Collusion_How Central Bankers Rigged the World Read online

  On July 13, the parliament approved the 2018 federal budget proposal. The new minimum wage (as recommended by Meirelles) per month was set at R$979, or the equivalent of US$300. It was the smallest increase in the entire historical series. To compare it with other costs, consider that the average price for house or apartment rental in Brazil is R$1,000 per month.154 Meirelles was also the main proponent of labor reforms that were punitive to workers, increasing hours and reducing guarantees of rest.155

  The crisis Brazil faced, with no prospect of improvement until 2019 or 2020, was directly caused by the influence of Meirelles in Brazil’s three most recent governments, first as chairman of the central bank, then as a government opponent working in the shadows with Washington, DC, and last as minister of finance. The relationship of Brazil with the Fed, IMF, China, and other global players was critically bound to the nation’s disastrous economic and monetary policies that rendered it more of a passive participant on the global stage, albeit a pivotal one.

  During the first G20 meeting held since Donald Trump became US president, in Hamburg in July 2017, Meirelles touted his accomplishments and Brazil’s ameliorated condition: “We are managing in a very focused and concentrated way the economic agenda, the economy is going well, which is a more relevant aspect. The market has maintained relative stability. The labor reform is on the way. Pension reform should be discussed in the second half. In summary, we continue to work hard.”156 In reality, the unemployment rate was rising and economic activity was declining.157

  On July 13, 2017, Meirelles’s former boss Lula was convicted and sentenced to ten years in prison for graft.158

  The SELIC hit 8.25 percent by September 2017, as Brazil’s stock market rose in tandem. As for Meirelles: his bid for a trifecta loomed. Having run the central bank and the ministry of finance, in the fall of 2017, he began mounting his 2018 campaign for president.159

  3

  CHINA: Dragon Rising

  The outbreak of the crisis and its spillover to the entire world reflect the inherent vulnerabilities and systemic risks in the existing international monetary system.

  —Dr. Zhou Xiaochuan, governor of the People’s Bank of China, March 23, 2009

  The twenty-first century rise of the People’s Republic of China as an economic, monetary, and political superpower was accelerated by the US financial crisis and the Federal Reserve’s collusion with G7 central banks to liquefy the financial system with conjured money.

  China turned wary of the possibility of US economic contagion and publicly skeptical of the manner in which the US government enabled its banks to wreak global havoc as well as the links between cheap money, the US dollar’s supremacy as the world’s main reserve currency, and dangerous speculative asset bubbles. Concern and opportunity propelled China’s geopolitical expansion in the 2010s following its economic expansion in the 2000s. The world’s longest-serving G20 central bank head, Zhou Xiaochuan, who led China’s central bank, the People’s Bank of China (PBOC), was key to forging this destiny.

  Zhou became governor of the PBOC in 2002. He was reappointed in 2007 and again in 2013. Zhou, born in 1948, the year the PBOC was established and the year before Mao Zedong proclaimed the establishment of the People’s Republic of China (PRC), was the son of an early Communist Party member who mentored former Chinese president Jiang Zemin. Zhou trained academically as an engineer and was diplomatic in demeanor. His scholarly achievements provided him a similar gravitas in China to Ben Bernanke’s in the US establishment.

  On March 24, 2009, in a marquee speech, Zhou argued that the ongoing financial crisis was a by-product of loose regulations and US dollar dominance in the international monetary system. To diversify from the US dollar, he advocated moving the world, in general, and China, specifically, toward the IMF special drawing rights (SDRs) as a centrally managed global reserve currency.

  Under Zhou’s leadership, the PBOC provided extra liquidity to China’s market by reducing reserve requirements (RRR) for Chinese banks. It adopted more market-friendly guidelines and transparency measures for the yuan to become a part of the IMF’s SDR basket. Throughout China’s march to greater influence on the global financial and monetary stage, Zhou engaged in constant public battles with the United States about the risks of US monetary policies.

