FCIC: Eroding Confidence in the United States?

Email response from an anonymous US observer (received 1/2/11)

I think your findings in general are accurate but your reasoning a bit naive. In my interactions with the Busch administration’s Commerce Department (specifically Under Secretary Grant Aldonas) it became clear to me that the Washington policy maker’s get these points very clearly, but they are making Policy at the behest of the large international corporates that have benefited greatly from the very same “ international financial imbalances that resulted largely from the macroeconomically unbalanced economic models” you now rightfully deride.

Moving your supply chain to China and increasing your margins at the same time you can reduce prices is only achievable through the economic subsidies inherent in such an unbalanced economic model. However, this is the economic heroin Wall Street thrives on regardless of its consequences to America or the rest of the developed market playing by more balanced trade rules. The point is: policy makers get this but are marching to the tune of the deepest pockets all while covering their real intentions in a cloak of public relations rhetoric that is as toothless as the WTO’s approach to the issue.

Anon.

CPDS Reply sent 31/1/11 (thanks to quirks of differences in time zones)

Thanks for feedback. You are probably right about the official awareness of the consequences of imbalances, and about the conflicted policy response. However awareness and understanding has been partial and grossly inadequate

There were clear signs of some level of understanding from the Federal Reserve even under Greenspan who used to note the need for easy money policy to prevent deflation – though deflation was a risk that Japan faced – not the US. Greenspan used to hope, naively, that providing support for Asian development through US demand would give rise (eventually) to the emergence of democratic capitalist systems. And Bernanke invented the concept of ‘savings gluts’ whose implications he clearly understood – and launched what has been seen as a ‘currency war’ in an attempt to discourage them.

However what there is no sign of anyone understanding are the cultural dimensions of the issue (which reflects the most significant ‘clash of civilizations’ despite the diversionary efforts of Islamist extremists). I have not seen official (or even academic) reference to:

the implications of cultures that lack the West’s classical Greek heritage for the types of economic methods that can be used (eg see Understanding East Asia's Economic Models);
analyses of the novel form of protectionism that such systems of socio-political-economy embody (see Resist Protectionism: A Call That is Decades Too Late). Protectionism is not implicit in artificially low exchange rates, but in directing national savings into economic activities with little regard for profitability – a tactic that only works without risk of financial crisis providing current account surpluses can be maintained at the expense of trading partners who are willing and able to continue borrowing and increasing their debt levels indefinitely;
the sorts of future international order that such societies might aspire to create if the current international order collapses (see Creating a New International 'Confucian' Political and Economic Order);
the role that Japan is likely to have played behind the scenes in generating the current situation – probably as a continuance of its post-Meiji resistance to Western societies (see Japan’s Predicament and Why Japan cannot deregulate its financial system). Japan’s contribution to financial imbalances has often been dominant. The obstacle to officially recognising the problem with international financial imbalances comes from the US’s military / security systems (because of the perception that Japan is the US’s key ally in Asia) just as much as multinationals who profit from offshore investment;
the options that the US has to deal with the situation (eg as suggested in China may not have the solution, but it seems to have a problem).

I would like to reproduce your comments on my web-site (either attributed or anonymously) if you are agreeable – at FCIC: Eroding Investor Confidence in the United States?

John Craig

Response from Anon received 4/2/11

John,

I am still not sure we are on the same page. A couple of additional points:

1) “awareness and understanding has been partial and grossly inadequate.” Completely disagree. You again are missing the point. Your statement applies to the masses, but is completely inaccurate regarding policy makers. They have understood this for over a decade and have made decisions based on the aspirations of their primary constituents whom benefit from such policies --- the multi-nationals. You are mistaking purposeful inaction and the resulting public relations meant to cover such inaction as a lack of “awareness and understanding”.

2) Cultures are subordinate to basic human nature (which is pervasive amongst the species): behaviors are driven by profit maximization for personal gain to the extent allowed by policy makers in any of the governments in questions (Western or Eastern). There is no complex paradigm to be cracked here as you imply.

3) Protectionism is implicit in any form of market intervention by a sovereign entity which enhances that entities ability to compete visa-vis the market: be it artificially low exchange rates, perverse savings incentives, tax free zones, loose environmental statutes, excessive capital availability without market credit parameters—the list goes on and on. Your conclusion is obviously correct; it goes without saying it takes two to tango and the market will correct this imbalance in the long run. The purpose of splitting hairs about the definition of the protectionism is lost on me. The focus needs to be on the fact that policy makers in the West are not concerned in the short run about the consequences of the ultimate correction as they are dancing to the tune of the multinationals who can quickly adapt to market corrections as opposed to the masses.

