As the new year begins, there is cautious optimism on Wall Street that the Federal Reserve will continue to moderate or perhaps reverse its moves to raise the federal funds rate. The Fed’s policies of increasing the rate target have led to expectations that a recession with rising unemployment will develop. What is the federal funds rate, and what is its relationship to the chances of a 2023 recession?
Federal law requires that commercial banks keep a certain amount of ready cash on hand either in the form of legal tender currency — paper money and coins — or deposits in one of twelve district Federal Reserve Banks making up the Federal Reserve System. The federal funds rate is the interest rate on loans commercial banks make to other commercial banks overnight.
When a bank is short of legally required cash reserves, it borrows from other banks that have a surplus over the legally required minimum. The money market is said to be tightening when the rate is rising. When the rate is declining, the money market is said to be easing. A tightening market precedes a recession, while an easing market points to an economic recovery. The Open Market Committee of the Federal Reserve System (today headed by Chairman Jerome Powell) — through the Federal Reserve Bank of New York — sets a target range for this interest rate, called “fed funds.” The fed funds target is currently between 4.25% and 4.50%. (1)
If the rate falls below 4.25%, the Federal Reserve Bank of New York pushes it up. It sells short-term government securities or borrows funds overnight from the New York money market through repurchasing agreements or repos. This results in a rise above 4.25%. If the rate rises above 4.50%, the Federal Reserve Bank of New York does the opposite: it feeds more money into the money market to push the rate back into the target range. It does this by purchasing short-term government securities or using repos to loan money overnight to commercial banks.
The movement of the federal funds rate affects not only New York money market interest rates but, under the dollar-centered international monetary system, interest rates throughout the world.
Rising rates mean rising monthly mortgage interest and credit card payments, but also rising debt service costs for the government — local, state, and federal. A rising trend in interest rates is bearish for the stock market, as the flow of dividends will be capitalized at a higher interest rate. (2) When a recession arrives, a cash crunch forces many indebted stock owners to sell their shares to raise cash to pay off their debts being called in or meet interest payments coming due. During a recession, profits decline and are sometimes replaced by losses. This causes dividend payments to stagnate. (3)
Falling interest rates are bullish because dividends are capitalized at lower interest rates, and accelerating business activity means higher profits and the growth of dividends associated with them. During the upward phase of the industrial cycle, interest rates rise gradually, but the mass of profits and dividend payments keep rising. As the rising phase of the industrial cycle approaches its end, the rise in interest rates accelerates, and stock market prices begin to fall. Then, as the boom transitions into recession, interest rates reverse direction.
At first, the arrival of the recession drives stock market prices lower due to the cash squeeze, the prospect of lower dividends, and rising corporate bankruptcies. But at a certain point in the recession, the cash crunch eases. This, combined with falling interest rates and the prospect of economic recovery with rising profits and dividend payments, causes stock market prices to rise. This is when smart money begins to purchase stocks. Every industrial cycle has many variations, but these general patterns are reproduced in successive cycles. (4)
To people who don’t understand the nature of money (including the lay public, all schools of capitalist economics, and most of today’s Marxists), the Federal Reserve System and its Open Market Committee seem to be in command of the course of the world’s capitalist economies. If the Fed creates too much money, excessive demand leads to inflation. It seems that when the Federal Reserve System creates too little money — by setting the target for the interest rate on fed funds too high — the result is slow growth or outright recession with rising unemployment. It appears that if the Fed gets the fed fund target rate just right, there is near-to-full employment, but not “over-employment,” where wages rise in an “inflationary” way — meaning not that rising wages cause price increases but rather a fall in the rate of surplus value and the rate of profit. (5)
According to U.S. Fed and U.S. government policies, the annual rise in the cost of living should be around 2%. When things go wrong, either with inflation above 2% or slow growth with rising unemployment — or outright recession — progressives and reactionaries blame not the capitalist system. Rather the Fed (and its Open Market Committee) is blamed by progressives and reactionaries alike.
If you have mastered the work of Karl Marx based on his uncompleted critique of classical bourgeois political economy (including an understanding that money must itself be a commodity produced by industrial capitalists for profit like other commodities), you realize the Federal Reserve System — or any central bank — has less power than it seems. This is not to deny that the Federal Reserve System can make things worse through unwise policies (from capitalism’s viewpoint) policies. If it creates too much paper money, the result is inflation and, eventually, a recession. If it creates too little paper money, it can cause unnecessary business stagnation and recession.
In the worse case, a tight monetary policy can make an inevitable recession worse than required to remove the barrier that overproduction represents to profits. No policy followed by the capitalist central bank (the Federal Reserve System) can prevent a recession and mass unemployment from developing once overproduction has gotten to the point where it floods the market with unsold commodities, destroying profitability.
I have written about this many times since this blog began in 2009, with examples drawn from past crises. Now we can see the effects of overproduction unfold in real-time, and they’ve already had political consequences. The most important so far involves the aborted British Tory government of Liz Truss. In 2022, widespread dissatisfaction with the leadership of Prime Minister Boris Johnson triggered a power struggle within the Tory party that led to his ouster. The main candidates to succeed him were Liz Truss and Rishi Sunak. Truss was the more radical candidate who saw herself as a kind of 21st-century Margaret Thatcher. She advocated a series of cuts to Britain’s highly popular socialized healthcare system. Truss supported deep tax cuts for the rich that would have increased the budget deficit run by the central government. She claimed these policies were necessary to accelerate Britain’s slow economic growth rate. Her policies proved popular with the Conservative Party, and Truss became prime minister.
In a so-called mini-budget, Truss presented her reactionary program to the House of Commons, where the Conservative party has a solid majority. Normally the financial markets would have reacted with massive bull moves, but not this time. The market for British government bonds crashed. The Bank of England intervened to stabilize the markets but warned its intervention could last only a few days. As a result, the mini-budget was withdrawn, and Truss was forced to resign after only six weeks in office, the shortest term ever served in the history of British prime ministers. She was replaced by her rival, the more conventional Tory reactionary, Rishi Sunak.
Truss failed to consider that, in reaction to the overproduction of the COVID aftermath boom, the global money market had been tightening during 2022. There wasn’t enough money on the world money market to finance a major increase in borrowing by the British government without causing a rise in interest rates worldwide. Under the ongoing conditions of global overproduction and the tightening of the world money market, this could have triggered a major financial panic. And so she had to go.
The relentless tightening policy of the U.S. Federal System’s Open Market Committee was the conventional explanation for tightening the world money market money that had such dire consequences for Truss. As explained in earlier posts, the COVID aftermath boom led to a wave of commodity hoarding, triggering overproduction. This was intensified by the Fed’s easy money policies during and after the 2020 COVID shutdowns, which caused underproduction. The resulting demand drove commodity prices higher in terms of dollars as well as gold.
