A Tale of Two Paradigms: Why the West Must Join China's Belt and Road Initiative

October 20—The Nineteenth Congress of the Chinese Communist Party opened on October 18 with a powerfully optimistic speech by President Xi Jinping, in which he presented a bold strategy for the continued advance of China's economy, as a contribution toward realizing "the common destiny for mankind and enduring peace and stability."  Xi outlined how China would build on its extraordinary progress in reducing poverty, saying that by 2020, poverty will be completely eliminated, and by 2035, the nation will be fully modernized.  While the driver for this is the extension of the "New Silk Road" into a global landbridge, centered on the Belt and Road initiative (BRI), Xi spoke of the thinking behind it, which includes promoting the "spirit of science" and classical culture, to make China an "innovation society."

The Schiller Institute's Helga Zepp LaRouche, an early advocate and promoter of the New Silk Road, who has been featured regularly in the Chinese press to provide her analysis of this process, described the effects of China's policy as a "key, unstoppable dynamic globally."  To bring this "Spirit of the Silk Road" to a western audience, Zepp LaRouche has initiated a weekly webcast (on newparadigm.schillerinstitute.com), to counter the lying characterizations in the transatlantic media of China's policy, and Xi's leadership. Only rarely can one find an honest report on China's dramatic accomplishments, and its goals for the future.  

"Most people are still unaware that we are at a crossroads of human history," she said in her first webcast, on October 5.  If there were honest reporting on what China is doing, she continued, people would become excited, and would wish to be a part of this dynamic, which she calls a "New Paradigm for mankind."  She spoke of the opportunity for this to advance, when President Trump goes to Asia for a series of events, beginning on November 5.  He will meet with President Xi on November 8

 

A BUBBLE IS NOT ECONOMIC GROWTH 

One of the oft-repeated falsehoods about China's economy in the western media is that credit expansion by Chinese financial institutions to fund the BRI projects has produced a bubble, which will ultimately pop.  Their argument is based on classic neo-liberal dogma, which describes government spending as inherently wasteful, including that channeled into infrastructure.  This belief has played a major role in the failure of western nations to invest in modernizing basic infrastructure, and is behind the incompetent insistence by neo-liberals that investment in infrastructure should be funded only by Public-Private Partnerships, or PPPs, and the choice of projects should be determined by their immediate profitability.  As the federal government debt has grown in the United States to above $20 trillion—with the largest growth occurring under Presidents George W. Bush and Barack Obama—the adherents of this view argue that government credit for infrastructure is not possible, due to the large deficits already on the books.  Instead of new investments, they push austerity, which in reality decreases productive economic activity and, therefore, wealth creation. 

Ironically, those who argue that China's spending on the BRI has created a gigantic, unsupportable bubble, and that western governments should not emulate China in generating large volumes of credit for infrastructure, seem to have missed the fact that the biggest bubble in the world is not a Chinese bubble, but that which was created by the bailouts of banks and financial institutions in the transatlantic world after the Crash of 2008.  The Quantitative Easing policy of central banks, which provided virtually zero-interest credit to those institutions, allowed them to continuing carrying worthless debt on their books—which they continue to buy and sell—while pouring money into overvalued stock markets.  Thus, while spouting their "fiscal conservative, anti-government" rhetoric against government spending, they make exceptions when it comes to bailing out bankrupt financial institutions, so they may continue to run speculative swindles!

As a result, the "Too Big to Fail" banks today are larger than at the time of the 2008 Crash, with the biggest U.S. banks 40% larger in assets.  As there are now fewer banks overall, there has been a concentration of banking assets held by a smaller number of institutions.  Further, there has been an expansion of derivative positions, since efforts to rein in derivative trading failed, as the Dodd Frank banking "reform" bill did nothing to limit it, and its sections on derivative trading were written by derivative traders!  And with the volumes of cheap money flowing from the central banks to the TBTF banks, trading of financial instruments of dubious value has expanded, as traders are taking on more risk, in search of ever-bigger profits.  

Those economists, journalists and politicians critical of China have, for the most part, until now, praised this bubble economy in the west as "Obama's recovery," and lead the cheers, as stocks hit new record highs daily.  But, as stock market valuations have soared "on a sea of liquidity," as Mohamed El-Erian put it, a real danger exists that, when the liquidity is removed, through "tightening", i.e., increasing interest rates, it will likely lead to a crash.