4) Seems pretty obvious what the world order will be. Follow the money. Look at value creation on a currency adjusted basis.

5) Japan invented this game before the Chinese even met Richard Nixon. The Chinese just took it to a scale commensurate with their economic capacity. Japan’s lack of headlines has little to do with our military allegiance and everything to do with the fact that they are a gnat on an elephants behind in the new world order. The elephant of course being China.

Anon

CPDS Reply sent 3/2/11

Unfortunately my statement applies to the policy makers just as much as to the masses. I have no doubt that the hidden agendas in the US that you refer to are part of the problem – but they are neither the only, nor the most important, issues that are not being discussed.

Cultures are a part of the ‘nature’ of people in different societies – and cultural differences can have profound effects. This can be illustrated by an example in The Cultural Potential for a Clash (in Competing Civilizations). Economists correctly regard knowledge / information as the key factor in economic growth. However different societies have completely different views of the nature of knowledge, so culture must affect economic performance. Moreover the view of knowledge that Western societies gained from their classical Greek heritage (ie that ideas model reality, and thus can be a basis for rational decision making) is unique. And rationality fails in dealing with complex problems (as is well recognised in management, public administration and economic literature) and only works reliably in Western societies because simplified social spaces are created (eg by a rule of law which makes it possible for individuals to know how the world will react to what they might choose to do) - see Cultural Foundations of Western Strengths. Native peoples do not create social spaces in which individual rationality would work, and do not solve problems by the use of abstract concepts. Australian aborigines are good at dealing with ‘real’ problems (eg fixing a motor), but completely lost in dealing with abstracts (eg designing a motor). Similarly Islamic societies do not create simplified social spaces in which rationality might work. Thus seeking to transfer the benefits that Western societies gain from democratic capitalism to the Middle East is a waste of time (see Stemming Refugee Flows from the Middle East ).

The economic notion of profitability is an abstract, and while it is very useful in organising economic activities in Western societies, it is by no means universal. Asian societies with a Chinese cultural heritage have an interest in, and a traditional means for achieving, political and economic power. But they have no classical Greek cultural heritage and their means for achieving political and economic power do not involve the use of rationality nor abstract concepts such as profitability (see East Asia in Competing Civilizations). Rather knowledge is used to directly transform individuals (through the education process) or society as a whole (through the influence of bureaucratic elites). Economically the goal is to maximize market share (ie ‘real’ rather than ‘abstract’ economic power) and become rich by saving, and it was noted at one stage that profitability was not a major goal of Japanese companies. Such societies have not created social spaces in which either rationality or abstract concepts such as profitability would be of any use in organising economic production (see The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems).

There may be a universal human aspiration to seek power – but the notion of ‘personal gain’ is mainly a Western phenomenon. The notion of seeking individual benefits (as compared with benefits for ones’ community) is traditionally viewed as abhorrent in ‘Asia’.

The way economic power has been sought in ‘Asia’ has macroeconomic consequences along the lines outlined in Understanding East Asia's Economic Models (ie a requirement for domestic demand deficits in a world dominated by Western concepts of profitability, and thus for trading partners who are willing and able to run current account deficits and continue increasing their debt levels indefinitely).

The point about protectionism (achieved by investing national savings without concern for profitability, because of the defence against financial crisis implicit in current account surpluses) is important because it has been invisible to Western observers who have no idea how such societies actually work.

There is no doubt that Japan invented the game long before China. There is also no doubt that Japan’s goal in WWII was to create an ‘Asia Co-prosperity Sphere’ and that its principle tactic in seeking to achieve this was to mobilize China (Japan’s ‘big brother’) to participate in this cause. According to Eammon Fingleton the methods that provided the basis for Japan’s post-war economic miracles were first used during Japan’s occupation of Manchuria in the 1930s – and were transmitted to China’s post-Mao leadership in 1979. In the 1980s I directly encountered untranationalist Japanese factions who were: (a) at the centre of the ‘system’ that lies at the core of Japan’s political and economic order; and (b) clearly still trying to win WWII. One needs also to look closely at the sort of precepts that are recommended in traditional ‘Art of War’ strategies, and at the methods for exerting power that are traditional in ‘Asia’ (methods based on influencing others’ thinking, rather than making decisions – see Pye ‘Asian Power and Politics). A classic Japanese precept is that ‘the Oyaban (boss / leader) does not dance on stage’.