During the 2021-22 inflation, gold proved to be a lousy inflation hedge, just as it had in the booms after World Wars I and II. At first, the Fed said inflation would go away as a resumption of normal industrial production eliminated the shortages. But it didn’t reckon on the multiplier and accelerator effects that forced capitalists to buy before prices rose higher. As a result, overproduction was whipped into a frenzy as unsold commodities tied up shipping ports. Fearing that the suddenly overheated economy would crash unless promptly reined in, the U.S. Fed was forced to reverse course and drive up the fed fund’s interest rates to restrain the boom.
The result was a bear market in stocks, bonds, and cryptocurrencies in 2022, as well as the collapse of Sam Bankman-Fried’s FTX, followed by Bankman-Fried’s criminal indictment and Liz Truss’s aborted Tory government. As the year ended, signs multiplied that the inflationary COVID aftermath boom was drawing to a close. As the money market tightened, the growth in demand that had fueled inflation ran out of steam. Gasoline prices fell (which may have played a role in limiting Republican gains in the 2022 election), and though other prices are much higher than before COVID, the rate of increase seems to be ebbing.
But bringing inflation down brought economic growth to a halt. The consequences are that the number of jobs being created is tapering off. Major corporations, including Amazon, Goldman Sachs, META (parent company of Facebook), and Twitter, among others, have announced major layoffs in the first weeks of January 2023, which are yet to be reflected in official employment-unemployment statistics.
Though the Labor Department estimated that total employment rose 223,000 in December 2022, this is a drop from the height of the COVID aftermath boom. In addition, the Labor Department estimated that the hours worked per week fell slightly, which pointed toward an end to the job growth of the boom. [Source: Bureau of Labor Statistics]. Another sign is the slowdown in dollar wage increases. Harvard economics professor Jason Furman wrote, “Wage growth … slowed a lot;” which represented the “best reason for hope on moderating inflation.” The fact that wage increases slowed so much raises doubts about the accuracy of the Labor Department estimate that 223,000 jobs were created in December. There are other figures casting doubt on job growth as well.
U.S. retail sales and industrial production decline
According to the U.S. Commerce Department, retail sales declined 1.1% in the key shopping month of December. This followed a 1% decline in November. These declines are expected in a recession. Industrial production shows a similar recessionary trend. Official figures show that U.S. industrial production declined by 0.7% in December after declining by 0.6% in November. But this isn’t the whole story. Manufacturing, the core of industrial production proper, fell at an even greater rate in both November (1.1%) and December (1.3%). Unless these trends reverse, unemployment will rise soon if it hasn’t done so already.
Professor Furman wasn’t the only one who was encouraged. President Biden said, “This moderation in job growth is appropriate.” He failed to add for what class the job slowdown is appropriate. Is it any wonder that his polling numbers are so low? With industrial production and retail sales heading south, unemployment is set to rise. The only question is how much it will increase before it peaks. Will it be the Labor Department’s estimate of a rise to around 4.4% over the next year with a gradual recovery after that, according to the U.S. Commerce Department — a so-called soft landing? Or will it soar to 6% or higher over the next year, a so-called hard landing? (6)
In response to the slowing economy and inflation rate, the Fed’s Open Market Committee increased its target for fed funds by only 0.50% in December. There’s hope on Wall Street that the committee might increase the federal funds target by only 0.25% in January and even halt further increases later in 2023. It then would be expected to pivot and start lowering the fed funds target by late 2023.
Some on Wall Street think they see the approach of a new bull market in stocks fueled by the prospect of both lower wages — a higher rate of surplus value — and lower interest rates. Stock market speculators, impatient to get in on the bottom, are behind the push of the stock market higher in the final weeks of 2022 and the first several weeks of 2023. (For example, the Dow Jones Industrial Average rose from 28,725.51 on September 31, 2022, to 34,302.61 on January 13, 2023. Other stock market indexes in the U.S. and around the world showed similar movements.)
The stock markets seem to be betting on a soft landing. It will be possible only if overproduction has not yet developed to the point that a major recession is unavoidable in the near future. In that case, the Fed would have successfully nipped overproduction in the bud. This is doubtful considering the frenzy of the COVID aftermath boom, especially since, aside from the COVID shutdowns of 2020, there has not been a full-scale global recession since 2007-2009. The COVID shutdowns replaced a normal recession followed by a normal recovery. Instead of the normal development of the industrial cycle, we had underproduction, followed by a surge of credit-fueled overproduction represented by the COVID aftermath boom, as I explained in earlier posts. This resembles the World Wars I and II aftermath booms that ended in full-scale recessions.
The Fed has been criticized for not rapidly increasing its fed funds target rate and halting qualitative easing measures earlier to rein in the COVID aftermath boom. Qualitative easing refers to a method of monetary inflation aimed at easing the money market. It was first employed during and after the crisis of 2008. At the time, the funds rate was approaching zero and couldn’t be lowered any further.
The Fed responded by purchasing long-term government bonds and mortgage-backed securities in addition to short-term Treasury bills and repo operations. They hoped to flood the banking system with newly created dollar-denominated reserves to prevent the death of credit, as occurred in 1931-1933. The Fed repeated the operation during the 2020 COVID shutdown, fearing that the sudden restriction of normal commodity production and circulation would provoke a credit collapse.
Perhaps if the Fed had halted quantitative easing as soon as the COVID restrictions began to be lifted in 2020 and moved to raise its target for fed funds, the COVID aftermath boom and the associated overproduction would have been more restrained. The massive unemployment — the worst since the 1930s Great Depression — that accompanied the 2020 COVID shutdowns would have declined more slowly. If massive unemployment had lingered, the wave of strikes that developed during the boom may have been more subdued or not have occurred since the balance of forces on the labor market would have been less favorable for the workers.
The chances of avoiding what I call a reset recession or keeping it mild would have been better. This would’ve been a better outcome for the capitalists — though they did make huge profits during the boom. For our class, prolonged unemployment would have been a worse outcome. If the current downturn turns into a deep recession or stagflation followed by a recession, it won’t be great for our class either. But capitalism never is.
Assuming that credit-fueled over-trading and overproduction have progressed to the point that a full-scale recession is the only way that capitalist profits can be preserved in the long run, any attempt to achieve a soft landing by slowing, freezing, or reversing the rise in the fed funds rate is doomed. The unavoidable recession can then only be postponed at the price of stagflation, which can only end in a worse recession. Even with low unemployment and high demand for the labor power commodity, inflationary periods are bad for real wages. So insisting that the Federal Reserve System lower interest rates in the face of overproduction does not provide a way out for the working class.