 

CRASH WARNINGS GROW 

El-Erian, the chief economic adviser at Allianz, and former CEO of PIMCO, the world's largest bond trading firm, is one of many institutional voices warning in recent weeks of the danger of a crash larger than 2008.  The International Monetary Fund (IMF) and the Bank for International Settlements (BIS) both sounded alarms over plans by central banks to raise interest rates, and to divest themselves of the junk assets they took on their books as collateral for QE.  In its fall meeting in Washington, the IMF warned of "downside" risks, if central banks adopted a "faster-than-anticipated tightening," while the BIS in its annual survey identified what its economists called the "risky trinity": low productivity growth; unusually high debt levels; and limited room for political maneuver, given the growth of "populist" movements hostile to both the political and financial establishment.

From London, a report by the Adam Smith Institute, "No Stress III: The Flaws in the Bank of England Stress Tests," said the stress tests conducted to determine the stability of its banks "lack credibility", and concluded that the "U.K. banking system is an accident waiting to happen."  City of London insider, Ambrose Evans-Pritchard of the Daily Telegraph, wrote of the present economic conditions in the west, that he has "never seen a more dangerous confluence of circumstances, or more remarkable complacency."

Among the more bizarre cases of someone issuing a stark warning is former German Finance Minister Wolfgang Schauble, who told the Financial Times that he is concerned "about the increased risks arising from the accumulation of more and more liquidity and the growth of public and private debt."  Schauble, who played a large role in promoting that flow of liquidity coming from the European Central Bank, to bail out the European Union's TBTF banks, somehow managed to keep a straight face when he added that the growth of new financial bubbles threatens a new financial crisis!

And on October 16, President Trump's chief economic adviser, former Goldman Sachs President Gary Cohn, told the American Bankers Association that he is concerned that the clearinghouses that were set up under Dodd Frank, allegedly to make derivative trading more "transparent", represent "a new systemic problem."  The clearinghouses are supposed to guarantee payment if a derivative trading partner fails.  But what happens, he asked, if a clearinghouse fails?  He said that an estimated $278 trillion in interest rate derivatives goes through clearinghouses.  "These are just staggering numbers," he exclaimed, adding "We don't have a resolution plan for them."

 

CHINESE CREDIT VERSUS WESTERN FUNNY MONEY 

Contrast the reality of the bankruptcy of the western financial and economic system, as reflected in these warnings, with the accelerating rate of growth of the physical economy in China, accomplished through improvements in productivity, which have resulted from BRI projects.  While the central banks of the transatlantic system have been churning out funny money, to provide liquidity to banks which are INSOLVENT, due to the worthless paper they are carrying on their books, and the leverage they have generated, Chinese government credit agencies and its leading banks have been building the infrastructure platforms for the future, not only in China but throughout its neighbors in Eurasia, and in Africa.  As the authors of the neo-liberal commitment to austerity and bailouts, such as Schauble and the IMF, now warn of impending doom—precisely because their policies were implemented—what do they have to offer?  More of the same—stay the course, they say, for the financial system must be saved, no matter how many people these policies kill.

Thirty years ago, on October 19, 1987, U.S. stock markets had their biggest one-day drop in history, as a stock bubble popped.  Four months earlier, Lyndon LaRouche forecast that there would be a stock crash in October.  Twenty years later, in July 2007, LaRouche warned of an impending collapse of the "Bush recovery," which was another speculative bubble, this time based on mortgage-backed securities trading in a market which had been deregulated, by the repeal of the Glass Steagall bank separation act in 1999.  On both occasions, LaRouche put forward as a solution the return to the American System of economics, based on restoring Glass Steagall, to end government support for reckless speculation, and credit creation to invest in physical production.  The system of Hamiltonian credit, which was designed by the first Treasury Secretary of the U.S., Alexander Hamilton, to secure investments in physical processes which would increase productivity, through a National Bank, is a central feature of the American system, which has been revived by LaRouche, and is included in his Four Basic Laws.  It starts with the idea that there is a fundamental difference between credit which is invested to insure productivity increases, which lift up the whole economy, and debt creation to provide funds for gamblers and speculators, who expect to be bailed out when their bubble implodes, as it inevitably will.

The work on economic policy and theory done by Lyndon LaRouche, and by his wife Helga, is reflected in the success of the BRI of China, whose leaders clearly understand the principles embodied in LaRouche's Four Laws.  This is the basis of the New Paradigm which Mrs. LaRouche has been tirelessly campaigning for, and which has become an "unstoppable global dynamic" since Xi Jinping announced the BRI policy in 2014.  It is now time for the U.S. and Europe to join this New Paradigm, to move mankind out from under the Old Paradigm, with its wars, terrorism, austerity and bailouts.

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