The Era of Fictitious Capitalism
by Addison Wiggin
English reader, who lives in France, recently passed on an interesting
article written by a Chinese bureaucrat, published on a non-profit
website hosted in Italy, sponsored by the government of Singapore.
The aim of the site is to increase amicable relations between Asia
and Europe in a U.S.-centric world. The purpose of the article:
a strategic recommendation on how China ought to position itself
while the U.S. and Europe as the major players in the two-bloc
international system the author predicts will eventually emerge
gear up for eventual war.
could possibly interest us about a Chinese bureaucrat’s white paper
on impending global war? First of all, his conclusion: "In
the last century," writes Wang Jian, "American people
were pioneers of system and technology innovation. However, the
interests of a few American financial monopolies now lead this country
to war. This is such a tragedy for the American people.
of war are gathering. Right now, the most important things to do
for China are:
neutral between two military groups while insisting on an anti-war
up in strategic reserves
- Get ready
for a short supply of oil
up economic integration with Japan, Hong Kong, Korea and Taiwan..."
a rather unsettling idea. China as the neutral power in a war between
the United States and a united Europe. How did Wang get there? That’s
the subject of the second part of the article, which we find intriguing...and
even more unnerving. Wang’s view is disturbingly similar to our
own understanding of the way the global economy works.
is the extension of politics and politics is the extension of economic
interests," Wang asserts. "America’s wars abroad have
always had a clear goal; however, such goals were never made obvious
to the public. We need to see through the surface and reach the
essence of the matters. In other words, we need to figure out what
the fundamental economic interests of America are. Missing this
point, we would be misled by American government’s shows and feints."
argument in a nutshell: By the mid 1970s, the U.S., the U.K., France,
Germany, Italy, Japan and other major capitalist countries had completed
the industrialization process now underway in China. In 1971, when
Nixon closed the gold window, the Bretton Woods system collapsed,
and the dollar the last major currency to be tethered to gold
came unstuck. Economic growth as measured by GDP was no longer
restricted by the growth of material goods production. Toss in a
few financial innovations, like derivatives, and the "fictitious"
economy assumed the central role in the global monetary system.
transactions related to material goods production," writes
Wang, "counted 80% of the total [global] transactions until
1970. However, only 5 years after the collapse of the Bretton Woods
the ratio turned upside down – only 20% of money transactions were
related material goods production and circulation. The ratio dropped
to .7% in 1997."
we note in our book, since Greenspan assumed the central role at
the most powerful central bank in the world, he has expanded the
money supply more than all other Fed chairmen combined. From 19852000,
production of material goods in the U.S. has increased only 50%,
while the money supply has grown by a factor of 3. Money has been
growing more than six times as fast as the rate of goods production.
The results? Wang’s research reveals that in 1997 before
the top blew off in the U.S. stock market, mind you global
"money" transactions totaled $600 trillion. Goods production
was a mere 1% of that.
seem to take it for granted that financial values can be created
endlessly out of nowhere and pile up to the moon," our friend
Robert Prechter writes in his book, Conquer the Crash. "Turn
the direction around and mention that financial values can disappear
into nowhere and they insist that it isn’t possible. ‘The money
has to go somewhere...It just moves from stocks to bonds to money
funds...it never goes away...For every buyer, there is a seller,
so the money just changes hands.’ That is true of money, just as
it was all the way up, but it’s not true of values, which changed
all the way up."
the fictitious economy, the values for paper assets are only derived
from the perceptions of the buyer and seller. A man may believe
he is worth a million dollars, because he holds stocks or bonds
generally agreed in the market to hold that value. When he presents
his net worth to a lender, a mortgage banker for example, and wishes
to use the financial assets as collateral for a loan, his million
dollars is now miraculously worth two. If the market drops, the
lender, now nervous about his own assets, calls in the note...and
the borrower once thought to be worth two million discovers he is
dynamics of value expansion and contraction explain why a bear market
can bankrupt millions of people," Prechter explains. "When
the market turns down, [value expansion] goes into reverse. Only
a very few owners of a collapsing financial asset trade it for money
at 90 percent of peak value. Some others may get out at 80 percent,
50 percent or 30 percent of peak value. In each case, sellers are
simply transforming the remaining future value losses to someone
we saw in the 20002002 bear market, in such situations, most
investors act as if they were deer caught in the headlights of a
speeding truck at night. They do nothing. And get stuck holding
financial assets at lower or worse, non-existent values.