  There was something of the warrior Lao Tzu in his approach to pushing market reforms for the benefit of external consumption while pressing China’s position as a superpower. Internally, Zhou orchestrated what he deemed best for China regardless of outside pressure. He spoke in reserved tones. For that very reason, his speeches often were misleading. Foreign politicians and press chided him and the PBOC for lack of transparency regarding its currency-related policies, but these US-led, often randomly dispensed criticisms rarely had numerical basis. In that regard, the PBOC was no different from any other central bank, including the Fed or the ECB.

  President Jiang Zemin (1993–2003) first championed the notion of an ideal Chinese “socialist market economy.”1 In a 1997 speech addressed to Henry Kissinger and the late World Bank president Barber Conable, Jiang said, “The nonpublic sector is an important component of our socialist market economy.”2 Under his tutelage, and before Hu Jintao succeeded him as president, China became the fastest-growing economy in the world.3 Zhou assumed his post on that wave of expansion and extended it to augment China’s growing prominence in the superpower hierarchy, directly competing with the United States.

  The US Fed assumed its role as global monetary policy coordinator as a result of the Bretton Woods agreement of 1944. But China began to play the long game after the financial crisis, disrupting US influence by increasing its own. This meant growing its economy, expanding its lending profile with countries that were formerly recipients of US debt, and forming fresh trade, currency, or other diplomatic partnerships with them by investing in long-term infrastructure and sustainable energy projects, and elevating its currency to one of the top five in the world. Even Japan, China’s former foe and ally of the United States, chose to establish bilateral and multilateral agreements with China that were unheard of before the Fed began its collusion and money-conjuring scheme.

  ZHOU’S INTUITION

  During 2008, the Fed cut rates from 3.5 percent to 0–0.25 percent as the PBOC maintained rates at 7.5 percent until September 2008, when it cut rates to 7 percent and then further, landing at 5.8 percent in November.4 Because of financial banking system turmoil during the first half of 2008, the US dollar fell against other major currencies. It even lost some of its luster as a safe-haven currency in late 2008, when the US-caused international financial crisis intensified and the Fed colluded to take global money-conjuring policy to unprecedented heights.

  On March 6, 2008, ten days before the collapse of Bear Stearns, Zhou exhibited a moment of prescience.5 Relying on his pragmatic and measured thinking as a trained engineer, he addressed a press conference on economic development and regulation held by the 11th National People’s Congress (NPC) at the Great Hall of the People in Beijing. His assessment of the situation developing in the United States was prophetic.

  Zhou saw an approaching boiling point and warned policymakers to be prepared for more fallout in the US banking system. Well before the broader US population became aware of it, and while US policymakers were pretending everything was fine, he told the gathering at the NPC, “The crisis has not yet run its course and it shouldn’t be ignored.”6

  Yet, as the Fed entered a more aggressive money-conjuring mode toward the end of the year, Zhou reluctantly began decreasing rates, too, starting in September 2008. Five more reductions followed through December. Zhou pursued a gradual yuan valuation versus the US dollar (applauded by US policymakers) during the first half of 2008 as a way of controlling China’s own rising inflation.7 During the second half of 2008, he kept the yuan stable compared to the US dollar.

  Zhou’s deftness at his role—balancing what was good for China with caution for potential problems with external poli
cies—took center stage. He understood the difference between the direct and indirect impacts of the escalating US subprime crisis on China.

  “In terms of the direct impact,” he said, “the proportion of subprime investments accounted for by Chinese financial institutions is relatively small, and they can handle it.”8 Indirect impact was another beast. As he opined, “The US economy may influence the global economy, for instance when it comes to trade, and… further effects.” With the Fed poised to enter its longest period of zero interest rates ever, the PBOC’s position on coordination or opposition was measured. “There’s certainly room for interest rates to rise,” said Zhou.

  China needed to contain its domestic inflation, which required higher rates that lifted the value of the yuan. In the world of conjured money, this policy ran counter to the Fed’s, yet in parallel with what the US government desperately wanted from China for trade purposes: a strong yuan that would render Chinese imports more expensive and US products more attractive price-wise.

