Fallacies Cannot Change the Facts

Burdened by the Wall Street financial storm, the global economy has fallen into a pit and up until now, has not been able to get out. At this moment, Treasury Secretary Henry Paulson, who will soon step down, has issued a shocking statement claiming that the high savings rate of China and other newly emerging markets knocked the global economy off-balance and is the reason for the financial crisis. The Chairman of the Federal Reserve Ben Bernanke directly blamed the large savings of foreign countries, especially China, for the American real estate bubble.

This type of “brilliant remark” gave the world a shock, provoking endless comments from many media sources.

However, fallacies cannot change the facts. As everyone knows, what triggered this crisis is American subprime lending, and the factor that directly triggered America’s excessive credit spending is the country’s own long-term low interest policies.

Ever since America was lifted out of the 1990’s economic recession, the ultimate goal of its currency policy has been ample employment, stable prices and preservation of long-term low interest rates. It is obvious that a low interest rate has been the policy that America started pursuing many years ago, and at that time, whether it was China or another newly emerging market, there was no large trade surplus, let alone large savings. Therefore, Paulson’s statement about emerging markets causing low interest rates actually confuses cause and effect.

In 1971, President Nixon unilaterally announced that he was taking the U.S. dollar off the gold standard, and the dollar continued to become the international currency standard, used by other countries as a reserve asset. Until today, there is no other country whose economic power matches that of the U.S., and the dollar’s powerful position has had no fundamental change. Under the current conditions, China and other developing countries still do not have enough strength to lead the world economy and could not have created the current crisis.

Confucius once said, “When meeting those who are not virtuous, we should turn inward and examine ourselves.” Even among America’s academic circles, some view America itself as the reason for its own continuous drop in savings rate and long-term worsening of its current account. For various reasons, what people widely criticize is the entire society’s habit of excessive consumption, misuse of financial derivatives, and lack of market supervision.

After the crisis broke out, the stock market, one of the barometers of the global economy, began to wreak its “bear” havoc. The 65.4% drop in China’s Shanghai Composite Index in 2008 ranked seventh when compared to a list of drops in other global stock markets. In first place was Iceland’s OMX in Reykjavik, whose index reached a 94.4% drop.

Looking at the top 20 spots on the list, we do not see America’s three major stock market indicators. Statistics show that although New York’s three major stock market indicators fell to their levels from 10 years ago, their drops are small compared to those in other stock markets. Analysts find that when problems arise with the capital chain in the country, American investment institutions will de-leverage and sell large quantities of overseas assets, causing emerging markets to suffer serious withdrawals of foreign capital. This is why the crisis happened in America and caused the global economy to suffer.

If we compare the American economy to a car, then emerging markets have become this car’s windshield in this prolonged crisis. We can infer that if the risk in capital markets were greater, then the damage done to China, this piece of glass, would be more serious. Now that this car has broken down, can we really blame the windshield?

We should admit that the reasons for this crisis include imbalances in global trade and investment, but the relationship between cause and effect should be made clear. It is the indulgent supervision and excessive investment of the U.S. dollar that caused the global problem of excessive liquidity to become more serious and that caused inflationary pressures to continually increase. In the end, it has become hard to carry on the low-interest policies of the U.S. dollar.

When an honest man gets caught in a predicament, he will certainly start by examining himself. However, if he believes he is always right, he will blame everyone and everything except himself and push responsibility onto them. When we look back, we see American realtors, investment banks, and insurance companies who acted like multi-level marketers playing with a variety of financial derivatives; we see Wall Street’s elite blowing a bigger bubble, gaining annual salaries of tens of millions of dollars, even over a hundred million. Where were Paulson and Bernanke? And where were the people in charge, who were talking about the world’s most advanced, most perfect American financial system?