goals of philosophy and science obsolete or even potentially harmful. If the turning points are real turning points, and if there really are two or more importantly different possible outcomes at many different points in time, of which only one can be realized, and if the actual outcome is contingent and systematically unpredictable, and if there are diverging paths from every moment of decision through new moments of decision onward into the future, then there are important kinds of Truth which are in practice impossible to attain or even state (i.e., possible only in the sense that a million monkeys might eventually type the works of Shakespeare). Tomorrow becomes a single particular partnered with one or more other ghost particulars which never came into being and never will, and the understanding of tomorrow’s outcome reality becomes simply a recognition that it’s there, rather than its explanation in terms of Truth. (Davidson talked about events as particulars two decades or so ago, but no one seems to have gone anywhere with it.)
6. The kind of question described in #5 is much discussed in many disciplines, but I think that there’s often an attempt to minimize or deny its impact, for example by convergence theories, fluctuation theories, or many-world theories, which all allow you to preserve Truth while making change, indeterminacy, real multiple possibility, and human choice insignificant. Be that as it may, questions of the type “What should I do?”, “What should we do?”, “Who am I?”, “Who are we?” are not truth-functional, and do presuppose an open future of real uncertainty. And since the future is by definition as yet undecided, even simple practical statements like “I’m going to build a shed in the back yard” cannot be true, since they are about an act that hasn’t happened and might not, and a thing that doesn’t exist and might never. Projects and proposals can’t be truths, but life consists above all of projects and proposals, and if philosophy is to be usable in the way that I’ve proposed that it should be, the insistence on Truth is a fatal impediment. Personal identities, group identities, and individual affiliations with groups are all projects and proposals, and group-formation is a multi-dimensional, multi-player process of persuasion involving much more than Truth. (Whether this has anything to do with Wittgenstein’s assertion that there cannot be a propositional ethics I don’t know; I think that it does.)
7. Philosophy should be a philosophy of wholes. Holism is distinguishable from generalism, though similar to it, but it’s above all contrastive to universalism. By and large universalism consists of rigorous truths which are everywhere and always true, and truths of this kind (for example in mathematics and logic) are found by narrowing the topic and making the definitions more abstract until finally rigorous Truth is achieved. Generalism uses the opposite method: it expands and contexts the topic, and makes the language more concrete until a realistic (but less certain) description of a broader reality is achieved.
8. The whole is more than just the general, however; in fact, a whole can be a part. A philosophical whole is an attempted description of everything about a topic — in the most general sense, everything about everything, but most often just everything about some specific question, particular or situation.
Holistic statements are always false. You always leave something out or get something wrong, and in any case, the world’s always changing, so that even if an ambitious holistic statement happened to be true today, it wouldn’t be tomorrow. Any holistic statement — above all any generalist holistic statement — immediately elicits opposition, and this is of necessity. Some will find the proffered holism suggestive, or usable with adaptations; others will find it thoroughly objectionable — and the debate will continue. Nobody should ever take holistic statements at face value.
9. So why do we want wholes at all? For practical reasons; we have no choice. We live our lives in accordance with our own holistic schemes. When we make decisions, we make on them on the basis of the whole we have constructed to model our own world, and a new holism presented by someone else might help us to improve the one we already have. No matter what, holism is a a gamble; it accepts responsibility for everything about a topic, including aspects not yet understood, and does the best it can. If we fail or screw up, we cannot (or should not) say things like “How was I to know that? Nobody told me about that” unless the unknown factor was something which was in actual fact unknowable. Holism deals with realities as they present themselves.
10. “Personal philosophy” is holistic, and public philosophy is also holistic, and holistic philosophies developed within the university could conceivably be resources for either of them. But they seldom are. One present-day impediment is the liberal dogma that individuals are all strangers to one another, so that personal philosophies are subjective and purely private, which makes it an intrusion on privacy and a violation of freedom for anyone to try to influence someone else at any very deep level. (People today are exceedingly scrupulous about “not telling others how to live their lives”.) A second major impediment is the scientistic dogma that every statement that’s not a statement of fact is meaningless hand-waving nonsense, and you still do find many traces of this in academic philosophy and social science. But the most destructive impediment at all to the development of a usable philosophy in the universities is the enforced principle that only truth is important, and that all truths are specialist truths.