Anyone suffering glances at their pension statements over the past
few years knows their prior "value" was a figment of their
to Wang: "In the era of fictitious capitalism, a fictitious
capital transaction itself can increase the ‘book value’ of monetary
capital; therefore monetary capital no longer has to go through
material goods production before it returns to more monetary capital.
Capitalists no longer need to do the ‘painful’ thing material
owners of stocks, bonds, foreign currency and real estate have increasingly
taken advantage of historically low interest rates and applied for
mortgages backed by the value of these financial assets. Especially
since the rally began 8 months ago, they then turn around and trade
the new capital on the markets. "During this process,"
writes Wang, "the demand of money no longer comes from the
expansion of material goods production, instead it comes from the
inflation of capital price. The process repeats itself."
instruments, themselves a form of fictitious capital, help investors
bet on the direction of capital prices. And central banks, unfettered
by the tedious foundation set by the gold standard, can print as
much money as is required by the demands of the fictitious economy.
You can, of course, trade the marginal values of these fictitious
instruments and do quite well for yourself. [See: 22
Trading Rules For The Fictitious Economy.]
Wang sees a darker side to the equation. "Fictitious capital
is no more than a piece of paper, or an electric signal in a computer
disk. Theoretically, such capital cannot feed anyone no matter how
much its value increases in the marketplace. So why is it so enthusiastically
pursued by the major capitalist countries?"
reason, at least until recently, is that the "major capitalist countries"
have been using their fictitious capital to finance consumption
of "other countries’" material goods. Thus far, the most
major of the capitalist countries, the U.S., has been able to profit
from the system because since the establishment of the Bretton Woods
system, and increasingly since its demise, the world has balanced
its accounts in dollars.
now," writes Wang, "U.S. dollars [have counted] for 6070%
in settlement transactions and currency reserves. However, before
the ‘fictitious capital’ era, more exactly, before the fictitious
economy began inflating insanely in the 1990s, America could not
possibly capture surplus products from other countries on such a
large scale simply by taking advantage of the dollar’s special status
in the world...Lured by the concept of the ‘new economy’, international
capital flew into the American securities market and purchased American
capital, thus resulting in the great performance of U.S. dollar
and abnormal exuberance in the American security market."
here we arrive at the crux of Wang’s argument that a war is brewing.
"While [fictitious capital] has been bringing to America economic
prosperity and hegemonic power over money," he suggests, "it
has its own inborn weakness. In order to sustain such prosperity
and hegemonic power, America has to keep unilateral inflow of international
capital to the American market...If America loses its hegemonic
power over money, its domestic consumption level will plunge 3040%.
Such an outcome would be devastating for the U.S. economy. It could
be more harmful to the economy than the Great Depression of 1929
example suggests, as your editors have oft reminded you, that a
collapse in asset values in a fictitious economy can adversely affect
the real economy for a long time.
the era of fictitious capital, Wang surmises, America must keep
its hegemonic power over money in order to keep feeding the enormous
yaw in its consumerist belly. Hegemonic power over money requires
that international capital keep flowing into the market from all
participating economies. Should the financial market collapse, the
economy would sink into depression.
reigning financial monopolies, he believes, (whoever they may be),
would not stand for it.
him mail] is the author, with Bill Bonner, of Financial
Reckoning Day: Surviving The Soft Depression of The 21st
© 2003 LewRockwell.com