UNDERSIDE OF FREE MARKET SUCCESS
Feb 28 - Mar 6, 2011
With the disintegration of USSR, the world was made to believe that communistic economic model and its variation, socialistic economic model were both doomed businesses. The state controlled, centrally planned economy lacked incentives for capital and labor and therefore, was destined to end up as an "also ran' in a race against the dynamic and highly potent model of free market economy. The US corporate empire looked with disdain at the struggling world economies trapped in the quagmire of state regulations. The US economy shifted its focus from industry to services sector and Wall Street became the centre of financial power. Hedge funds and financial derivatives became the smart vehicles of fast pace economic growth. Far greater than the acumen of Wall Street wizards, it was the unmatched and unchallenged American military might that lent strength to the US dollar. The Wall Street CEOs - not doctors, engineers, scientists, or academics - became the role models of the neo-elite-culture of American society. Their prices shot up to such heights as to put the most precious metals to shame.
According to Niall Ferguson, the author of The Ascent Of Money, Lloyd Blankfein, CEO at Goldman Sachs, received in 2007 $73.7 million in salary, bonus and stock awards. Next to follow was Richards S. Fuld. of Lehman Brothers with $71.9 million.
COMPARISON: TWO FREE-MARKET AND SOCIALISTIC WORLD ECONOMIES
ECONOMIC INDICATORS UNITED STATES REPUBLIC OF CHINA Rank in world economies First Second Nominal GDP $14.660 trillion $5.880 trillion GDP growth 2.9% 10.3% Per capita GDP $46,442 (Rank 17th) $4,283 (Rank 95th) Inflation rate 1.6% 4.9% Labor force 154.5 million (2009 est.) 813.5 million (2009 est.) GDP by Sector Industry: 21.9% Industry: 46.8% Services: 76.9% Services: 42.6% Agriculture: 1.2% Agriculture: 10.6% Unemployment 9% 4.2% Ease of doing business (Rank) 5th 79th Exports goods $1.280 trillion $1.578 trillion Imports goods $1.948 trillion $1.395 trillion Main export partners/import partners Canada 13.2% / 11.6% Us: 20% / 7.7% Mexico: 8.3% / 9.1% Hong Kong:12% / 10.1% China: 4.3% / 15.4% Japan: 8.3% / 12.3% Japan: 3.3% / 4.9% S. Korea: 4.6% / 9% Germany: - / 3.7% Germany: 4.2% / 5.6% Foreign Direct Investment (FDI) stock $2.938 trillion (Dec 2009) $100 billion (2010) Gross external debt $14.390 trillion (Sep 2010) $347.100 billion (2009) Public debt 93% of GDP (Jan 2011) 18.2% of GDP (2009) Revenue $2.162 trillion $1.260 trillion Expenditure $3.456 trillion $1.398 trillion Foreign exchange reserves - $2.847 trillion
Angelo R. Mozilo of Countrywide Financial was paid $102.8 million. But, to beat them all was the world-renowned hedge fund manager George Soros who made $2.9 billion by shorting on pound sterling. Incidentally, it was the same year 2007 that witnessed the worst financial crisis surfacing after the 1929-30 Great Depressions. Lehman Brothers was wiped off. Goldman Sachs, Bear Sterns, Merrill Lynch, Morgan Stanley, Citigroup, AIG and many others suffered terrible fates and had to be bailed out under TARP ñ Troubled Asset Relief Program. The crisis moved from the financial sector to the real sector. US automobile industry was the worst hit. The three auto giants Ford, General Motors, and Chrysler were pushed to the brink of disaster threatening job loss for more than a million.
It was the unhindered availability of dollars to the US economy - through borrowing and printing - that turned the tide and reduced the crisis to manageable limits, at least for a certain period. Damage assessment exercises and diagnostic reviews revealed that it was the total lack of government intervention and absence of regulatory mechanism that triggered the crisis. The diehard proponents of ultra free market economy were slow to admit that the system needed some control points. Alan Greenspan, the ex-Fed chairman, conceded that he failed to properly regulate the emerging financial derivatives market. President George W. Bush made the following 'guarded' statement in his memoir Decision Points: "Democratic capitalism, while imperfect and in need of rational oversight, is by far the most successful economic model ever devised."
Rational oversight in the shape of timely state intervention and well-designed regulatory mechanism is what separates the two leading world economies (one relying on brutal forces of free market and the other on prudently laid-down economic policies and programs) - the US and China. The size of American public debt betrays how precariously the economy is positioned. Heavy US reliance on services sector is in sharp contrast to Chinese model, which strives to maintain a balance between services and industrial sectors. China's high reserves position combined with a low debt-to-GDP ratio enables it to act as "banker to the United States of America", as stated by Niall Ferguson. The dominance of a prudently managed, state-controlled economy over the much-feared but in fact hollow economy of US belies all claims about the invincibility of free market capitalism.
It is the sound economy of China that lends a helping hand to the US economy. This fact is beautifully described by Niall Ferguson in one of his bestsellers The Ascent Of Money, in the following words:
"Welcome to the wonderful dual country of "Chimerica" - China plus America - which accounts for just over a tenth of the world's land surface, a quarter of its population, a third of its economic output and more than half of global economic growth in the past eight years. For a time it seemed like a marriage made in heaven. The East Chimericans did the saving. The West Chimericans did the spending. Chinese imports kept down US inflation. Chinese savings kept down US interest rates. Chinese labor kept down US wage costs. As a result, it was remarkably cheap to borrow money and remarkably profitable to run a corporation. Thanks to Chimerica, global real interest rates - the cost of borrowing, after inflation - sank by more than a third below their average over the past fifteen years. Thanks to Chimerica, US corporate profits in 2006 rose by about the same proportion above their average share of GDP. But, there was a catch. The more China was willing to lend to the United States, the more Americans were willing to borrow. Chimerica, in other words, was the underlying cause of the surge in bank lending, bond issuance and new derivative contracts that Planet Finance witnessed after 2000."