In a recent discussion with a contact who has a very good understanding of Chinese traditions (and is well respected and connected in China in this regard) that individual (who does not want such views publicly ascribed to him) suggested that:

[Original Amended: a statement to the effect that The Twelve Civil Offensives within the The Six Secret Teachings of Jiang Tai Gong, seem to have been first deployed against the US by a defeated and occupied Japan after 1945]

My response was:

“Thanks for that reference. I presume it is to Civil Teaching in Six Secret Teachings. This apparently says all the right things that could have provided the basis for Japan continuing to try to defeat the US through economic means after its military defeat in 1945 (eg about creating social stability and wealth) but:

It is only about ‘success’ for a particular society (and its ‘king’ / elites in particular) – not about benefiting people as the primary goal or creating a world in which all may prosper. Thus it is really is just about mercantilism (ie about seeking to mobilize economic strength to boost the power of a state);

Chapter 9 (Honouring the Worthy) is particularly interesting as it merely requires the ‘king’ to have infinite knowledge and wisdom if he is to be successful. This is undoubtedly true – but it is also impossible;

there is nothing in it to prevent people innocently creating an unsustainable economic model because of the methods that they use to mobilize productive capacity, and their lack of attention to the consumption side of the economic equation (see Are East Asian Economic Models Sustainable?).

Are you on the public record anywhere (eg in …. ) as suggesting that that Jiang Tai Gong’s teachings “were first deployed against the US by a defeated and occupied Japan after 1945”? While what you say is probably correct, suggesting this publicly would really hasten hasten the changes that are likely to disrupt Japan’s post-WWII strategy. “

While that contact will not permit me to publish his views, I would greatly appreciate your permission to publish our present exchange on my website (perhaps quoting you as an anonymous observer, if you did not wish to be named).

John Craig

Response Received 5/2/11

John,

Final couple of comments for you to continue to digest.

First, I still think you need to ultimately address a strategy to deal with the true power brokers influencing the global strategies that have precipitated our current state. Spend time digging deep into the Commerce Department with an eye towards cutting through the rhetoric and you may be shocked. You are correct that it is not being discussed amongst the masses, but the solution involves educating the masses and then using the systems available (i.e., constitutional rights, voting, etc.) to change the power brokers, not trying to enlighten the power brokers whom are already “in the know” and are using the current construct to their benefit.

Second, as the owner of an American manufacturing company with an engineering office in Shen Zhen, I think your knowledge of history and culture, while admirable, is truly not relevant to the daily activities in China (certainly not on the east coast). The historical underpinnings of a 5000 year foundation proved to have the shelf life of a loaf of bread once a capitalistic system was set in motion. I transact daily with a multitude of Chinese entrepreneurs whom are wholly 100% self-motivated by personal gain and are as keen to profitability as any Wall Street Banker I have ever worked with. The following postulation is categorically false in today’s Eastern China: “The economic notion of profitability is an abstract, and while it is very useful in organising economic activities in Western societies, it is by no means universal. Asian societies with a Chinese cultural heritage have an interest in, and a traditional means for achieving, political and economic power. But they have no classical Greek cultural heritage and their means for achieving political and economic power do not involve the use of rationality nor abstract concepts such as profitability.” This may have been true for the 5000 years prior to 1995 and is true today in most of Western China, but the belief is eradicated instantly with knowledge about self-determination as Ayn Rand’s Objectivism mandates. Cultures are organic- frighteningly quick to adapt to the benefit of the individual as opportunity presents itself. Historical systems utilizing “group think” were necessary means of existence that have proven time and again to evaporate when self-determination is a viable option and the concept of profit is the least abstract element of the entire equation. They may see profit the first time as you describe but certainly not the second. Even your Australians aborigines have proven this in micro settings. Once again I recommend you delve into the commercial activities on the east coast, your historical focus will be turned on its head by what’s happening this very minute.

I don’t not want any of this in the public domain given my interest in both the US and China. You may use it anonymously.

Anon

CPDS Reply sent 5/2/11

Thanks again for your thoughts, and for permission to reproduce them as the comments of an anonymous observer.

