Reform the International Rating System to Promote
the World Economic Recovery
Guan
Jianzhong
Although the international community has adopted a series
of bailout actions to the global credit crisis since 2008, it is still uncertain
about the deepening and spreading of the crisis, making it difficult to predict
the prospects of the world economy. It is the most urgent task for the
contemporary human society to explore the complicated origin of the crisis and
choose the correct approach for the world economic
recovery.
While studying the inherent law governing
the formation, development and conclusion of the global credit crisis from the
perspective of credit relationship, one discovers that two pairs of
contradictions, namely the contradiction between production and credit and the
one between credit and rating, are the impetus to drive the development of
contemporary world economy.The nature of continuous expansion of production
requires that consumption increase is promoted by increasing the credit demand,
and the inherent requirement of the movement of this pair of contradictions is
the pro-cyclical development of the credit; the subjects of credit are creditors
and debtors, and the precondition for creditors and debtors to establish a
credit relationship is that creditors require that ratings are assigned for
debtors on their maximum debt ceiling underpinned by their real wealth creation
capability, the inherent requirement of the movement of this pair of
contradictions is the counter-cyclical development of the credit. Therefore, of
these two pairs of contradictions, credit and rating constitute the principal
contradiction, and rating is the principal aspect in the principal
contradiction. The current international rating system has failed to follow this
law; rather, it violates the principle that credit increase must be based on the
capability of real wealth creation, complies with the needs of movement of the
contradiction between production and the credit, and keeps on providing
creditors with wrong rating information, leading to the breakdown of
international credit relationship ultimately. The global credit crisis is a
process of adjustment to the insolvent credit relationship established according
to the wrong rating information. The practice of creating virtual credit
relationship by increasing credit supply could transfer crisis only, as it can
never rescue the crisis. The only way out for keeping the world economy from
precarious economic situation is to establish a new international credit rating
system that embodies the essential requirements of the credit economy and that
is able to assume the rating responsibility for the whole world and to establish
the credit relationship that is supported by the capability of real wealth
creation through impartial ratings. The purpose of this paper is to pursue the
correct approach for the world economic recovery.
I. The Mankind Has Entered the Societal Development Phase of Credit
Economy
After World War II, the contradiction
between the capitalist production and consumption promoted a world-wide credit
revolution. By world credit revolution, it means that the traditional credit
model based on the real material wealth has been modified worldwide; the
consumption demand has been expanded continuously on credit and beyond the real
material wealth creation capability, in which credit relationship is integrated
into the entire process of social reproduction, making credit relationship the
economic foundation of modern society, influencing the overall economic and
social activities of the humankind. The world credit revolution has experienced
four stages of development:
(I) The stage of US
dollar-gold par value emerged. The US dollar –gold par value system means that
the humankind has ended the thousands of years of history when there was no a
unified pricing instrument for cross-border economic activities and the US
dollar was chosen as the world currency, which is the starting point of
reshaping human credit activities. The stage started from 1944 when the Bretton
Woods System was established and ended in 1973 when the system collapsed,
lasting 29 years in total.
As the world currency,
the US dollar extremely expanded cross-border credit settlement, playing a
critical role in promoting the internationalization of creditor-debtor
relationship; the internationalization of credit relationship saved the cost of
social reproduction by the maximum extent, making it a positive force to promote
the economic development. As the basis of credit relationship is the production
and trade of material assets during this stage, especially the US dollar is
directly linked with gold, which restrained the excessive expansion of credit
beyond the needs of real economic development; meanwhile, it became a shackle of
further growth of consumption demanded by capital. The imbalance in the
development of capitalist production and consumption inevitably breaks the
bondage of the gold standard credit regime with its powerful force to tap the
credit resources that they require. From the perspective of relationship between
production and consumption, credit resources are presented as the following: the
production expansion involves the additional consumption scale increased in the
manner of credit as well as the debt service resources for the credit scale
demanded by the consumption increase; from the perspective of relationship
between credit and debt, they are presented as: the amount of capital supply by
the creditor and the debt service resources for the amount of capital demanded
by the debtor. In 1971, the United States issued $70 billion beyond its gold
reserve; the credit consumption beyond the productive capability of real
material wealth destroyed the traditional credit model, thus the Bretton Woods
System disintegrated afterwards. For the first time in human history, the
humankind got rid of the limit on the expansion of credit demand worldwide by a
precious metal as currency, and started the great practice of creating credit
demand as the principal mode of economic
growth.