The danger of stagflation
As the end of a boom approaches, competition among financial, commercial, and industrial capitalists forces them to keep expanding (or at least not reduce) their loans, inventories, and production before their competitors do. A bank that cuts back on its loans while competitors keep expanding them will lose business to its competitors, a merchant who runs out of stock will lose customers to other merchants. Most important, an industrial capitalist that cuts production and lays off workers too soon will lose business to other capitalists. Driven by the pressure of competition, business is still in expansion mode, and hiring continues. When this happens, the financial press complains the economy is overheated, meaning that recession-breeding overproduction is occurring, soon making falling profits and recession inevitable.
For this reason, the Fed can’t control the economy like controlling the water level in a bathtub. In 2022, the Fed complained that businesses kept hiring workers when they should have reduced or halted new hiring. The Fed wanted businesses to check overproduction before recession became inevitable. But driven by competition, business was unable to do this.
At some point, a severe shortage of cash forces financial, commercial, and industrial capitalists to move to reduce loans, inventories, and production so they can make loan and interest payments coming due. The crisis has arrived, cash is king, and everything changes. As business after business cuts back to conserve cash, individual businesses no longer run the risk of losing customers if they cut back. Falling interest rates no longer stimulate business.
The multiplier and the accelerator effects now work in reverse. In response, the Fed progressively lowers the fed funds target. In earlier days, the Bank of England reduced its (re)discount rate. In extreme circumstances, the Federal Reserve Reserve System resorts to qualitative easing.
But no fall in interest rates will revive business until excess inventories — overproduction — have been liquidated. A period of overproduction must be followed by a period of underproduction. If a rapid fall in the fed funds target and federal deficit spending whip up demand before overproduction is sufficiently liquidated, interest rates reverse direction and start rising. This is followed by a new cash crunch that soon leads to the crisis’s resumption. Only when recession/depression — through a period of underproduction and mass unemployment that does a thorough job of liquidating overproduction — will a full-scale upswing of the industrial cycle develop, usually lasting seven to eleven years.
After the 2007-09 Great Recession, left-wing Keynesian economists and progressives complained that the Obama stimulative package was too small for a return to full employment, considering the massive unemployment and excess capacity created by the crisis. They were right. But the small size of the stimulative package postponed the appearance of renewed overproduction on a scale sufficient to lead to a new crisis.
Because Obama’s conservative fiscal policies delayed the development of new overproduction on a world market basis, a new global crisis of general commodity overproduction had not yet developed when the March-April 2020 COVID shutdowns interrupted the normal course of the industrial cycle. As we’ve seen, the overproduction — which was slow to develop during 2009-20 thanks to the severity of the preceding crisis and the Obama administration’s fiscally conservative policies — the industrial cycle which began with the 2007-09 crisis lasted right up to the COVID shutdowns.
Based on government statistics on industrial production and retail sales, a recession is beginning. Why, then, doesn’t the Fed make an emergency move to reduce its fed fund target in light of these developments. Why did they raise their target by 0.50% when the economy was already slowing at their December meeting?
Today’s progressives are not the only ones who believe the central bank should move to reduce interest rates in a situation like we’re in now. John Maynard Keynes wrote about it in his “General Theory,” first published in 1936. In Chapter 22, entitled “Notes on the Trade Cycle,” Keynes wrote, “the remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the so-called boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus keeping us permanently in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom.’” (Source: The General Theory of Employment, Interest, and Money by John Maynard Keynes). If the Federal Reserve System followed Keynes’ advice, they’d immediately lower their fed funds target. But if you asked the Fed’s bankers why they’re not doing this (and if the bankers were honest — good luck finding an honest banker), they’d answer, “We tried that in the 1970s, and it led to runaway inflation.”
When central bankers tried to implement Keynes’s advice in the 1970s, they ran into the commodity character of money, what Marx called in “Capital, Volume III,” the metal barrier. In Marx’s day, this meant that if the Bank of England lowered interest rates too soon to avoid or minimize a recession, it faced a run on its gold reserve. Keynes was well aware of the metal barrier but saw it as a mere technical problem associated with the gold standard. But Marx saw it as an organic feature of the capitalist system. To remove the metal barrier, Keynes advocated that central banks end their promise at once and redeem their currency into a fixed amount of gold. Marx advocated the working class revolution to transform the capitalist system into socialism.
At the beginning of the 1970s, the U.S. Treasury ended its promise to pay gold for dollars at a fixed rate to foreign central banks holding dollars as reserves. U.S. policymakers believed this would let them nip recessions in the bud or even avoid them altogether, as Keynes advocated. (7)
But when they tried to implement such policies, the demand for gold soared on the open market, causing the dollar and other currencies linked to it to fall. Dollar inflation was whipped into a frenzy, and interest rates were driven up in a phenomenon called stagflation. The Fed ran smack into the metal barrier in a different form. In the end, central banks were forced to return to their traditional policies of raising interest rates (or not lowering them) until a recession was underway. They then lowered them cautiously even though the gold standard was not restored.
As signs of incipient recession and slowing inflation have multiplied, the belief has spread that the U.S. Federal Reserve System, which functions as the world central bank, will slow down, increasing the fed fund target. But it could overdo it and reignite the boom before a recession removes the barrier to profits that commodity overproduction of the COVID aftermath boom represents. As a result of these fears, the dollar has weakened against other currencies and, most importantly, against gold. (8)
The belief that the Fed would slow the rate it’s been increasing, the fed funds target seemed to be confirmed when it announced it was raising the target by only 0.50% in December instead of 0.75%. The gold market — the exchange rate between the dollar and gold — was quick to react. On October 14, 2022, the dollar price of gold closed at $1,650.20, the lowest since the pandemic sent the price soaring in early 2020.
As the belief began to spread that the Fed would slow and possibly halt its rise in the fed funds target, the gold market started to reverse direction. The trend accelerated during the second week of January when gold rose from $1,870.50 to $1923.00 on the 15th, in only one week. Interestingly, the dollar price of oil also increased during the same week from $73.73 to $80.07 a barrel.
Too much shouldn’t be made of weekly moves. Markets often move in one direction one week and reverse the next. Here the markets are sending a message to the Fed’s Open Market Committee. If you fight further rises in interest rates by issuing dollars at a faster rate before a cash crunch replaces the COVID aftermath boom with an overproduction liquidating recession, stagflation will not be far behind. The metal barrier Marx wrote about hasn’t gone. Only its form changed with the passing of the gold standard.