I have no doubt that you are correct in relation to the distorted policy processes in the US. President Obama seemed to have an aspiration to change the way Washington works – though he has apparently found it rather hard to change the ‘tiger’ while riding it. My suspicion is that educating the broader community about what is going on is only part of the solution. More fundamentally there seems to be a need to break down the ‘corporatist’ character of the US’s system of political economy (ie that, exemplified by the so-called military-industrial complex, which more generally involves private corporations in central roles in carrying out key government functions and thus gaining access to strategic understanding of the issues that exceeds that available to those who might act primarily in the community interest). One key requirement to break this down is likely to involve the creation of a permanent professional civil service to support executive government, rather than reliance on importing politically favoured executives from business and academia to run government agencies. Australia’s system of government faces challenges which are somewhat different and milder than those afflicting the US – but here also there is arguably a need for better external and internal support (through an informed community, and reversion to a professional civil service) to cope with those challenges (see A Nation Building Agenda).

Your experience doing business in China provides a useful basis for observing what is going on at the coalface. However it is also possible that appearance may be deceptive, or that there is a serious breakdown looming in China’s system of socio-political-economy (because individuals are exploiting for personal benefit the resources that the state makes available to them in the expectation that they will act primarily in the communal interest).

Certainly there are strong commercial traditions in southern China. However could the effective business activity that you observe be simply driven by a desire for commercial strength (ie doing real deals) rather than by a desire for profitability (ie earning a large return on invested capital)? One could only tell this by having access to the books of those you have business dealings with, and being confident that accounting practices are reliable. It is my understanding that: (a) business success in China depends more on connections (‘guanxi’) than on enterprising initiative; (b) capital for business investment is available primarily to those with connections – especially to China’s current social elite (ie the Communist Party); and (c) China’s system of socio-political-economy involves mobilizing national income for investment with limited regard for profitability (as suggested in earlier emails). If my understanding is realistic, it would not be obvious at the coalface – and it would require macroeconomic distortions (ie massive domestic demand deficits) that make global economic growth unsustainable.

However, if both my understanding and your perception (ie that individual self-interest is dominating over the communal interest at the coal face) are correct, then this could indicate a serious flaw in China’s system of socio-political-economy. Such a possibility was indicated by a prominent Chinese academic’s comment about erosion of the meritocratic government that China relies on. Moreover China’s history is one of periodic civil wars between north and south China (see Political Constraints) – and the core of those conflicts (which have seen southern Chinese groups repeated driven out to become the offshore Chinese) arguably lies in stresses between commercially-focused cultures that are strongest in southern China and the communally-focussed expectations that seem to dominate in north China.