(II) The stage that the state creates
credit demand
That the state creates credit
demand means that the contracting states of the Bretton Woods System were able
to regulate the total size of the market credit by means of the volume of
currency issuance, interest rate, and exchange rate on their own in order to
meet the demand of production and consumption, without being restricted any
longer by the current term wealth creation capability. The stage started from
1973 when the Bretton Woods System was disintegrated and ended in 1985 when the
United States became a net debtor country, lasting 12 years in total. As no
state can get rid of the restriction of real wealth while creating credit
demand, this stage is characterized by utilization of the real-life credit
resources.
That the state creates credit demand is by no
means the same as the state's issuing currency; rather, it is the inevitable
choice of the state in order to resolve the inherent contradiction between
production and consumption under the premise that the capitalist political and
economic order has been established. The essence of the state's creation of
credit demand is to expand the social consumption scale and overspend by means
of increasing currency supply with the value created by the entire society in
the current term as the pledge via the state creditworthiness. This has changed
the previous model of consumption based on the value created in the current
term; credit consumption is integrated into the social reproduction and injects
into productivity development with unprecedented dynamics, promoting the global
expansion of capital and starting an era of capitalist
prosperity.
That the state creates credit demand is
realized via the socialization of credit-debt relationship by using monetary
policies such as interest rate and foreign exchange rate. The expansion of the
credit relationship at this stage is still based on the value created by the
state in the current term to arrange the social credit consumption scale; the
state that are entitled to issue international reserve currency increase the
total social credit consumption volume of the state based on the value created
by the whole world in the current term; due to the restriction by the inherent
relations between the currency issuance volume and the total volume of the
social material wealth, the credit-debt relationship at this stage is
established on the basis of real material wealth, and guaranteed by real debt
service resources, thus it is stable and there is no systematic debt crisis.
National credit resources ceiling is shown as the balance between the volume
of money supply and the size of wealth created at the current term; and the
general social price level serves as a barometer of the balance. The state
cannot increase the total social credit demand excessively beyond the total
volume of real wealth of the country. However, the state that is entitled to
issue international reserve currency is able to continuously increase the total
social credit volume to meet the demand of the capital expansion in the country
by going beyond the material wealth created by the state in the current term.
The contradiction between the limitation of increasing consumption and the
unlimitedness of self-expansion of capital in the process of the state’s
creating credit demand drives the state with the mintage for the world to expand
the money supply volume by continuously going beyond the real wealth creation
capability of the state; although such an act does not trigger inflation
domestically, it does create credit inflation in an unconventional manner. It is
the super liquidity provided by these states that pushes the human credit demand
to yet another new stage. That the state creates credit demand has established
the relationship between production and credit; when the first credit resources
to develop this relationship runs exhausted, the contradiction between
production and consumption promotes the development of the second credit
resources.
(III) The stage that the market creates
credit demand
That the market creates credit demand
means that instead of regulating the market credit demand through such
government-controlled credit instruments as money supply volume, interest rate
and foreign exchange rate, social credit demand are created by the market based
on the value that economies may create in the future through the design of a
series of financing facilities enabling debtors to raise funds from creditors.
The stage started from 1985 when the United States became a net debtor country
and ended in 1995 when the large scale of financial derivatives entered the
market, lasting 10 years in total. This stage is characterized by using future
credit resources as the creation of credit demand by the market is based on the
wealth to be created in the future.
The fundamental
difference between the state’s creating credit demand and the market’s creating
credit demand is that the government develops the realistic realizable value as
credit resources by using the state creditworthiness and creating credit demand
by regulating the money supply volume. In order to perform its duty of
stabilizing the macro-economic and credit environment, the state not only
proactively supervises the credit system risks, but also refrains its credit
expansion behavior. That the market creates credit demand is a spontaneous
behavior of capital that in order for capital to pursue greater profit space, it
develops the future realizable value as credit resources by taking advantage of
the contradiction between production and consumption, and between the limited
first credit resources and the unlimitedness of capital expansion. In this
stage, the benefit driven capital combination morphology composed of capital
owners and occupants in credit relationship is the motive force for creating the
social credit demand. As this is a unique mechanism to realize capital expansion
through operating credit-debt relationship, it lacks immanent impetus to
constrain risks; the state and market take turns in creating credit demand, and
the principal function of the money in directly regulating the social credit
demand fades out, making it gradually evolve into a pricing tool for credit
relationship.
There is a great difference between
the market's creation of credit demand and ordinary credit transaction. That the
market creates credit demand means to tap the future credit resources on a large
scale, so as to assume the responsibility of expanding the market credit
consumption demand and balancing the contradiction between production and
consumption through operating the credit-debt relationship in the special
background that the realistic credit resources are no longer able to underpin
the demand for production development. The conspicuous characteristics of the
market's creating credit demand is to inject the value that could be generated
in the future in the form of credit and debt and maintain the economic and
societal vitality of the state. It represents an irreplaceable historical
process. While ordinary credit transactions are behavior of local financing or
profit making of capital, and this does not bring about any fundamental
influence to social reproduction.