If signs continue to multiply that a recession threatens or has already begun and overproduction is being liquidated, fears about stagflation will recede. Then the Fed can start to reduce its fed funds target. But, on the other hand, if the boom resumes before the overproduction of 2021-22 has been sufficiently liquidated, the Fed will have to resume raising its fed funds target or face stagflation — with all its consequences.
In the next few months, whether the economy goes into full-scale recession or moves toward stagflation, it could have implications for the outcome of the Russo-Ukrainian war. Right after Russia launched its special military operation on February 24, 2022, U.S.-NATO opened an economic war against Russia designed to crash the ruble and the economy. (9)
Soaring oil and natural gas prices protected the ruble and the Russian economy from this economic war. Then as the Fed kept increasing the fed funds target, leading to expectations of a world recession in 2023, the price of oil and natural gas reversed direction, causing the ruble to lose strength. These trends have been further strengthened by what has turned out to be a mild winter in Europe.
If a world recession develops in 2023, oil and gas prices will keep falling, and the dollar will rise against gold and other currencies as businesses and governments scramble for dollars as a means of payment, even as the fed funds and other interest rates fall. With large amounts of dollars falling out of circulation due to the recession, Washington will have no difficulty finding money to borrow on the world money market to finance arming the puppet Ukrainian Euromaidan government and increase intervention in other ways. At the same time, as oil and natural gas prices fall, the balance of payments will shift against Russia, causing a rise in Russian interest rates and ruble inflation. This will make it difficult for Russia to finance the war before it falls into a deep recession.
If 2023 instead brings stagflation, prices for oil and gas, fertilizers, and food will rise in dollar terms. Capitalists across the globe will move to get rid of dollars as they buy more before dollar prices rise even higher. This will make it easier for Russia to finance its war effort. This will change when stagflation gives way to recession, but stagflation gives Russia more time to win the war. This puts additional pressure on the Fed’s Open Market Committee, organs of U.S. imperialism, to follow policies leading directly into recession instead of policies leading to recession through stagflation.
Taiwan, the law of absolute advantage, and the battle for control of the world semiconductor market
However things turn out in 2023 and beyond, the Russian-Ukrainian war was not the only event threatening a major war last year. The other involved the Chinese island of Taiwan. This situation has implications for the theory of international trade — is it governed by absolute advantage, as Anwar Shaikh believes, or by comparative advantage, as other economists believe?
Last August 2022, then-U.S. Speaker of the House of Representatives, Nancy Pelosi, staged a provocative visit to Taiwan. Her visit was in brazen violation of the agreement in 1979 between the People’s Republic of China and the United States that established formal diplomatic relations between the two countries. According to this agreement, the United States recognized the government of the People’s Republic of China — thirty years after its founding in October 1949 — as the sole government of all of China under the One China doctrine.
One China acknowledges Taiwan as an integral part of China and the government of the PRC as the only legitimate government of all of China. Taiwan is a Chinese island off the Pacific coast of the Chinese mainland. It is inhabited mostly by ethnically Han Chinese people, with a minority descended from an aboriginal population. When the People’s Liberation Army swept Chiang Kai-shek and his KMT (Chinese Nationalist Party) off the mainland in 1949 — an event called Liberation in China — Chiang and the KMT retreated to Taiwan. Washington found itself unable to militarily intervene on the Chinese mainland as it was preoccupied with organizing NATO and reviving (West) European capitalism to stave off the emergence of a united socialist Europe.
In 1945, U.S. imperialism assumed that with the defeat of Japan, China would fall into its lap. But the victory of the great Chinese people’s revolution of 1949 frustrated those hopes. Enraged by this turn of events, Washington refused to recognize the PRC for an entire generation, calling it “Red China.” Only at the beginning of the 1970s under Richard Nixon did the U.S. move to normalize relations, and then only because Nixon hoped to play China off against the Soviet Union, isolating Vietnam from its allies in the socialist camp and allowing it to be defeated.
Between the 1949 victory of the Chinese Revolution and the 1970s normalization of relations, the United States encouraged capitalist development in what the U.S. media called “Free China” or sometimes “Nationalist China” — not Taiwan. It could hardly be called democratic China, even by the corporate media, because in those years, Taiwan was a one-party state under the personal dictatorship of Chiang Kai-shek (1887-1975).
Washington hoped that a rising standard of living in Taiwan would encourage a successful counterrevolution on the mainland. This proved to be a fantasy. The main takeaway is that nobody challenged the idea that Taiwan was part of China during the Cold War. The government of Chiang Kai-shek, formally known as the Republic of China, claimed to be the legitimate government of all of China. Chiang and the U.S. claimed that the PRC was just a bunch of communists in rebellion against Chiang’s legitimate Chinese government.
Taiwan has been part of China for centuries. When Britain’s Opium Wars against China beginning in 1839, China’s century of humiliation began. Taiwan was seized by the Empire of Japan in 1895 and remained a part of it until 1945 when it was returned to China following Japan’s defeat in World War II.
In 1949 at the time of liberation, the Chinese People’s Liberation Army was unable to liberate Taiwan and bring the Chinese Civil War (raging since 1927) to a conclusion. (10) To liberate Taiwan, the PLA would have needed the military power to defeat not just the armed forces of Chiang Kai-shek but the U.S. Navy and Air Force as well. The Korean war showed that the Chinese armed forces could, at great cost, fight U.S. armed forces effectively on the ground but not in the air or at sea. (11) A modern navy and air force capable of defending itself against the U.S. Navy and Air Force requires a high level of technology that China, just emerging from its century of humiliation, did not have.
With these realities in mind, Beijing and Washington reached a comprise in 1979 called the One China principle. The U.S. acknowledged that mainland China and Taiwan were both part of a single country, and the government of the People’s Republic of China was the legitimate government of all of China. Recognizing the realities of the military balance of power in the Western Pacific, for the time being, the Chinese government tolerated what amounted to U.S. colonial control over Taiwan.
This was the price that Beijing had to accept to have formal diplomatic relations with the most powerful imperialist power on earth. The Chinese government has never compromised on its position that Taiwan is an integral part of China. As it has since 1949, the PRC offers to negotiate with the Republic of China but reserves the right to use force if necessary to reunify China and finally end this relic of the century of humiliation.
In the final period of the Cold War — between the victory of Vietnam over U.S. imperialism in 1975 and the ascent of Mikhail Gorbachev in 1985 — the U.S. and the PRC found themselves in a de facto alliance against the Soviet Union and the socialist camp. During this period, the term Red China with its red-baiting connotations, disappeared from the U.S. media to be replaced by the People’s Republic of China, or China, or very occasionally, mainland China. As the term Red China vanished, so did the term Free China or Nationalist China, replaced by the term Taiwan. Different times, different names!