John Craig

Introduction + FCIC: Eroding Confidence in the United States? Related Interchange with Anonymous US Observer IMF's Blindness to Financial Crisis	Introduction This document includes CPDS' comments on an official US review of the global financial crisis (GFC) which suggested that the review seemed grossly inadequate, because it dealt only with domestic factors and ignored the international financial imbalances which had a significant role in generating the crisis. This gave rise to an interchange with an observer in the US (Anon) to whom the above comments had been circulated. Issues emerging from that interchange include: Anon's perception that US officials were well aware of the adverse effects of financial imbalances, but turned a blind eye because multinationals (and banks) who profit from the associated trade flows have a dominant behind-the-scenes influence on policy; CPDS' suggestions that the understanding of the cultural dimensions involved in those imbalances is essentially non-existent; Anon's view (based on business dealings in China) that cultural issues do not need consideration because exposure to business opportunities had led people in China to behave in the same self-interested ways as others; CPDS' suggestions that: (a) it would be impossible to tell at grass roots level, as the key issue is how the financial system is run; and (b) China's system of socio-political economy could be at risk if China's businesspeople are in fact operating with a high level of individual self interest at grass roots level when financial systems appear to provide concessional access to national savings to those with good Communist Party connections on the presumptions that they will act in the communal interest .
	FCIC: Eroding Confidence in the United States? (Email sent 29/1/11) Phil Angelides, Chairman, Financial Crisis Inquiry Commission The report by the Financial Crisis Inquiry Commission (FCIC) does more to erode investor confidence in the United States than any other event in recent decades. I have had some interest in the financial crisis, and have written about the circumstances that gave rise to it for several years (eg see Structural Incompatibility Puts Global Growth at Risk (2003); Financial Market Instability: A Many Sided Story (2007); and Global Financial Crisis: The Second Test of Globalization?). The financial crisis was partly the result of policies and actions taken within the United States. And the FCIC report has addressed those domestic issues. However those policies and actions were also partly a result of pressures from the international economic / financial environment. For example, the easy money policies that contributed to the emergence of asset bubbles that subsequently burst had been needed to maintain growth in the face of international financial imbalances that resulted largely from the macroeconomically unbalanced economic models that have been the basis of economic ‘miracles’ in East Asia. A crisis emerged because US policy makers appeared unable to see what could go wrong because of a blinked approach to what was happening elsewhere in the world. Unfortunately the FCIC Report reinforces this perception – as it makes little or no reference to the global context within which the financial crisis emerged. Without this perspective it is neither possible to properly understand the recent financial crisis nor to avoid stumbling into another (one with somewhat different symptoms). I would be interested in your response to the above speculations. John Craig
Interchange with Anonymous US Observer	Email response from an anonymous US observer (received 1/2/11) I think your findings in general are accurate but your reasoning a bit naive. In my interactions with the Busch administration’s Commerce Department (specifically Under Secretary Grant Aldonas) it became clear to me that the Washington policy maker’s get these points very clearly, but they are making Policy at the behest of the large international corporates that have benefited greatly from the very same “ international financial imbalances that resulted largely from the macroeconomically unbalanced economic models” you now rightfully deride. Moving your supply chain to China and increasing your margins at the same time you can reduce prices is only achievable through the economic subsidies inherent in such an unbalanced economic model. However, this is the economic heroin Wall Street thrives on regardless of its consequences to America or the rest of the developed market playing by more balanced trade rules. The point is: policy makers get this but are marching to the tune of the deepest pockets all while covering their real intentions in a cloak of public relations rhetoric that is as toothless as the WTO’s approach to the issue. Anon. CPDS Reply sent 31/1/11 (thanks to quirks of differences in time zones) Thanks for feedback. You are probably right about the official awareness of the consequences of imbalances, and about the conflicted policy response. However awareness and understanding has been partial and grossly inadequate There were clear signs of some level of understanding from the Federal Reserve even under Greenspan who used to note the need for easy money policy to prevent deflation – though deflation was a risk that Japan faced – not the US. Greenspan used to hope, naively, that providing support for Asian development through US demand would give rise (eventually) to the emergence of democratic capitalist systems. And Bernanke invented the concept of ‘savings gluts’ whose implications he clearly understood – and launched what has been seen as a ‘currency war’ in an attempt to discourage them. However what there is no sign of anyone understanding are the cultural dimensions of the issue (which reflects the most significant ‘clash of civilizations’ despite the diversionary efforts of Islamist extremists). I have not seen official (or even academic) reference to: the implications of cultures that lack the West’s classical Greek heritage for the types of economic methods that can be used (eg see Understanding East Asia's Economic Models); analyses of the novel form of protectionism that such systems of socio-political-economy embody (see Resist Protectionism: A Call That is Decades Too Late). Protectionism is not implicit in artificially low exchange rates, but in directing national savings