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Economist James Henry discusses China and its impact on global markets

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JARED BALL, PRODUCER, TRNN: Welcome everyone, back to the Real News Network. I’m Jared Ball here in Baltimore. Monday morning was an extremely turbulent day on the market as U.S. stocks plummeted by 1,000 points, and closed with a loss of nearly 600 points. According to CNN, the 588-point decline was the worst for the Dow Jones since August 2011. Tuesday morning however, stocks surged after China cut interest rates to help reboost the economy, partially recovering some of Monday’s losses. Here to discuss this is James Henry, who among many other things is is an economist, educator, lawyer, and investigative journalist. Welcome, James Henry, to the Real News Network. JAMES HENRY: Good to be with you. BALL: So if I could, first of all I just would like to ask, what is going on, generally speaking of course, and then what does this have to do or mean for working people, the majority of whom will never own any significant amount of stock? HENRY: Well, it means that we are, as Robert Schiller, the economist at Yale said, we are in a period of irrational exuberance. And the downside of that is we sometimes have these very irrational kind of technical corrections. When you really look at the fundamental changes that went on in real economics over the last couple weeks, basically China was trying to do the [inaud.] thing with its currency to, as the IMF has recommended, allow it to vote and to remove the peg against the U.S. dollar. It did that in a rather surprising way that nobody was prepared for. China should have told us more about it before that. But the markets reacted to that as if this was going to have a huge impact on the world economy when in fact we know that for example, U.S. exports to China are about 0.7 percent of U.S. GDP. That this is not a currency war, that if anything the yuan or the renminbi will revaluate against other currencies as they float the exchange rate. And this was an example, I think, of the way stock markets have been structured. About 84 percent of the trades that went on on Monday in the first couple hours, when the Dow plunged 1,850 points were run by so-called automatic trading programs. No humans involved, they’re just looking at computers, basically looking at momentum and stop order limits that they’ve put in place. And this was just a completely arbitrary kind of decline, way out of proportion to any real economic factors. BALL: But again, and specifically, what does this mean for the average working person? How will she or he feel these ups and downs in the market, or the changes in China’s policies and currency rates, et cetera? HENRY: Well, I think it should help China’s growth rate over time. I don’t think there’s any chance that China’s going to go into a deep recession, here. It’s likely to maintain the kind of 6 percent growth rate that it has targeted. If anything this will improve their economy. And they’ve lowered interest rates. They’re trying to stimulate domestic demand. They need to also, I think, regulate their stock market. Because basically, take a look at the Shanghai stock market that set all this off, and it’s like a casino. Fifteen, twenty million people. Many small investors trading on margin, which means they borrow to buy the stocks. There’s no active insider trading regulation. It’s the $28 billion dollar market cap that the rest of the world is reacting to as if it’s a huge center of finance. But I think the lesson for the rest of us who may or may not own stocks, but many of us have interests in companies that are subject to this, and we have, if we’re lucky, we have our housing market and we hope that that will sustain–you know, we should look at this with some kind of chance to educate ourselves about the way finance capitalism has evolved. I mean, this is a case in which many people may have been tempted to sell on Friday, because they saw its wild fluctuations. And if they’d done that on Monday they would have lost their shirts because a lot of this trading was at prices way below economic value. So what we need to learn, I think, first thing is to, when you’re investing in the stock market if you’re able to do that, or in housing or in anything else, education, you should look at the long-term fundamentals. And the value of the technologies involved, the real assets that are involved and not the short-term trading swings, which are often driven by irrational exuberance. BALL: Can you talk quickly, James Henry, about short-term and long-term policy solutions? What kind of policies can stabilize the economy, and what are the broader structural changes that might be needed? HENRY: Well, as Paul Krugman pointed out a couple days ago, what the world as a whole is facing here is a kind of a savings glut. In other words we have throughout Europe and to some extent in the United States with the Republican party emphasize budget cutting, austerity programs, trying to balance budgets in a period in which what we really need is more growth and investment. And so to absorb those savings we actually need much stronger stimulus programs, especially in places like Europe, than they’ve been able to achieve politically. They’ve been emphasizing austerity programs. They just put Greece through the ringer. We have a real breakdown in terms of macroeconomic consensus in terms of the kind of stimulus programs that countries should be engaged in. I think that’s a first priority here, to maintain growth. We can’t just do it on the basis of the Federal Reserve’s low interest rates forever. Fed’s been talking about raising interest rates like 0.375 percent in September. That won’t have any real impact on our economy to speak of. It’s certainly not responsible for this meltdown on Monday. But longer term, we have to get out of the mode of just having monetary policy and the Federal Reserve being the only driver of economic growth, the U.S. and the world. We need to have fiscal policies as well, progressive taxation and spending, and I think that’s something that Obama has tried to argue for in Europe. One of the reasons the United States is doing so much better than Europe is that we’ve had more stimulating spending than Europe, at least before 2012. That’s a short answer to your question. But the other thing is when we look at countries like China, they have tremendous problems of domestic kleptocracy and corruption, and basically the kind of legal systems that we take for granted are just really a work in progress in China. So if you’re an investor there, you’re worried about taking your money out of the country. There’s been massive capital flight from China. A lot of the arguments about what’s going on in China today have been talking about their debt. But the debt problem in China is really a domestic debt problem, and from a global balance sheet perspective, they have a lot of capital flight offshore. They want to be able to bring that money back to a regular world where there’s predictable laws and regulations, and actually democratic institutions. And those are, I think that’s a lesson for China to learn. BALL: Well James Henry, thank you again for joining us here at the Real News Network. HENRY: You’re very welcome. BALL: And thank you for joining us as well. For all involved, again, I’m Jared Ball here in Baltimore. And as always, as Fred Hampton used to say, to you we say peace if you’re willing to fight for it. So peace, everybody, and we’ll catch you in the whirlwind.


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James S. Henry is an investigative economist and lawyer, a Global Justice Fellow at Yale University, and a Senior Advisor at the Tax Justice Network. Previously, James served as Chief Economist at the international consultancy firm McKinsey & Co. As an investigative journalist his work has appeared in numerous publications like Forbes, The Nation and The New York Times.