11. Holistic thinking is managerial thinking. Specialist thinking is subaltern thinking — specialists are docile bodies and attendant lords. (See Jeff Schmidt, Disciplined Minds.) Even in philosophy, which I think should be the broadest and most independent field of study, the university trains philosophers to do their jobs according to apodictic rules (paradigms) which are not to be questioned or even to be discussed much, but are only to be obeyed. The university does not teach freedom or free citizenship, and for good reason: free minds make managements’ job more difficult, and nowadays everything is managed. The university is managed by university managers, politics is managed by PhD politicos, and government is nothing but management by experts. This is the golden age of management, and for the nomenklatura it’s really terribly unfortunate that Western Civilization is collapsing right at the point when they were ready to achieve total world domination.
12. What do the managers — the real men — study? Well, they’re all practical, high-testosterone men, some of them (e.g. Karl Rove) with very little formal education indeed. Managers are as smart and hard-working as academics, and they resent academic arrogance and take pleasure in making academics look bad (not that it’s hard). Their educations seem mostly to be in engineering, economics, finance, law, and mushy quasi-fields like international relations, public relations, and management. Graduates of Bible colleges are probably as common as humanities graduates.
And without much help from philosophy or any of the liberal arts, they’ve all patched together their own holistic personal philosophies, and based on what we know, these personal philosophies are horrible indeed. And they rule the world, and we obey them.
13. So the world fares on, its docile, jellified citizens obediently performing their assigned tasks and intermittently emitting subjective, purely-private grumbles about the management they always obey. High above them, the real decisions are being made by real men, and down at street level unemployed humanities majors scuffle for scraps and remember the far-off days when anyone gave a shit what they did.
What would you do with actually-existing philosophy if you were to replace Leiter as Philosophy Commissar and were empowered to take drastic measures?
Philosophy of Mind, Philosophy of Language, and Logic would be reassigned to psychology, linguistics, mathematics, AI, and Computer Science, as appropriate. A few liaison functionaries would be left behind. Philosophy of Science and Political Philosophy would be sent to reeducation camps, and those few capable of reeducation would be retained. Ethicists working in hospitals, etc. would be left there. The other Ethicists together with the Metaphysicians and Epistemologists would be sent to Happy Puppy Farm, where incontinent old dogs are sent when the family gets tired of cleaning up after them, and there they would live out their days frisking and sporting in the happy meadows.
What kind of philosopher are you?
I have very limited involvement in “Continental” philosophy (Foucault, Nietzsche, some Marxism). This can get a bit sticky, because Continental Philosophy is the Hamilton Burger / Washington Generals / Workers and Peasants Party fall guy in today’s cartelized philosophical world, and non-analytic philosophers are usually assumed to be Continentals.
My own interests are pragmatism, “practical philosophy”, left social criticism, Chinese Philosophy, and process philosophy (and the theory of historicity). All of these tendencies are marginal in today’s philosophy biz, and process philosophy approaches extinction.
In reality I’m not a philosopher at all, of course, but a pamphleteer, polemicist, satirist, and guttersnipe. That ship has sailed.
Do you claim that every present-day Anglo-American philosopher fails on every point of your denunciation?
Too goddamn many of them fail on too goddamn counts. Many fail in every single one. Charles Taylor passes my tests, with a B- on readability. Toulmin is out of philosophy now. Rorty is dead. Putnam is moving in the right direction, but he’s a hundred years old and still seems too meta.
Is there anything that you’d like to say to your critics?
When making your criticism, please cpecify whether you think that what I’m saying a.) not right, b.) partly right but exaggerated, c.) in many respects right, but that’s not a bad thing at all, d.) right, but please shut up because there’s nothing we can do about it and it’s too depressing, or e.) not proven.
If e.), shut up and get out of here, because of course it’s not proven.
Understandably, the major focus now is on the denouement of the crisis.