The stage that the market creates credit
demand is of epoch-making significance:
1. Credit
relationship became the economic basis of modern society. That the market
creates credit demand changed the traditional way of formation of credit
relationship which is dominated by financial media; it directly created one
credit-debt relationship after another through various debt instruments; the
fast socialization of credit relationship that it promoted integrated
credit-debt relationship into the entire process of social reproduction, and
credit relationship became the basic economic relationship between social
members; the social credit system directly constructed by the benefit driven
capital owners and users, demonstrating a strong merging power: not only did it
absorb the indirect financing system it also enabled the superstructure to
highly rely on the credit system for normal operation. Thus the economic basis
of the human society has undergone dramatic changes. Meanwhile, the market also
promoted the internationalization of credit relationship; the global credit
system was established, the world economy is connected into an integral whole
that is mutually dependent through credit-debt
relationship.
2. New driving force was generated
that would influence the course of human economic and social development. Credit
is presented as a common form of capital when borrowing with the value that
might be created in the future as a pledge became the principal way of supply
for the capital needed for social reproduction; credit = future solvency =
capital, at this moment, the relationship between production and consumption is
transferred into the relationship between production and credit. The subjects of
credit are creditors and debtors, and the asymmetry of debtors’ solvency risk
information is the principal contradiction formed during the process of
socialization of credit relationship; therefore, the highly socialized credit
relationship chose professional credit rating agencies to solve the problem of
asymmetry of credit risks information, establishing a relationship between
credit and rating. In the stage that the market creates credit demand there
emerges two pairs of contradictions, namely, the contradiction between
production and credit, and the one between credit and rating; of these two pairs
of contradictions, relation between credit and rating is the principal
contradiction, which plays the decisive role over production and credit, and
rating is the principal aspect of the principal contradiction. This pair of
contradictions is interdependent and its motion promotes the development of
economic society that is based on credit
relationship.
3. Credit relationship became the new
form of possession and distribution of the world wealth. The credit
globalization constitutes the foundation of the world economy supported by the
credit system and debt system. Major developed countries took advantage of their
status as issuers of international currencies and their dominant say in the
rating business, and transferred the wealth of the credit system to the debt
system in the manner of being in debt; since then the capitalist system embarked
on the path that their prosperous status is maintained by high
indebtedness.
In this stage, the credit relationship
is established entirely on the prediction of the future value creation
capability, so it is extremely uncertain, increasing the possibility of
systematic defaults. That the market creates credit demand established the
position of the relationship between production and credit in the modern
credit economy; when the second credit resources that maintain the relationship
became exhausted, the contradiction between production and consumption promoted
the development of the third credit resources, meanwhile, it pushed the human
credit demand to an era of termination.
(IV) The stage of virtual credit demand.
By virtual
credit demand, it refers to the credit demand that lacks the support of
realistic and future value creation capability, and essentially it is a credit
bubble. Virtual credit demand is realized in Western countries where the
low-income population who lacks real solvency is encouraged to raise debt and
repeated development is conducted to the existing credit relationship, credit
derivatives are innovated and credit demand is artificially designed. The stage
started from 1995 when large-scale financial derivatives entered the market and
gradually occupied the dominant position in direct financing and ended in 2008
when the credit crisis broke out, lasting 13 years in total. Since there is no
real wealth as the basis for the virtual credit demand, the stage is
characterized by utilizing the completely non-existent credit resources.
The credit relationship created by the virtual credit demand has neither real
wealth as the basis nor wealth that could be created in the future as support;
though the transactions are real, the credit relationship thus established is
virtual as the solvency of debtors is designed on a series of assumptions. The
region with the most developed credit relationship of this kind is the very area
that has the most vulnerable segment in the global credit chain. The virtual
credit demand symbolizes that the development and exploitation of credit
resources by capital has come to the end; the credit crisis that broke out in
the Wall Street in 2008 declared the termination of this era. The global credit
system started its journey of dissolution from the United States where the
bubble credit relationship is most pervasive, and this is the global credit
crisis.
The world credit revolution led by developed
countries changed the drive of economic growth from consuming the material
wealth created in the current term for hundreds of years to consuming the value
that might be created in the future or the virtual wealth; and it promoted the
socialization and globalization of credit-debt relationship, injected credit
relationship into every section of social reproduction so as to make it a
fundamental element of social productivity, which triggered a dramatic change of
social relationship. As the capital’s movement morphology, the status of credit
relationship is decisive to the sustainability of social reproduction. The sum
total of credit relationships constitutes the social credit system, and the
credit system connects the society to an integral whole, which establishes the
world economic foundation composed of the credit system and debt system. Since
then, the humankind entered the societal development phase of credit
economy.