But Washington has no intention of giving up its colonial control of Taiwan. So instead of claiming that it was a redoubt of freedom in China, it shifted unofficially to the position that Taiwan was a nation in its own right, separate from China. This message has been supported by the corporate media and has now been accepted by a portion of the U.S. left.
Chiang Kai-shek died in 1975. After his death, the one-party dictatorship of the KMT, with Washington’s encouragement, was dismantled. Instead, the U.S. encouraged the formation of a party of Taiwanese separatists called the Democratic Progressive Party. Instead of Chiang’s one-party dictatorship, a U.S.-style two-party system was established. Under this system, the KMT and the DPP succeed each other in free elections, modeled on the contests between the U.S. Democrat and Republican parties.
There is a difference between the two parties. The KMT is rooted in the Revive China Society founded by Sun Yat-sen, the founder of modern Chinese nationalism and the first president of the Republic of China. The party assumed its current name, Kuomintang or KMT — in English, the Chinese Nationalist Party — in 1919. Sun Yat-sen is revered not only by the KMT in Taiwan but on the mainland as well.
The KMT reveres Sun much like the Russian Federation’s Communist Party reveres Lenin. Dr. Sun founded the KMT to lead the struggle against Western imperialism. Its ideology is Chinese nationalism, even though the party has betrayed the cause of Chinese nationalism in practice. The KMT considers Taiwan to be a part of China and might, in the future, be open to making a deal with the PRC along the lines of one nation, two systems.
This would be similar to the agreement between Britain and the PRC when Britain’s lease of Hong Kong expired in 1997. Under this agreement, Hong Kong retains its British-designed system of government — set up during the final days of British colonial rule to create problems for China — while legally becoming a special zone of the PRC. Its full integration was postponed until at least 2047. The PRC made this concession for financial and economic, not military reasons. Continued British and U.S. influence in Hong Kong remains a major irritant and is a reminder that the century of humiliation has not yet been fully overcome. (12)
A similar one-country, two-systems agreement would be a transitional step to the full integration of Taiwan into the People’s Republic of China sometime in the future — perhaps fifty years after the agreement goes into effect. In contrast to the KMT, the U.S.-supported Democratic Progressive Party claims Taiwan is a nation separate from China and should never rejoin. It’s widely believed that DPP leaders hope to declare Taiwan independent with U.S. support at an appropriate moment. A key pillar of Beijing policy is ensuring such a moment doesn’t arise.
Beijing has implied that if a DPP government were to declare its independence, China might react by military means. In contrast to the days of Chiang Kai-shek, Taiwan’s capitalist media, with the full approval of U.S. imperialism, has been trying to convince the people that they are indeed a separate nation and should aspire for independence. In the November 2022 local elections, after the crisis caused by Pelosi’s visit, the KMT scored sweeping victories over the governing DPP. This can be seen as a rejection of the U.S.-supported DPP’s anti-China, separatist, pro-imperialist, and pro-colonialist policies.
There are reasons to believe that the days of U.S. domination of Taiwan are numbered. The main one is that China has emerged as the leading manufacturing country in the world, replacing the United States, which had led since the turn of the 20th century. The U.S. remains ahead in per capita production, as China has almost four times the population. But we shouldn’t underestimate China’s progress, made possible by the victory of the 1949 Chinese Revolution. The U.S. empire continues to dominate the high-tech, high-organic composition of capital industries, though China has been closing the gap.
China and high tech
China is the only country besides the United States to land a probe on the surface of the planet Mars and send back information about conditions in our neighboring world. Today China has the world’s largest radio telescope, is building its own space station, and has been using space probes to explore the moon’s surface. The PRC is expected to soon send its astronauts to land on the moon and, at times, has been ahead in the race to build the world’s fastest supercomputer.
China’s technological progress in these fields has major implications in the military field, especially regarding air and sea power. It seems only a matter of time before China can handily defeat U.S. forces in a sea, air, and land battle to control Taiwan.
Washington has no legal basis to intervene if a shooting war breaks out between the PRC and what is officially the Republic of China headquartered in Taiwan — or any Republic of Taiwan created by the DPP. From a legal point of view, such a war would be a continuation of the civil war between the Republic of China and what was then called the Chinese Red Army — later the People’s Liberation Army — since 1927.
The relationship between China and Taiwan should not be confused with that of the Russian Federation and the Republic of Ukraine. Since the time of the Russian Revolution, successive governments in Moscow acknowledged Ukraine as a separate nation with the right to self-determination. During the period of the Union of Soviet Socialist Republics existing between 1922 and 1991, the Soviet Socialist Republic of Ukraine was a member of the Soviet Federation. But all Soviet constitutions from 1922 acknowledged Ukraine’s right to leave the Soviet Federation at will.
When the United Nations was created, the SSR of Ukraine was represented by its own delegation in the U.N. General Assembly. Today, nationalist Russian President Vladimir Putin deplores what he calls Ukrainian statehood. He is of the view that once enjoyed broad support among many Russian revolutionaries (including many Bolsheviks) that Ukrainians belong to the Russian nationality.
Present-day Russian nationalists believe that Ukrainians will one day choose to join the Russian Federation. Putin has not denied that Ukraine is today an independent country. He blames the Russian Revolution and Lenin personally for the situation. He’s correctly pointed out that Kiev’s present far-right U.S.-NATO-dominated nationalist government that claims to reject everything related to the Russian Revolution and banned all symbols associated with it, to be consistent, should reject Ukrainian independence. They should be begging to once again become a part of Russia. (13)
Will the U.S. wage war against China over Taiwan?
The U.S. government has left the door open on how it would react if Chinese armed forces were to move to reintegrate Taiwan into China. Before the 1970s, the U.S. reserved the right to come to the aid of the Republic of China if its government asked it to do so against the PRC. In the 1950s, Washington even threatened to unleash Chiang Kai-shek on the mainland to settle accounts with the communist rebels once and for all. Although the U.S. has been careful to never explicitly promise to intervene, no treaty exists to that effect.
For years, the military balance of forces has meant that while Taiwan’s Republic of China has no realistic prospect of regaining control of the mainland, the PRC was unable to take Taiwan because of the superiority of U.S. naval and airpower. But with China’s industrial and technical advances, this situation won’t last much longer.
If it becomes clear that the U.S. can no longer defeat China in a battle for control of Taiwan, Washington may decide there’s no alternative but to accept Taiwan’s integration into the PRC. This could be done through a transitional one-country, two-systems agreement. Assuming a revolution doesn’t intervene, this would allow the current governmental system to continue for another fifty years. The difference would be that Taiwan would no longer call itself the Republic of China but would be a special territory within the PRC along the lines of Hong Kong.
