China and the folly of positive real interest rates

Let’s start with the conclusion:

Claims that China is still a communist country are often dismissed as nothing more than a historical conceit of capitalism’s new Wild East. But maybe China really does represent a new and interesting take on communism. Using the old words, one might describe China as allowing the development of a small bourgeoisie, with its constant revolutions in production, while harnessing the arcane machinery of bourgeois financial institutions to nationalize much of the wealth produced by the proletariat. Expropriation via high finance is superior to taxation or outright nationalization, because it masks itself as a fact of nature, as something implicit to markets and currencies and banks. It also has the advantage of turning the bourgeoisie into an ally rather than an adversary of the confiscatory state. Since the bourgeoisie are financially sophisticated, they can avoid expropriation of returns by working outside the state-regulated money and banking system. Plus, the state uses part of the excess returns extracted from the proletariat to buy the support of the bourgeoisie, while the rest can be used to pursue national goals. At the moment, China’s currency policy captures much of the action: By subsidizing exports, it buys off the capitalists; by preventing Renminbi appreciation or deflation, it robs real returns from ordinary savers; and by encouraging development and increasing China’s economic and industrial power, it serves state interests and arguably the public good.

To see how I got here, read below the fold. I seem to recall it had something to do with ice cream.

Update History:
  • 17-Mar-2006, 4:26 a.m. EET: Changed “Wild West” to “Wild East”.