Publisher’s Note: For the moment, the world’s two most powerful 21st century Empires are US and China. We’ve been to western China and witnessed the ambitious “One Belt, One Road” initiative at its launch. Why is it that China can invest $1 trillion (= USD) in a massive Eurasian infrastructure project, and the US can’t seem to locate any capital to rebuild the US Empire’s crumbling bridges, roads, and highways? The short answer: in China, the Government runs the Banks, and in the US, the Banks run the Government. Here’s a deeper dive, courtesy of Ellen Brown. How ’bout a PUBLIC bank for Vermont?

“One Belt, One Road,” China’s $1 trillion infrastructure initiative, is a massive undertaking of highways, pipelines, transmission lines, ports, power stations, fiber optics, and railroads connecting China to Central Asia, Europe and Africa. According to Dan Slane, a former advisor in President Trump’s transition team, “It is the largest infrastructure project initiated by one nation in the history of the world and is designed to enable China to become the dominant economic power in the world.” In a January 29^th article titled “Trump’s Plan a Recipe for Failure, Former Infrastructure Advisor Says,” he added, “If we don’t get our act together very soon, we should all be brushing up on our Mandarin.”

On Monday, February 12^th, President Trump’s own infrastructure initiative was finally unveiled. Perhaps to trump China’s $1 trillion mega-project, the Administration has now upped the ante from $1 trillion to $1.5 trillion, but critics say it has yet to solve the funding problem that has long kept the nation’s critical infrastructure situation in limbo. Only $200 billion of the Administration’s new plan is to come from federal funding. The rest is to be extracted from cities, states, and private investors; and since city and state coffers are depleted, that leaves private investors. The focus of the Administration’s plan is on public-private partnerships (P3s); and as Slane observes, P3s drive up costs compared to financing with municipal bonds and are not suitable for many of the most critical infrastructure projects. They would not attract private investors, since there is no ongoing funding stream such as a toll or fee.

A February 12^th article on Politico quotes Oregon Rep. Peter DeFazio, the top Democrat on the Transportation Committee, who said of Trump’s plan in an address on February 9^th:

This is not a real infrastructure plan — it’s simply another scam, an attempt by this administration to privatize critical government functions, and create windfalls for their buddies on Wall Street. This fake proposal will not address the serious infrastructure needs facing this country, so our potholed roads will get worse, our bridges and transit systems will become more dangerous, and our tolls will become higher.

The White House says it’s not a take-it-or-leave-it proposal but is the start of a negotiation, and that the president is “open to new sources of funding.” But no one in Congress seems to have a viable proposal.

How Does China Do It? The Deep Pocket of Its State-owned Banks

How is it that China can find the funds for $1 trillion in infrastructure when the US cannot?

Where is the Chinese government getting the money?

The simple answer seems to be that they print it. Not directly. Not obviously. But most of China’s banks are government owned, and as the Bank of England has acknowledged, banks do not merely recycle existing deposits but actually create the money they lend by writing it into their borrowers’ deposit accounts. Incoming deposits are needed to balance the books, but where do these deposits come from? At some point they originated in the deposit accounts of other banks; and since the Chinese government owns most of the banks, it can aim the liquidity firehose at the country’s most pressing needs.

China has also turned to an innovative form of quantitative easing in which central bank-issued money is directed, not at propping up the biggest banks, but at “surgical strikes” into the most productive sectors of the economy. Citigroup chief economist Willem Buiter calls this “qualitative easing” to distinguish it from the quantitative easing engaged in by Western central banks. According to a 2014 Wall Street Journal article:

In China’s context, such so-called qualitative easing happens when the People’s Bank of China adds riskier assets to its balance sheet – such as by relending to the agriculture sector and small businesses and offering cheap loans for low-return infrastructure projects – while maintaining a normal pace of balance-sheet expansion [loan creation]. . . .

The purpose of China’s qualitative easing is to provide affordable financing to select sectors, and it reflects Beijing’s intention to dictate interest rates for some sectors, Citigroup’s economists said. They added that while such a policy would also put inflationary pressure on the economy, the impact is less pronounced than the U.S.-style quantitative easing.