Such an agreement might be acceptable (or considered the lesser evil) to a part of Taiwan’s capitalist ruling class. Under a one-country, two-systems agreement, private property would be guaranteed for another fifty years, as in Hong Kong. Many private enterprises thrive today on the mainland. Chinese President Xi Jinping has indicated what he calls state capitalism on the mainland will (per the program of the Communist Party of China) one day give way to socialist ownership that will end private property in the means of production. He has yet to indicate when this will occur, and China, an ancient civilization, tends to think in very long terms. Ultimately this question will be settled by the course of the global class struggle that China, including Taiwan, is a part of.
Recently the U.S. implied that if China moves to reintegrate Taiwan by military force, it will aid Taiwan as it has done with Ukraine. However, the two situations are different. It’s only a matter of time before Taiwan reunites with China. So why is the U.S. continuing to interfere? If this continues, it could lead to a major shooting war between the two, which could, in the worst case, go nuclear.
Why doesn’t the U.S. resign itself to the inevitable and try to maintain as much influence as possible under a one-nation, two-system arrangement as the U.S. and Britain have been doing in Hong Kong? Why did Nancy Pelosi, a liberal politician from San Francisco in the twilight of her political career, make her highly provocative visit to Taiwan? Her visit created a major diplomatic crisis between Washington and Beijing and threatened to lead to a military clash.
The real cause of the unofficial but increasingly strident U.S. championship of Taiwanese independence was revealed in an August 4, 2022, article in the online publication The Conversation. It pointed out that Pelosi met with Mark Liu, Chairman of the Taiwan Semiconductor Manufacturing Corporation (TSMC), while in Taiwan. The article states, “Taiwan’s autonomy [meaning U.S. domination of Taiwan -SW] has become a vital geopolitical interest for the U.S. because of the island’s dominance of the semiconductor manufacturing market.” Further, “U.S. officials began to realize during the Trump administration that U.S. semiconductor design companies, such as Intel, were heavily dependent on Asian-based supply chains for the manufacturing of their products.” For decades, U.S. corporations have designed the chips in the U.S., maintaining ownership of the patents, but often contracted the production to industrial capitalists such as the Taiwan Semiconductor Manufacturing Corporation operating outside of the U.S. where costs are lower. What’s cheaper is the cost of labor power, engineers as well as production workers. This works fine for U.S. capitalists as long as they maintain solid political and military control.
The COVID shutdowns followed by the COVID aftermath boom brought this home both to the leaders of the corporations and their political representatives in Washington. According to The Conversation, TSMC has 53% of the foundry market. The factories that produce processing and memory chips — semiconductors — are called foundries. In addition, another 10% of the world chip market is controlled by smaller Taiwanese industrial capitalists.
This means that 63% of world chip production is carried out on the island of Taiwan. If China and Taiwan were to peacefully reunify today, this would mean that 63% of world chip production would be in the PRC, not counting the chip production already carried out on the mainland. If this remains unchanged when Taiwan is reintegrated, China will not only have a commanding position in many light industries — textiles, garments, and footwear that dominated the 19th century — and in heavy industry — the iron and steel industries that dominated the 20th century. China will also be the leader in the industry, which will likely dominate the 21st century.
Today’s processing and memory chips — semiconductors — are far from limited to computers proper. They’re found in cell phones, automobiles, washing and drying machines, tablets, refrigerators, toasters, and TVs. They’re also found in or control factory machinery. They’re in cruise missiles, aircraft — commercial and military — and space satellites, both civilian and military. Factory, mining, and agriculture machines increasingly rely on computer processors, as does the search for new mineral deposits of nickel, iron, copper, lithium, gold, and other precious metals. Today, the term computer, which seemed to be on almost everybody’s lips in the late 20th century, is passing out of usage. It’s being replaced by the term device because powerful computers the size of a fingernail are now everywhere. In our ever more computerized world, no country can hope to dominate the world capitalist economy without dominating semiconductor-based computer technology.
If China comes to dominate semiconductor technology, the U.S.-NATO world financial and military empire will be history, and Washington knows it. The U.S. is determined to prevent this. This is why military spending is at record levels and rising. This is why Washington is determined to stop the Taiwanese semiconductor industry from falling into Chinese hands.
The CHIPS Act and U.S. neo-mercantilism
On August 9, 2022, President Biden signed the so-called CHIPS Act into law. CHIPS stands for Creating Helpful Incentives to Produce Semiconductors (processing and memory chips).
Wikipedia says, “The CHIPS and Science Act is a U.S. federal statute enacted by the 117th United States Congress and signed into law by President Joe Biden on August 9, 2022. The act provides roughly 280 billion dollars in new funding to boost domestic research and manufacturing of semiconductors in the United States. The law does not have an official short title as a whole but is divided into three divisions with their own short titles: Division A is the CHIPS Act of 2022 (where CHIPS stands for ‘Creating Helpful Incentives to Produce Semiconductors’); Division B is the Research and Development, Competition, and Innovation Act; and Division C is the Supreme Court Security Funding Act of 2022.”
Wikipedia explains, “The CHIPS and Science Act combines two bipartisan bills the Endless Frontier Act, designed to boost investment in domestic high-tech research and the CHIPS for America Act, designed to bring semiconductor manufacturing back to the U.S. The act is aimed at competing with China.”
While the Endless Frontier Act is, under present circumstances, aimed at the PRC, it can be aimed against any country not under the control of the U.S.-led financial, military, political empire. Endless frontiers, indeed!
According to Wikipedia, “The Endless Frontier Act was initially presented to Senators Chuck Schumer (D-NY) and Todd Young (R-IN) by Under Secretary of State Keith Krach in October 2019, as part of the Global Economic Security Strategy to boost investment in high-tech research vital to our national security.”
So while Democrats pretended to be in an all-out fight with the far-right anti-democratic Trump administration, they were at the same time working hand-in-glove with them to pass the anti-China Endless Frontier Act.
Wikipedia explains, “The CHIPS for America Act portion stemmed from Under Secretary of State Krach and his team brokering the $12 billion on-shoring of TSMC (Taiwan Semiconductor Manufacturing Company) to secure the supply chain sophisticated semiconductors, on May 15, 2020. Krach’s stated strategy was to use the TSMC announcement as a stimulus for fortifying a trusted supply chain by attracting TSMC’s broad ecosystem of suppliers; persuading other chip companies to produce in the U.S., especially Intel and Samsung; inspiring universities to develop engineering curricula focused on semiconductor manufacturing and designing a bipartisan bill (CHIPS for America) to provide the necessary funding. This led to Krach and his team’s close collaboration in architecting the CHIPS for America component with Senators Cornyn (R-TX) and Warner (D-VA). In June 2020, Senator Warner joined U.S. Senator John Cornyn in introducing the $52 billion CHIPS for America Act.”