Pessimists are concerned about a catastrophic crash. Optimists are more sanguine, expecting a soft landing with gradual reforms correcting the systemic issues.
The crash scenario is predicated on continuing increases in debt levels and over-investment. Policy adjustments are fatally delayed. Ultimately, authorities are forced to tighten credit aggressively triggering failures in the financial system and a sharp slowdown in growth.
Weaknesses in financial structure exacerbate the money market tightening causing liquidity driven problems for both vulnerable smaller banks and the shadow banking entities. The rapid decline in credit availability results in problems for leveraged borrowers, such as those in local governments and property sectors. The larger banks which are likely to benefit from the flight to quality are unable or unwilling to expand credit to cover the shrinkage from smaller banks and the shadowing banking sector, due to risk aversion or regulatory pressures.
The deceleration in credit growth and liquidity results in lower levels of economic activity. Combined with cost pressures and weak external conditions, Chinese businesses, who are major suppliers of cash to the economy, experience a decline in cash flows which compounds the liquidity problems.
Foreign capital inflows, which have enabled the People’s Bank of China (“PBOC”), the central bank, to provide liquidity to the financial system slow and then reverse. At the same time, capital outflows, especially from corporations and also the politically well-connected and wealthy, increase, driving further contraction in credit.
The confluence of a liquidity crisis, financial system problems, slowing growth and capital outflows would feed accelerating negative feedback loops which would be difficult to deal with.
The optimists counter that the debt levels while high are manageable because of high growth rates, the domestic nature of the debt, high savings rates and the substantially closed economy. They argue that the banking system has low leverage, a large domestic funding base and low levels of non-performing loans. They also rely on the high level of foreign exchange reserves and modest levels, at least by developed country standards, of central government debt.
The optimists believe that reform programs, albeit slow in implementation, will ensure a smooth transition. China will rebalance its economy from investment to consumption. Deregulation and structural changes will improve the resilience of the financial system.
The strength of the banking system is probably overstated, primarily because of the understatement of bad loans and the relationship with shadow banks. Real levels of non-performing loan may be as high as 5-10% of assets, about 5 to 10 times the reported levels. The risk of a significant portion of assets held in the shadow banking system may ultimately come back into the banking system.
China’s foreign exchange reserves (invested in high quality securities denominated in US$, Euro and Yen) may prove difficult to realize without triggering losses or currency issues. More fundamentally, the reserves are not true savings, being matched by Renminbi created by the PBOC and paid to domestic entities in exchange for foreign currencies.
In effect, the flexibility of Chinese authorities to deal with any problems may be more constrained than assumed. But the risk of a major collapse while always present is, at this stage, low. A familiar endgame, entailing bank failures, depositor runs, massive outflows of foreign investors or a sovereign default, is unlikely. The Central Government is seeking to steer a middle path, which is both difficult and has significant risks.
Middle Kingdom, Middle Path…
The strategy will entail continued credit expansion, providing liquidity, managing non-performing assets and using transfers from households to the financial and corporate sector.
The central bank will continue to provide abundant liquidity to the financial system through a variety of mechanisms.
Lenders have been instructed to roll-over loans to local governments which cannot be repaid out of cash flow. Maturities are being extended for up to 4 years, to alleviate refinancing pressures on the around US$1.5-2 trillion of debts that mature over the next three years. Chinese authorities subscribe to the theory that “a rolling loan gathers no loss”.
A variety of alternative funding structures are now being used to circumvent regulations. Authorities have altered regulations to allow local governments to issue public bonds, for the first time in 20 years.
Synthetic loans are common. Private equity funds subscribe equity which the sponsor contracts to repurchase at a future date at an agreed price. Insurance and security companies are partnering with banks to invest in real estate projects, which are then re-sold to banks at an agreed future date at an agreed price which guarantees the investor a fixed return. Securitisation of future cash flows is used to raise debt.
With banks unable to increase their exposure to local governments, LGFVs have established subsidiaries, designated as small and medium enterprises with preferential access to finance, to raise funds which are then on lent to the parent. Property companies use related industrial companies, to apply for loans which are on-lent to the real-estate venture.
