According to the US department of commerce, the 2008 American deficit on international trade

in goods and services was $677.1 billion. 

This is down from $700.3 billion in 2007 but still 4.7 per cent of GDP. In order to cover the
deficit of past years, the US has borrowed $11.338 trillion from international sources. To quote
an IMF report, the US per capita income for 2008 was estimated at $47,000. 

The US consumes about 25 per cent of the world resources because of its higher GDP and per
capita income while it has .a mere 4.5 per cent of the global population.  

But it is not the real wealth which has pushed up the US per capita income and GDP. It is the
result of manipulated creation of money which does not involve production of goods or provision
of services and still adds up the GDP and per capita figures. This is the very basis of the US
capitalism! 

For decades, the US has been exploiting the world with shadow financial or banking system in
order to keep consuming more than it produces. The world has been made to believe that
capitalism and the so-called free market economy is the engine behind prosperity. 

The US did produce goods, provided services and traded domestically and internationally. But
the wealth generated through these activities is not that huge to raise its GDP that high. Based
on real businesses alone, its GDP might not sustain the repayment of $11.39 trillion debts. 

The US trade deficit calculated at 4.7 per cent of GDP might swell to 50 per cent or even higher,
in case computed on basis of real business. 

The super-rich, who run the scams like stock markets, hedge funds, currency exchanges and
commodity markets managed to inflate the size of GDP and the per capita. 

They are rich, they own private jets and islands. They earn huge profits. The money earned
from stock market has nothing to do with the real business of corporates. Still one can make
huge profits in trading of shares. 

In fact, 300 out of top 500 rich in US in 2007 before the 2008 crash were ‘traders’. But the
dividend paid to investors was very small. 

If a stock is trading at $1, a 10 per cent dividend would be 10 cents. But if stock prices rises due
to higher demand and goes up to $10, the investor earns huge profits of 900 per cent. Very
easy to manipulate if you have money to do so – the system provides the opportunity.  

The money earned from that activity does not involve any economic activity; it is simply a result
of artificially created demand or supply or gambling. A stock selling 40 times the price of
company’s projected profit is still thought to be normal. 

The size of market is several times higher than the real value of the companies listed on stock
market. 

The fluctuation in stock price has nothing to do with real business being done by the corporates.
The markets are another type of casinos. This gambling continuously ‘creates’ money and is
available to spend. The money created from these ‘non-productive business’ keeps GDP and per
capita figures high. 

Hedge funds are the major players who manipulate these markets. Around 8,000 hedge funds
manage a total of $620 trillion. With such huge funds in their hands, they manipulate the prices
and earned huge profits, thus returning their investors even up to 100 per cent profits. 

The tax havens are exempt them from submitting the accounts of their shady ‘businesses’. The
whole system is basically crafted for rich to become super-rich at the expense of starving weak
and poor around the world. 

Banking system allows hedge funds to borrow up to 30 times more than the money their
investors have deposited with them. Even after paying bank interests, the earnings from 30
times more than the real investor money earns them huge profits. These investors would not be
able to earn so much with their own money. 

Banks are allowed to lend more than they actually posses. Sometimes it is ten times more than
their deposit money. This enables them to earn much more money than their investor’s
deposits. 

The extra money earned is not real as it is ‘created’ by banks and hedge funds. The real wealth
would involve goods and services and economic activity which makes wealth circulate in society
like blood circulates in body. 

Similarly, banks would lend 30 times for currency trading, another non-business contributor to
American GDP.. This involves trading ‘non-existent’ money. The huge lending enables traders to
manipulate price and create huge returns. In a real business, the profits would not be that huge.
The currency trade is estimated to be 30 times of world trade, so are the profits and
manipulation. 

Then there are pyramid schemes Bernard Madoff, who was only exposed after $50 billion were
lost. They pay returns to investors’ money, actually without any business activity. However
these ‘profits’ also add into the GDP. 

Hedge funds and currency traders can borrow 30 times more than investor deposits and they
earn huge profits. But so are the losses. The present crisis began when hedge funds were out of
money as they lost many times more than their assets but were continuously paying huge
returns to their investors to get more deposits and borrow 30 times more from banks. The extra
losses were from the money borrowed from banks. 

The banks had lent several times more money for gambling than their depositor’s money. This
pushed banks into bankruptcy. The insurance companies which used to provide insurance cover
to these banks on various instruments also became the victims as the losses exceed their total
assets. 

This entire cycle of ‘creating money’ out of thin air and adding to per capita income and GDP has
created a ‘fake demand’ for goods and services. If the profits from these ‘artificial’ money
schemes (several times the real GDP) are deducted from GDP figures, per capita income would
be considerably lower. 

Since these profits ‘created’ out of no real activity are disappearing, there is less money
available to be spent. This is pushing the legitimate production facilities to layoffs, which are
further adding in to less demand. The entire infrastructure built on ‘plastic money’ through
credit cards, which itself is not the money available with banks also fueled the demand. Since
the demand is shrinking, it will further push down the ‘real-business’ as demand shrinks. 

In ‘real-business’ world, the US economy might be less than half the stated figures. The deficit
would be more than half of GDP. Since the money ‘creating’ apparatus has come to halt, there
cannot be enough lending to cover such huge deficit while the US keeps on consuming 1/4th of
world resources. With the real GDP, the size of economy might not support debt servicing.  

Ultimately, the manipulated GDP and unbridled free market economy is to collapse as it has no
real basis. The rescue package might not be helpful because of the size of the disaster. Change
in the system might be the only alternative. 
The writer is a managing director of Hansberry Food Industries, Sdn Bhd, Malaysia.

Economics and Business – Dawn- Monday, 29 Jun, 2009