Through the CHIPS Act, with the support of the Democrats and Republicans alike, Washington is telling the capitalists of the TSMC to move their production from Taiwan — in danger of being unified with the PRC — to the U.S. They want Taiwan’s chip industry to be relocated somewhere more militarily and politically secure. If this happens, the Taiwanese economy centered on high tech will be dismantled — in the name of defending democracy. Then China would inherit the ruins of an economy, which the U.S. had earlier hoped might promote a counterrevolution in China.
As PwC.com (PricewaterhouseCoopers) puts it, “The funding, however, comes with a catch: new geographical manufacturing restrictions. … The CHIPS Act prohibits funding recipients from expanding semiconductor manufacturing in China and countries defined by U.S. law as posing a national security threat to the United States. These restrictions would apply to any new facility unless the facility produces legacy semiconductors predominately for that country’s market.”
While the CHIPS Act is handing out generous amounts of money capital — thanks to the U.S. taxpayer — to the capitalists producing the chips and related products, there are strings attached. If a capitalist is to receive these injections of money capital, they must agree to produce only in countries Washington approves of. Among these areas is the U.S. itself. The PRC is among the nations where this production cannot be carried out. Any other country where the capitalists producing computer chips and receiving government subsidies must be approved by the U.S. It’s hard to imagine a purer form of mercantilism.
Here we can see a tie-in to the situation in Ukraine. Due to its Soviet past and despite the ravages of thirty-five years of counterrevolution, Ukraine still has many skilled engineers, scientists, and workers. Because of the years of counterrevolution that was deepened by the Euromaidan coup in 2013-14, labor is cheap. If the U.S. and its Euromaidan clients are victorious in their war with Russia, with Russia weakened or even broken up altogether, Ukraine could emerge as a profitable and secure area for capitalist investment. That would give the green light for capitalists to build “fabs” (microchip fabrication plants) in Ukraine.
If the U.S. and Euromaidan puppets are defeated by Russian armed forces and the people in Donbass, the political future of Ukraine will be up for grabs. The Euromaidan regime that seized power in 2013-14 may be overthrown by the Ukrainian people.
The regime claimed that integrating Ukraine with the wealthy imperialist West would bring a higher standard of living. But what has it achieved in practice? Starting in 2014, it delivered a bloody war with the people of Donbass, lost the Crimea, where the people did not want to live under the Russia-baiting regime in Kiev, sold off Ukrainian farmland to U.S. corporations, launched an all-out campaign against labor unions, and moved to repeal labor legislation dating from Soviet times that protects Ukrainian workers. And on top of this, in the name of fighting communism, it restricted democratic rights to form political parties or labor unions.
That was before February 24, 2021. Since then, the war has largely stamped out whatever democratic rights still existed. It’s banned most political parties that offered an alternative to the government while involving the people in a war with Russia, costing tens of thousands of Ukrainian lives. Because of the historically close connection between the Ukrainian and Russian people, this war has taken on the flavor of a civil war.
If defeated by the Russians and Euromaidan falls, a new Ukrainian government will seek to normalize relations with Russia. However, even if Euromaidan holds on to power for a while after a Russian victory, its future will be dubious. In that case, Washington will likely prohibit any high-tech investments in Ukraine.
Against the principles of free trade, the United States will prohibit any high-tech investment in any country not considered a secure part of the U.S.-NATO financial, economic, military empire. The message to all countries of the Global South (from Russia in the North to Argentina and Chile in the South) is to create a regime like Euromaidan Ukraine that sells all its natural resources to U.S. corporations, crushes labor unions, and working class (and even bourgeois nationalist) political parties that don’t do Washington’s and Wall Street’s bidding or be shut out of the 21st-century high tech economy.
Democrats, Republicans, liberals, conservative supporters of Donald Trump, and supporters of Joseph Biden have thrown out the teachings of neoclassical economics and comparative advantage with its claim that free trade is equally advantageous to all nations and government should not pick winners and losers — that it should be left to the free market. Instead, Washington is embarking on a series of neo-mercantilist policies designed to salvage its threatened high-tech monopoly, which is vital to the U.S.-NATO financial, economic, military empire.
Independent capitalist nations have only followed free-trade policies preached first by the followers of Ricardo and then by neoclassical economists under one circumstance: That was where the capitalist country in question has the economic superiority of higher productivity of labor in the decisive branches of industry over any competitor. Under other circumstances, independently governed capitalist countries follow foreign-trade policies based on mercantilist principles.
Next month I will examine and critique Anwar Shaikh’s views on interest rates and the prices of financial securities.
(1) The Federal Reserve System’s Open Market Committee consists of all seven members of the Board of Governors. Those members are appointed by the president and confirmed by the Senate. The Federal Reserve Bank of New York president is also on the committee. (Source: “The Fed Open Market Committee.” https://www.federalreserve.gov/monetarypolicy/fomc.htm) In addition, four of the eleven other Federal Reserve Bank presidents serve on a rotating basis. The chairperson — now Jerome Powell — heads the committee.
Since World War II, the raising or lowering of the fed funds target level has emerged as the chief, though not the only, way that the Federal Reserve System intervenes in the money market. Under the current dollar-centered international monetary system, changes in the federal funds rate reflect not only the tightening or easing of the U.S. money market but throughout the world. Before World War I, the world’s leading central bank was the Bank of England. While it also engaged in open market operations, its chief method of intervening in the money market was raising or lowering the rate at which it (re)discounted bills of exchange. When the Bank of England raised its discount rate, that signaled that the money market was tightening in London and the world. When it lowered its discount rate, it signaled that money market conditions were easing worldwide.
One difference between the (re)discount rate charged by the Bank of England and the U.S. federal funds rate is that the discount rate is a rate of interest charged by and set by the central bank. The fed funds rate, or its counterpart in other countries, is manipulated by the central bank. It’s set by the commercial banks — not the central bank. (back)
(2) Stock market prices are determined by the amount of dividends divided by the rate of interest, a process called capitalization. For example, let’s say a company pays a dividend of $10 per share over a year. If the interest rate is 2%, the flow of dividend income is capitalized by dividing 100 by 0.02, or $500 per share. If the interest rate rises to 5%, the capitalization is 100/.05 or $200. If interest rates were to fall from the rate of interest, from 2% to 1%, the capitalization would be 10/.01 or $1000. Suppose the dividend changes. If, due to booming business conditions, the dividend payout per share rises from $10 to $20 while interest remains at 2%, the capitalization of the dividend will be $20/.02 or $1000 per share. If due to a recession, the dividend is cut from $10 to $5, the capitalization falls from $500 to $250. In recent years interest rates have been low. Immediately after the end of the 1970s stagflation, interest rates were in the double digits. It is not surprising that stock market prices today are far higher than in the early 1980s. Decades of falling interest rates have enriched the stockholders of profitable corporations.