Provinces and local governments have established development funds, which are permitted to borrow from banks and then on lend to the relevant sponsor, ostensibly to support industry. For example, the fund can finance construction of a new factory which will inevitably include the cost of clearing the land where the old factory stood and building the infrastructure needed for a property project.
Defaults in the shadow banking will also be managed. The failure of a bond issuer (Chaori 11) has been incorrectly interpreted as a shift in policy where the authorities will allow default. The reality is more complex. Where considered appropriate, banks and state entities will intervene to minimize investor losses, by taking over the loans or re-integrating assets into regulated banks.
In a recent case, investors in the US$500 millionCredit Equals Gold No.1, managed by China Credit Trust (“CCT”), one of the country’s biggest Trust Companies, faced losses. The Trust principal asset was a loan to an unlisted mining company Zhenfu Energy which could not meet repayments.
Investments in the vehicle had been distributed by ICBC, China’s largest bank, to around 700 wealthy individuals expecting a return of around 10% per annum.
With default threatening, ICBC made it clear that it had not guaranteed or assumed liability for returns or investment. After a period of uncertainty, an unnamed third party agreed to purchase an equity stake in the underlying venture, which then was granted a valuable mining license. With the borrower’s ability to repay restored, investors inCredit Equals Gold No.1 suffered only modest losses.
The case is not isolated. A number of Trust Company and WMP investments have missed payments, with many having been rescued, sometimes under mysterious circumstances.
Authorities have chosen to intervene to avoid a loss of confidence in these vehicles, resulting withdrawal on investments, forced selling of assets and crippling the sector which has become an important source of credit within China. One analyst told a reporter: “Moral hazard in China is state policy”.
As in previous Chinese episodes of bad lending, non-performing loans (“NPLs”) will be sold to asset management companies (“AMCs”) to avoid a banking crisis.
In the late 1980s and early 1990s, Chinese state owned banks had large NPLs from policy driven loans to loss making state owned enterprises that were unable to repay. In the late 1990s, the banks incurred NPLs exceeding 30% of assets, primarily from the collapse of a property and equity boom. The problem was resolved by a combination of recapitalization by the government, restructuring of loans, debt write-offs and transferring bad loans to AMCs. The actions were taken to allow the Chinese banks to list on the Hong Kong Stock Exchange, in order to raise new capital.
As part of this process, in 1999, the Central Government established four big asset management companies (one for each of the major policy banks) to purchase US$170 billion of bad loans generally at face value. The AMCs issued government guaranteed 10 year bonds back to the bank to finance the purchase.
With recoveries insufficient to repay the bonds when they matured in 2009, the AMCs replaced the original funding with new 10 year bonds. Since 2012, the AMCs have repaid around 45% of these bonds. The source of funding is not clear but appears to be from the government. It appears that this was done to provide liquidity to the banks forced to hold the original AMC bonds. It was also designed to allow the AMCs to raise new capital. At least, one AMC has undertaken a successful IPO in Hong Kong, with other such equity raisings likely.
These actions may be part of a strategy to allow the government to use the AMCs to deal with the expected rise in NPLs from the current round of credit expansion. There is currently some evidence for this with the AMCs purchasing certain assets from banks.
In effect, instead of resolving the debt problems, the Chinese government will oversee a process of supporting over indebted borrowers and the banking system. As in a shell game, bad debts will be shuffled from entity to entity, delaying the recognition of losses.
The actions will reduce the immediate financial pressure, but merely defer the debt problem. The primary objective of the strategy is to maintain high growth for as long as possible and also preserve social order. It reflects the fact that a financial and economic crisis in China is synonymous with a loss of confidence in the state itself and the Chinese Communist Party.
The Price To Pay…
The ultimate price of this strategy will be to lock the Chinese economy into a lower growth path with the risk of de-stabilising crash.
Over time, increasing amounts of capital and resources will become locked into unproductive investments which do not generate sufficient returns to service the debt incurred to finance it.
The need for economic growth will continue to drive debt fuelled investments with inadequate returns.
When the debt incurred cannot be serviced or paid back, more capital will be tied up in warehousing the losses to avoid a banking crisis.