  On March 14, 2008, the yuan responded to the PBOC’s policy of setting stronger exchange rate midpoints as a way to fight inflation (Chinese inflation had hit an eleven-year high of 8.7 percent in February 20089). For two straight days, the PBOC elevated reference rates, pushing the yuan to 7.0875 against the dollar, its highest level since it abolished the fixed rate peg to the dollar in 2005.10

  The renminbi (RMB) had been pegged at RMB 2.46 per US dollar for decades. During the 1970s, it was revalued until it hit RMB 1.50 per US dollar in 1980.11 When China began opening its economy in the 1980s, the renminbi was devalued to lift the competitiveness of Chinese exports in an early form of currency wars. As its account balances improved, China adopted a higher peg of RMB 8.27 per US dollar from 1997 to 2005. On July 21, 2005, that peg was lifted. The yuan strengthened from July 2005 to July 2008. China reinstated the peg unofficially as the financial crisis intensified in July 2008.

  Despite calamity within its own banking system, the United States was adamant about dictating the path of China’s currency and financial policy. Just after the collapse of Bear Stearns, during his trip to China, Treasury secretary Hank Paulson, who later wrote a book touting his closeness with China, particularly during his days as the CEO and chairman of Goldman Sachs, noted that “a more flexible exchange rate is a more powerful tool in redirecting growth to domestic consumption.”12 He wanted China to look inward rather than compete.

  China’s reasons for being less protectionist had nothing to do with the United States but with internal inflation pressures due to rising food prices and its growing current account surplus. Yet Paulson chose to consider these items US related, or even US dictated. It was a power play combined with a pat on the back. The yuan gained 4 percent versus the dollar during the first quarter of 2008 compared with 6.86 percent in 2007.

  Paulson was one of many US leaders obsessed with ruling China’s currency policy and market reforms so as to open its capital borders to outside speculators, such as Brazil and other emerging nations were pressed to do. He tried to accomplish this change as a public servant, though he began this effort at Goldman Sachs, where he championed the firm’s relationship with China for deal-making purposes. Like President Nixon, in whose administration Paulson had worked before he moved to Goldman Sachs, his visits to China sowed political and economic seeds.13 “They’ve headed down the path to a market economy and capital markets are a very powerful force for good,” he told the press in April 2008.

  But like other US leaders, he had a blind spot for how the US banking system, compared to that of China (or of other countries), operated. He downplayed its propensity to cause financial destruction in the aftermath of the Bear Stearns collapse but before Lehman’s and full-blown financial crisis. Instead, he pressed ahead with the ideologies of the Strategic Economic Dialogue initiative he began in 2006, to encourage China to liberalize its markets. As Paulson noted on a visit to China to speak with Chinese leaders on April 2, 2008, “The key is that, as they open up and they’re the ones that create the regulatory structure,… the same rules will apply to all financial institutions.”14

  The US banking sector, including his former firm, would soon be bailed out by a combination of congressional funds and conjured-money policy. Paulson’s concern about China’s banking sector was misguided—it was the US banking system that would implode under a mélange of regulatory misses. In that wake, Chinese banks would ultimately rise in global stature. Paulson’s brand of China-blaming was part of a bipartisan doctrine of similar diatribes, which China handled by attacking US monetary policy as it built up its own empire.

  The Chinese government and the PBOC pressed yuan appreciation policy for its own purposes, not Paulson’s or the United States’. By July 10, 2008, the yuan-dollar exchange rate hit 6.8464, its highest level since 2005.15

  Unlike the more somber, “blank-faced,” and reserved Hu Jintao, who cracked one joke (about hair dye) during his decade at the height of Chinese power,16 Premier Wen Jiabao cultivated a friendly image with the upper echelons of Communist Party leadership and external leaders. His demeanor played well in international circles, enabling him to dispense uncomfortable truths about the subprime crisis, though for the most part they fell on deaf ears. In September 2008, at a meeting with Wall Street bankers, Wen underscored the rapid development of Chinese-US economic and trade relations as mutually beneficial to both countries and as contributing to global economic development, though the US subprime mortgage crisis triggered a financial upheaval.17

  A few days later, at a World Economic Forum meeting, Wen warned, “The greatest challenge facing the international economy and finance is that the sub-prime mortgage crisis has affected some financial enterprises, even the physical economy, which resulted in the slowdown of global economy.”18 China had gotten caught in the storm of US regulatory and banking system recklessness and wasn’t pleased about it.