into economic activities with little regard for profitability – a tactic that only works without risk of financial crisis providing current account surpluses can be maintained at the expense of trading partners who are willing and able to continue borrowing and increasing their debt levels indefinitely; the sorts of future international order that such societies might aspire to create if the current international order collapses (see Creating a New International 'Confucian' Political and Economic Order); the role that Japan is likely to have played behind the scenes in generating the current situation – probably as a continuance of its post-Meiji resistance to Western societies (see Japan’s Predicament and Why Japan cannot deregulate its financial system). Japan’s contribution to financial imbalances has often been dominant. The obstacle to officially recognising the problem with international financial imbalances comes from the US’s military / security systems (because of the perception that Japan is the US’s key ally in Asia) just as much as multinationals who profit from offshore investment; the options that the US has to deal with the situation (eg as suggested in China may not have the solution, but it seems to have a problem). I would like to reproduce your comments on my web-site (either attributed or anonymously) if you are agreeable – at FCIC: Eroding Investor Confidence in the United States? John Craig Response from Anon received 4/2/11 John, I am still not sure we are on the same page. A couple of additional points: 1) “awareness and understanding has been partial and grossly inadequate.” Completely disagree. You again are missing the point. Your statement applies to the masses, but is completely inaccurate regarding policy makers. They have understood this for over a decade and have made decisions based on the aspirations of their primary constituents whom benefit from such policies --- the multi-nationals. You are mistaking purposeful inaction and the resulting public relations meant to cover such inaction as a lack of “awareness and understanding”. 2) Cultures are subordinate to basic human nature (which is pervasive amongst the species): behaviors are driven by profit maximization for personal gain to the extent allowed by policy makers in any of the governments in questions (Western or Eastern). There is no complex paradigm to be cracked here as you imply. 3) Protectionism is implicit in any form of market intervention by a sovereign entity which enhances that entities ability to compete visa-vis the market: be it artificially low exchange rates, perverse savings incentives, tax free zones, loose environmental statutes, excessive capital availability without market credit parameters—the list goes on and on. Your conclusion is obviously correct; it goes without saying it takes two to tango and the market will correct this imbalance in the long run. The purpose of splitting hairs about the definition of the protectionism is lost on me. The focus needs to be on the fact that policy makers in the West are not concerned in the short run about the consequences of the ultimate correction as they are dancing to the tune of the multinationals who can quickly adapt to market corrections as opposed to the masses. 4) Seems pretty obvious what the world order will be. Follow the money. Look at value creation on a currency adjusted basis. 5) Japan invented this game before the Chinese even met Richard Nixon. The Chinese just took it to a scale commensurate with their economic capacity. Japan’s lack of headlines has little to do with our military allegiance and everything to do with the fact that they are a gnat on an elephants behind in the new world order. The elephant of course being China. Anon CPDS Reply sent 3/2/11 Unfortunately my statement applies to the policy makers just as much as to the masses. I have no doubt that the hidden agendas in the US that you refer to are part of the problem – but they are neither the only, nor the most important, issues that are not being discussed. Cultures are a part of the ‘nature’ of people in different societies – and cultural differences can have profound effects. This can be illustrated by an example in The Cultural Potential for a Clash (in Competing Civilizations). Economists correctly regard knowledge / information as the key factor in economic growth. However different societies have completely different views of the nature of knowledge, so culture must affect economic performance. Moreover the view of knowledge that Western societies gained from their classical Greek heritage (ie that ideas model reality, and thus can be a basis for rational decision making) is unique. And rationality fails in dealing with complex problems (as is well recognised in management, public administration and economic literature) and only works reliably in Western societies because simplified social spaces are created (eg by a rule of law which makes it possible for individuals to know how the world will react to what they might choose to do) - see Cultural Foundations of Western Strengths. Native peoples do not create social spaces in which individual rationality would work, and do not solve problems by the use of abstract concepts. Australian aborigines are good at dealing with ‘real’ problems (eg fixing a motor), but completely lost in dealing with abstracts (eg designing a motor). Similarly Islamic societies do not create simplified social spaces in which rationality might work. Thus seeking to transfer the benefits that Western societies gain from democratic capitalism to the Middle East is a waste of time (see Stemming Refugee Flows from the Middle East ). The economic notion of profitability is an abstract, and while it is very useful in organising economic activities in Western societies, it is by no means universal. Asian societies with a Chinese cultural heritage have an interest in, and a traditional means for achieving, political and economic power. But they have no classical Greek cultural heritage and their means for achieving political and economic power do not involve the use of rationality nor abstract concepts such as profitability (see East Asia in Competing Civilizations). Rather knowledge is used to directly transform individuals (through the education process) or society as a whole (through the influence of bureaucratic elites). Economically