If returns on investment are insufficient, then there must be a transfer from one part of the economy to another to cover the shortfall. This cost will be borne by households, with slower improvement in living standards and erosion of the value of their savings.
Authorities will have to keep saving rates high to provide the capital needed to pursue this strategy.
They will ensure that the bulk of funds remain in the form of low yielding deposits with policy banks, which can be directed by the Central Government as required. Interest rates will remain low below inflation. Banks will need to maintain a large spread between borrowing and lending rates to ensure sufficient profitability to absorb the cost of non-performing loans. Borrowing rates and the cost of capital will also need to be kept low to support the investment strategy and also reduce pressure on unprofitable or insolvent businesses.
The loss of purchasing of household savings will provide the economic basis for the transfer of resources, amounting to as much as 5% of GDP, to banks and to borrowers, primarily SOEs and exporters.
The necessity of high saving rates will impede the rebalancing from investment to consumption. It will also impede the development and deepening of the financial system. China will also have fewer resources available to improve health, education, aged care and the environment.
In the short run, continued mal-investment and deferring bad debt write-offs will provide the illusion of robust economic activity. Over time, households will discover that the purchasing power of their savings has fallen. Wealth levels will be reduced by the decline in the prices of overvalued assets. Businesses and borrowers will find that their earnings and the value of their overpriced collateral are below the levels required to meet outstanding liabilities.
The alternative is equally problematic. If the government moved to liquidate uneconomic businesses and unrecoverable debt, then it would need to finance the recapitalization of businesses and banks.
This cost would require a sharp increase in taxation, which would also result in a slowdown in economic activity.
In reality, China’s Potemkin economy of zombie businesses and banks will create progressively less real economic activity.
There is increasing concern that China risks turning Japanese. There are points of correspondence and divergence between the positions of Japan in the early 1990s and China today.
In both cases, Investment levels were high, in similar areas such as property and infrastructure. Chinese fixed investment at around half of gross domestic product is higher than Japan’s peak by around 10 per cent and well above that for most developed countries of 20 per cent.
Like Japan before it, China’s banking system is vulnerable. Rather than budget deficits, China has directed bank lending to targeted projects to maintain high levels of growth.
The reliance on overvalued assets as collateral and infrastructure projects with insufficient cash flows to service the debt means that many loans will not be repaid. These bad loans may trigger a banking crisis or absorb a big portion of China’s large pool of savings and income, reducing the economy’s growth potential.
One difference is that whereas Japanese bad debts affected private banks and businesses. In contrast, the state effectively underwrites Chinese banks and many debtors. In addition, China is less developed economy and has greater growth potential.
But at the onset of its crisis, Japan was much richer than China, providing an advantage in dealing with the slowdown. Japan also possessed a good education system, strong innovation, technology and a stoic work ethic which helped adjustment. Japan’s manufacturing skills and intellectual property in electronics and heavy industry made it less reliant on cheap labour, allowed the nation to defer but not entirely avoid the problems.
In contrast, China relies on cheap labour, to assemble or manufacture products for export using imported materials. Labour shortages and rising wages are reducing competitiveness. China’s attempts at innovation and hi-tech manufacture are still nascent.
China’s credit-driven investment model may have reached its limits. Continuing existing policies increase domestic imbalances, misallocation of capital, unproductive investments and loan losses at government-owned banks.
Chinese achievements over the last 30 years are considerable. But until 1990, Japan too was successful, growing strongly with only brief interruptions. After the bubble economy burst, Japan has had almost two decades of uninterrupted stagnation. Today, with or without change, China faces a prolonged and difficult period of adjustment. French author Marcel Proust was correct when he stated that:“The real voyage of discovery consists not in seeking new landscapes, but in having new eyes.”
Satyajit Das is a former banker and author ofExtreme Money andTraders Guns & Money
- See more at: http://www.economonitor.com/blog/2014/04/chinas-debt-endgames/?utm_source=contactology&utm_medium=email&utm_campaign=EconoMonitor%20Highlights%3A%20The%20Big%20Picture#sthash.7cDlfYzF.dpuf