As capitalism develops, interest rates fluctuate, but with a downward bias over the long run. Dividends rise with the rise in the mass of profit even though the long-term trend of the rate of profit is downward. The result is that stock market prices increase in value over the long run. But the stock market is speculative. Stock market speculators bet on future changes in both dividends paid by individual companies as well as changes in interest rates. In addition, the law that stock market prices rise over time applies to the stock market as a whole. Individual companies can go bankrupt and face liquidation, making their stock worthless. Speculating in the stock market to get rich has ended in the total ruin of many a would-be billionaire. (back)
(3) Rising interest rates followed by recession greatly increase the risk that an individual company will collapse, wiping out its stock owners. (back)
(4) For example, late 1929 and early 1930 seemed a great time to purchase stocks. Stocks seemed cheap after the 1929 stock market crash, and the economy was well into recession, with economic recovery expected by late 1930. If this had been an ordinary recession, buying stocks, especially in blue chip corporations that were unlikely to go bankrupt, would have been a smart move. Stock market prices rallied in late 1929 and early 1930. But this recession was not an ordinary one. Stocks turned down again and continued falling until the middle of 1932. In this case, the time to buy stocks was the middle of 1932 when stock market prices were lower than in early 1930. (back)
(5) Occasionally, in a moment of honesty, the financial press writes about wage inflation that doesn’t mean a rise in the cost of living but rather a fall in the rate of surplus value and profit. Naturally, the capitalists hate wage inflation. (back)
(6) Or official unemployment might rise very little in 2023, only to soar in 2024 or a little later. That would be a hard landing only a little later. This might happen if the economy moves into stagflation first rather than straight into recession. (back)
(7) As part of the New Deal reforms, management of the U.S. gold reserve was transferred from the Federal Reserve System to the U.S. Treasury, which, unlike the Fed, is directly under the control of the White House. (back)
(8) The DXY index of the dollar relative to a basket of currencies widely used in international trade peaked in September and has been declining since. Also, since September, gold prices have been rising, with gold reaching a high in the first week of January 2023. “The U.S. dollar is weakening and that’s one of the reasons why we’re seeing the rally in gold, which I think it is going to just accelerate from here,” CNBC quoted an analyst saying, Jan. 19, 2023. (back)
(9) The current Russo-Ukrainian war didn’t begin on February 24, 2022, but in 2014 when the new Euromaidan government launched a war on the Russian population in the Donbass. Russia’s special military operation began a new, more dangerous phase of an already ongoing war. The Kremlin is attempting to end the war by driving the Ukrainian military out of Donbass — and other regions with a Russian population claimed by Ukraine — to end the fighting in Donbass and secure the Russian Crimea, including the strategic port of Sevastopol. (back)
(10) In 1925, the KMT government — then located in the south Chinese city of Guangzhou (sometimes called Canton in the West), with the support of the USSR and the Communist International, launched an offensive aimed at liberating northern China from a pro-imperialist government headquartered in Beijing. After two years of fighting, the KMT government’s armed forces led by Chiang Kai-shek reached Shanghai, where the Chinese Communist Party — a section of the Communist International — had strong support among the city’s working class. The KMT promptly turned against the Shanghai workers and, with the help of criminal gangs, killed many workers and communists.
After these events, what was left of the communist party was driven underground. Some leaders, including Mao Zedong (1893-1976), fled from cities and found refuge in the countryside. They became leaders of a peasant-based army, which evolved into the People’s Liberation Army. So began the Chinese Civil War, which after more than twenty years of fighting, led to the victory of the revolution and the founding of the People’s Republic of China in October 1949. (back)
(11) In 1950, the invading armies of the U.S. and a few satellites approached the Chinese border. In response, China sent an army of volunteers to aid the besieged Koreans. With the help of Chinese volunteers, U.S. armed forces were driven back to the 38th parallel. The war then bogged down until a ceasefire was arranged in June 1953. A peace treaty has never been signed. (back)
(12) Hong Kong was seized by Britain at the end of the first Opium War in 1842. London was determined to sell opium to China to accumulate reserves of silver, China’s primary monetary metal, in the vaults of the Bank of England. The silver was used to buy Chinese-grown tea, which became very popular in Britain. The Opium Wars and the ceding of Hong Kong to Britain are considered to be the opening of China’s century of humiliation. The People’s Liberation Army could have easily liberated Hong Kong in 1949. But unlike the U.S., the British government recognized the People’s Republic of China. Eager to maintain links to the world market, Beijing decided to tolerate continued British colonial control of Hong Kong for the time being.
In 1997, Britain’s lease of Hong Kong negotiated with the Ching dynasty expired. Britain, which had tolerated no democratic forms in its colony, created a government with Western-style elections closely tied to Western imperialism. In 1997, China could have used the People’s Liberation Army to absorb Hong Kong. But eager to maintain trade and business relations with the West, Beijing made a deal with London. Hong Kong would be a special administrative district of the PRC, leaving in place the British-created government for fifty years. This deal is the one country, two systems arrangement. Beijing has offered a similar agreement regarding Taiwan, but so far, the U.S. is resisting.
This has allowed both the U.S. and Britain to make trouble in Hong Kong in the name of democracy. As both jobs and land are scarce, a section of the local population fears that Chinese moving from the mainland will drive up housing costs further and take scarce jobs, depriving native residents. This has led to a movement backed by the U.S. and Britain that aims to secede from China in the name of defending (colonial-style) democracy — with its untrammeled capitalist exploitation.
This reactionary and sometimes violent movement combines anti-communism and support for Western-style democracy. During the demonstrations a few years ago, U.S. and British flags were displayed, and portraits of Donald Trump were carried. Members of this movement don’t consider themselves Chinese despite being descended from people who certainly did consider themselves Chinese. It is marked with what can only be described as racism toward those who identify as Chinese. While the Beijing government could easily crush this reactionary movement by force, it prefers to tolerate the situation, which it views as a bearable nuisance out of fear that economic and financial ties to the West could be disrupted. Portions of the U.S. left support this reactionary movement. (back)
(13) In reality, Ukraine nationalists are not so inconsistent after all. Instead of joining the Czarist empire that hasn’t existed since 1917, they’re instead joining the U.S.-NATO empire. (back)
A Critique of Crisis Theory 