the goal is to maximize market share (ie ‘real’ rather than ‘abstract’ economic power) and become rich by saving, and it was noted at one stage that profitability was not a major goal of Japanese companies. Such societies have not created social spaces in which either rationality or abstract concepts such as profitability would be of any use in organising economic production (see The Cultural Revolution needed in 'Asia' to Adapt to Western Financial Systems). There may be a universal human aspiration to seek power – but the notion of ‘personal gain’ is mainly a Western phenomenon. The notion of seeking individual benefits (as compared with benefits for ones’ community) is traditionally viewed as abhorrent in ‘Asia’. The way economic power has been sought in ‘Asia’ has macroeconomic consequences along the lines outlined in Understanding East Asia's Economic Models (ie a requirement for domestic demand deficits in a world dominated by Western concepts of profitability, and thus for trading partners who are willing and able to run current account deficits and continue increasing their debt levels indefinitely). The point about protectionism (achieved by investing national savings without concern for profitability, because of the defence against financial crisis implicit in current account surpluses) is important because it has been invisible to Western observers who have no idea how such societies actually work. There is no doubt that Japan invented the game long before China. There is also no doubt that Japan’s goal in WWII was to create an ‘Asia Co-prosperity Sphere’ and that its principle tactic in seeking to achieve this was to mobilize China (Japan’s ‘big brother’) to participate in this cause. According to Eammon Fingleton the methods that provided the basis for Japan’s post-war economic miracles were first used during Japan’s occupation of Manchuria in the 1930s – and were transmitted to China’s post-Mao leadership in 1979. In the 1980s I directly encountered untranationalist Japanese factions who were: (a) at the centre of the ‘system’ that lies at the core of Japan’s political and economic order; and (b) clearly still trying to win WWII. One needs also to look closely at the sort of precepts that are recommended in traditional ‘Art of War’ strategies, and at the methods for exerting power that are traditional in ‘Asia’ (methods based on influencing others’ thinking, rather than making decisions – see Pye ‘Asian Power and Politics). A classic Japanese precept is that ‘the Oyaban (boss / leader) does not dance on stage’. In a recent discussion with a contact who has a very good understanding of Chinese traditions (and is well respected and connected in China in this regard) that individual (who does not want such views publicly ascribed to him) suggested that: [Original Amended: a statement to the effect that The Twelve Civil Offensives within the The Six Secret Teachings of Jiang Tai Gong, seem to have been first deployed against the US by a defeated and occupied Japan after 1945] My response was: “Thanks for that reference. I presume it is to Civil Teaching in Six Secret Teachings. This apparently says all the right things that could have provided the basis for Japan continuing to try to defeat the US through economic means after its military defeat in 1945 (eg about creating social stability and wealth) but: It is only about ‘success’ for a particular society (and its ‘king’ / elites in particular) – not about benefiting people as the primary goal or creating a world in which all may prosper. Thus it is really is just about mercantilism (ie about seeking to mobilize economic strength to boost the power of a state); Chapter 9 (Honouring the Worthy) is particularly interesting as it merely requires the ‘king’ to have infinite knowledge and wisdom if he is to be successful. This is undoubtedly true – but it is also impossible; there is nothing in it to prevent people innocently creating an unsustainable economic model because of the methods that they use to mobilize productive capacity, and their lack of attention to the consumption side of the economic equation (see Are East Asian Economic Models Sustainable?). Are you on the public record anywhere (eg in …. ) as suggesting that that Jiang Tai Gong’s teachings “were first deployed against the US by a defeated and occupied Japan after 1945”? While what you say is probably correct, suggesting this publicly would really hasten hasten the changes that are likely to disrupt Japan’s post-WWII strategy. “ While that contact will not permit me to publish his views, I would greatly appreciate your permission to publish our present exchange on my website (perhaps quoting you as an anonymous observer, if you did not wish to be named). John Craig Response Received 5/2/11 John, Final couple of comments for you to continue to digest. First, I still think you need to ultimately address a strategy to deal with the true power brokers influencing the global strategies that have precipitated our current state. Spend time digging deep into the Commerce Department with an eye towards cutting through the rhetoric and you may be shocked. You are correct that it is not being discussed amongst the masses, but the solution involves educating the masses and then using the systems available (i.e., constitutional rights, voting, etc.) to change the power brokers, not trying to enlighten the power brokers whom are already “in the know” and are using the current construct to their benefit. Second, as the owner of an American manufacturing company with an engineering office in Shen Zhen, I think your knowledge of history and culture, while admirable, is truly not relevant to the daily activities in China (certainly not on the east coast). The historical underpinnings of a 5000 year foundation proved to have the shelf life of a loaf of bread once a capitalistic system was set in motion. I transact daily with a multitude of Chinese entrepreneurs whom are wholly 100% self-motivated by personal gain and are as keen to profitability as any Wall Street Banker I have ever worked with. The following postulation is categorically false in today’s Eastern China: “The economic notion of profitability is an abstract, and while it is very useful in organising economic activities in Western societies, it is by no means universal. Asian societies with a Chinese cultural