The United States military believes we’re losing the Third World War to China.
According to U.S. Secretary of the Navy Richard V. Spencer, not only has that war started, but it’s unlike any conflict in history. “When it comes to China, the bottom line there is the chequebook,” he says.
According to military leaders, this war isn’t being fought on a conventional battlefield with armies struggling for territory. It’s being fought on a monetary battleground, through the command of money.
China, it seems, has cheated – financially – through the weaponization of capital. It’s using its abundant financial resources to make strategic gains against the West.
But instead of criticizing China’s financial prowess, perhaps we should be copying them.
The West’s monetary system has been dominated by privately-owned banks since the founding of the Bank of England in 1694. Although this system has served us well, it’s coming under intense competitive pressure from more efficient systems.
In the West, 97 per cent of all new money is created when a privately-owned bank issues a new credit card or writes a loan.
The good thing is that this new money is generally created with solid collateral backing, stabilizing the monetary system.
The bad news is that in the West, all new money is created as debt. That means it carries an obligation to repay both the principal and compounding interest to a bank that did very little (or nothing) to create those monetary resources in the first place.
In addition, unlike China, the western state has ceased to be an independent monetary actor and – apart from physical notes and coins – can’t create monetary resources from treasury. It can only raise finances through taxation or accessing the bond markets.
China’s remarkable success over the past four decades has been facilitated by a quasi-sovereign money supply. The state can create as much money as it wants because it owns and controls the monetary system.
How is this an advantage?
China can spend at will. For instance, it can state-finance the construction of infrastructure like high-speed trains without increasing taxes or raising money on the bond markets. China has more than 40,000 km of bullet-train tracks while the United States has none.
How did China manage this remarkable monetary feat?
It started from a different place. Pre-1978 China operated a Soviet-style mono-banking system that was 100 per cent owned by the state. It did not attach a debt-and-interest burden on new money creation.
China maintains state ownership over its central bank (People’s Bank of China). The nation also holds large majority shares in its commercial banks. And it directs lending for political rather than purely commercial purposes.
There is a down side. China has a massive number of non-performing loans (NPLs).
How does China deal with these bad debts?
In 1998, the government set up four asset management companies (AMCs) to take possession of the NPLs, simply removing them from the banks’ balance sheets. In effect, the bad loans are acquired by the state and written off.
In other words, the Chinese state can use its banks or its treasury department to issue whatever monetary resources it needs.
Our privatized banking system worked well in the past, when it had no real competition, But clearly it can’t survive an assault by a determined sovereign monetary adversary with an open chequebook.
This monetary advantage could change the course of world history if the West doesn’t wake up and respond appropriately.
The West’s privatized debt money system has been suspended in the past. The most famous suspensions occurred in the United States. During the Civil War, the Union government of Abraham Lincoln issued the Greenback dollar to fund the war effort. More recently, the U.S. Treasury simply printed the sovereign money it needed to finance its Second World War effort.
Doing nothing in the face of such monetary warfare is not an option. Western governments are at their self-imposed debt limits. Continuing to embrace pointless austerity could mean this financial war is over before it’s begun.
Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.