The One Belt, One Road initiative is included in the targets of these “surgical strikes” with central bank financing. According to a May 2015 article in Bloomberg:

Instead of turning the liquidity sprinkler on full-throttle for the whole garden, the PBOC is aiming its hose at specific parts. The latest innovations include plans to bolster the market for local government bonds and the recapitalisation of policy banks so they can boost lending to government-favoured projects. . . .

Policymakers have sought to bolster credit for small and medium-sized enterprises, and borrowers supporting the goals of the communist leadership, such as the One Belt, One Road initiative developing infrastructure along China’s old Silk Road trade routes.

China’s Non-Performing Loans or “Helicopter Money for Infrastructure”?

Money that Need Not Be Repaid

 Critics say China has a dangerously high debt to GDP ratio and a “bad debt” problem, meaning its banks have too many “non-performing” loans. But according to financial research strategist Chen Zhao in a Harvard review called “China: A Bullish Case,” these factors are being misinterpreted and need not be cause for alarm. China has a high debt to GDP ratio because most Chinese businesses are funded through loans rather than through the stock market, as in the US. China’s banks are able to engage in massive lending because the Chinese chiefly save their money in banks rather than investing it in the stock market, providing the deposit base to back this extensive lending. And most of China’s public “debt” consists of money created on bank balance sheets for economic stimulus. Zhao writes:

During the 2008-09 financial crisis, the U.S. government deficit shot up to about 10 percent of GDP due to bail-out programs like the TARP. In contrast, the Chinese government deficit during that period didn’t change much. However, Chinese bank loan growth shot up to 40 percent while loan growth in the U.S. collapsed. These contrasting pictures suggest that most of China’s four trillion RMB stimulus package was carried out by its state-owned banks. Thus, these banks de facto carry fiscal responsibilities. The so-called “bad debt problem” is effectively a consequence of Beijing’s fiscal projects and thus should be treated as such.

China calls this “lending” rather than “money printing,” but European central bankers would call it “helicopter money” for infrastructure – central bank-generated money that does not need to be repaid. If the Chinese loans get repaid, great; but if not, it’s not considered a problem. Like helicopter money, the non-performing loans merely leave extra money circulating in the marketplace, creating extra “demand.” This is something that is actually needed in an economy that is contracting due to shrinking global markets following the 2008-09 crisis.

In a December 2017 article in the Financial Times called “Stop Worrying about Chinese Debt, a Crisis Is Not Brewing”, Zhao expanded on these points. He wrote:

[S]o-called credit risk in China is, in fact, sovereign risk. The Chinese government often relies on bank credit to finance government stimulus programmes. . . . China’s sovereign risk is extremely low. Importantly, the balance sheets of the Chinese state-owned banks, the government and the People’s Bank of China are all interconnected. Under these circumstances, a debt crisis in China is almost impossible.

Chinese state-owned banks are not going to need a Wall Street-style bailout from the government. They are the government, and the Chinese government has a massive global account surplus. It is not going bankrupt any time soon.

What about inflation? As noted by the Citigroup economists quoted earlier, Chinese-style “qualitative easing” is actually less inflationary than the bank-focused “quantitative easing” engaged in by Western central banks; and Western-style QE has barely succeeded in reaching the Fed’s modest 2 percent inflation target. It has created asset bubbles due to near-zero interest rates and the clearing of toxic mortgage-backed securities from bank balance sheets, and medical insurance and education costs have shot up; but these results are not due to augmenting the money supply through QE. Health insurance is effectively mandatory, while the private medical/industrial/pharmaceutical industry has been allowed to raise costs to what the market will bear; and higher education has been sold as virtually mandatory, while student loans have been made available to all and bankruptcy is effectively foreclosed, allowing colleges and universities to raise tuition to what that market will bear.

In any case, inflating the money supply is not the same as inflating prices. The real economy needs more money in circulation to create the demand necessary to create jobs and fill the gap between consumer purchasing power and GDP. Adding money to the money supply drives up prices only when demand (money) exceeds supply, something the consumer economy is a long way from now.

In the current political climate, the most expedient way to get new money into the economy is to spend it on rebuilding America’s crumbling infrastructure. Rather than regarding China as a national security threat and putting our resources into rebuilding our military defenses, perhaps it is time to take a closer look at China’s economic policies. We might want to adapt some of their tools to save our own crumbling roads and bridges before it is too late.

Attorney and money expert Ellen Brown’s book Web Of Debt provides a history of US banking and is a must-read for every citizen of the US Empire.