heritage have an interest in, and a traditional means for achieving, political and economic power. But they have no classical Greek cultural heritage and their means for achieving political and economic power do not involve the use of rationality nor abstract concepts such as profitability.” This may have been true for the 5000 years prior to 1995 and is true today in most of Western China, but the belief is eradicated instantly with knowledge about self-determination as Ayn Rand’s Objectivism mandates. Cultures are organic- frighteningly quick to adapt to the benefit of the individual as opportunity presents itself. Historical systems utilizing “group think” were necessary means of existence that have proven time and again to evaporate when self-determination is a viable option and the concept of profit is the least abstract element of the entire equation. They may see profit the first time as you describe but certainly not the second. Even your Australians aborigines have proven this in micro settings. Once again I recommend you delve into the commercial activities on the east coast, your historical focus will be turned on its head by what’s happening this very minute. I don’t not want any of this in the public domain given my interest in both the US and China. You may use it anonymously. Anon CPDS Reply sent 5/2/11 Thanks again for your thoughts, and for permission to reproduce them as the comments of an anonymous observer. I have no doubt that you are correct in relation to the distorted policy processes in the US. President Obama seemed to have an aspiration to change the way Washington works – though he has apparently found it rather hard to change the ‘tiger’ while riding it. My suspicion is that educating the broader community about what is going on is only part of the solution. More fundamentally there seems to be a need to break down the ‘corporatist’ character of the US’s system of political economy (ie that, exemplified by the so-called military-industrial complex, which more generally involves private corporations in central roles in carrying out key government functions and thus gaining access to strategic understanding of the issues that exceeds that available to those who might act primarily in the community interest). One key requirement to break this down is likely to involve the creation of a permanent professional civil service to support executive government, rather than reliance on importing politically favoured executives from business and academia to run government agencies. Australia’s system of government faces challenges which are somewhat different and milder than those afflicting the US – but here also there is arguably a need for better external and internal support (through an informed community, and reversion to a professional civil service) to cope with those challenges (see A Nation Building Agenda). Your experience doing business in China provides a useful basis for observing what is going on at the coalface. However it is also possible that appearance may be deceptive, or that there is a serious breakdown looming in China’s system of socio-political-economy (because individuals are exploiting for personal benefit the resources that the state makes available to them in the expectation that they will act primarily in the communal interest). Certainly there are strong commercial traditions in southern China. However could the effective business activity that you observe be simply driven by a desire for commercial strength (ie doing real deals) rather than by a desire for profitability (ie earning a large return on invested capital)? One could only tell this by having access to the books of those you have business dealings with, and being confident that accounting practices are reliable. It is my understanding that: (a) business success in China depends more on connections (‘guanxi’) than on enterprising initiative; (b) capital for business investment is available primarily to those with connections – especially to China’s current social elite (ie the Communist Party); and (c) China’s system of socio-political-economy involves mobilizing national income for investment with limited regard for profitability (as suggested in earlier emails). If my understanding is realistic, it would not be obvious at the coalface – and it would require macroeconomic distortions (ie massive domestic demand deficits) that make global economic growth unsustainable. However, if both my understanding and your perception (ie that individual self-interest is dominating over the communal interest at the coal face) are correct, then this could indicate a serious flaw in China’s system of socio-political-economy. Such a possibility was indicated by a prominent Chinese academic’s comment about erosion of the meritocratic government that China relies on. Moreover China’s history is one of periodic civil wars between north and south China (see Political Constraints) – and the core of those conflicts (which have seen southern Chinese groups repeated driven out to become the offshore Chinese) arguably lies in stresses between commercially-focused cultures that are strongest in southern China and the communally-focussed expectations that seem to dominate in north China. John Craig
IMF's Blindness to Emerging Financial Crisis	IMF's Blindness to Emerging Financial Crisis - email sent 10/2/11 Independent Evaluation Office, IMF Re: IMF ignored warnings: watchdog, February 10 2011 It is understood that the IEO has concluded that the IMF failed to anticipate the financial crisis, because IMF analysts had a blinkered approach to excesses that were developing in US financial systems. May I respectfully suggest that there was an equal (and complementary) contributing factor related to the financial crisis that the IMF ignored (and that the IEO still appears to be ignoring) – namely distortions in the financial systems that seem to be essential to the systems of socio-political-economy in major East Asian economies (eg see Structural Incompatibility Puts Global Growth at Risk, 2003; Financial Market Instability: A Many Sided Story, 2007; GFC Causes; Understanding East Asia's Economic Models, 2009; and Resist Protectionism: A Call That is Decades Too Late , 2010). John Craig

US Evaluation of Financial Crisis (2011)
CPDS Home Contact	See reference to this in GFC: The Second Failure of Globalization?