  As the financial crisis in the United States escalated, however, the PBOC found itself having to adhere more to the Fed’s rate policy for liquidity reasons. On September 10, 2008, the PBOC reduced its benchmark loan interest rate and reserve requirement ratio for commercial banks by 0.27 percent to “foster economic growth.” It was the first rate decrease since October 2005. The move reflected concern over the slowing economy and eased inflationary pressure.

  The September 15, 2008, collapse of Lehman Brothers increased international instability. The Japanese yen benefited as “the” safe-haven currency, the largest reserve currency after the US dollar and the euro—which were both mired in banking problems—and exhibited its highest daily gain since 2002.19 The Dow Jones Industrial Average (DJIA) experienced its biggest drop, 504 points, since the attacks on the World Trade Center on September 11, 2001.20

  For the first time in ninety-five years, the Fed decided to accept equities as collateral for cash loans at one of its special credit facilities. It expanded its emergency lending avenues, while the ECB and Bank of England injected money into their codependent financial systems to keep them alive.

  On September 29, 2008, the US House of Representatives rejected a proposed $700 billion rescue for banks, causing further upheaval.21 The Standard & Poor’s 500 stock index fell almost 9 percent, and the Dow Jones Industrial Average shed 778 points (almost 7 percent), to 10,365.45. The Nasdaq Composite fell 9.1 percent, its worst decline since the crash of 1987. Asian and European markets swan-dived.

  A month later, the PBOC cut rates for the third time in six weeks, decreasing by 0.27 percent the one-year loan rate to 6.66 percent and one-year fixed deposits from 3.87 percent to 3.60 percent.22 “China’s economy is still facing relatively big downward pressure,” the PBOC said. “At the same time, the overall level of domestic prices remains low, and real interest rates are still higher than the historical average.”23 China claimed it was little affected by the US financial crisis yet worried about global recession and the effect on its exports. That was not entirely accurate: the main concern in China was the
effect the crisis would have on consumption and demand for Chinese products.

  In November 2008, the PBOC cut its one-year lending and deposit rate by 1.04 percent, the largest reduction since the late-1990s Asian financial crisis. Its explanation echoed the Fed’s, that the move was done “to implement a flexible monetary policy, to ensure the fluidity of the banking system, to ensure stable growth of credit and to demonstrate the positive role that monetary policy plays.”24 Zhou had temporarily shifted his discourse to both resonate with the Fed’s strategy and emphasize the importance of his monetary policy.

  It was clear to him and the Chinese government which country was hampering their growth and why. The PBOC noted, “China’s economy has slowed significantly after the collapse of Lehman Brothers in September. Industrial growth slumped last month to a seven-year low while exports, imports, retail sales and fixed-asset investment all weakened.”25 Just before Christmas, the PBOC cut its key rates again in an effort, it said, to maintain economic growth and job levels. The one-year loan rate was cut by another 0.27 percentage point to 5.31 percent and the one-year fixed deposits decreased to 2.25 percent.26

  YEAR OF THE OX

  Throughout 2009, most developed countries’ central banks dove deeper into money-conjuring mode. Emerging nations had to balance their domestic needs while succumbing to this directive, and the world economy saw no real recovery. Although the results of the Fed’s policies did not boost US employment or growth rates, some US banks declared considerable profits derived from the unrestricted use of cheaper money, while others remained at risk. To assign blame elsewhere for US economic problems, the US Treasury Department strongly criticized Chinese exchange rate policy and colluded with other developed countries to do the same.