Reform the International Rating System to Promote the World Economic Recovery
Although the international community has adopted a series of bailout actions to rescue 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 a 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 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.
II. The Current International Credit Rating System Is the Source of the Global Credit Crisis
The immanent link among credit rating, credit relationship and the world economy is that the capital combination morphology as the representation form of credit relationship is established through credit rating information as a medium; this new capital is involved in the social reproduction and plays the dominant role. The movement status of the three elements decides the trend of the world economy. The world economy in recent 60 years is a history that credit is compliant with the production development; the pro-cyclical economic prosperity is driven by the accumulation of credit bubbles and ultimately at the cost of correcting the mistake of excessive consumption credit through the way of crisis. During this course of history, the international credit rating system failed to reveal that credit expansion kept exceeding the capacity of material wealth creation is the ultimate cause of the pro-cyclical development of the world economy and of the accumulation of credit risks, it also failed to prevent the pro-cyclical risks by using the status of credit rating; on the contrary, they indulged themselves in pursuing their private gains by abusing the public rights of credit rating. Thus it became the source of the credit crisis. (I) The global credit system is highly reliant on the international credit rating system. The global credit system is the sum total of credit relationships composed of creditors and debtors, it is the world economic foundation; this system is constructed by the socialization of credit relationships promoted by credit rating information as a medium with the global expansion of capital as the motive power. It is impossible to match the establishment of credit relationship through the independent judgment of debtors’ risks by creditors with the speed of capital expansion in the industrialization era; the broadness and depth of capital development not only requires the establishment of a fast forming mechanism for credit relationship adaptable with the speed of capital expansion, but also requires that the international credit rating system is able to undertake the rating responsibilities for the world. As creditors and debtors are separated in both time and space, besides the underlying factors of debtors’ credit risks are increasingly socialized; these make the judgment of credit risks a complicated process of study, so complicated that neither creditors nor debtors are able to conduct sustainable studies. The establishment and maintenance of every credit-debt relationship is directly or indirectly dependent on credit rating information. When such a mechanism became an integral component of the economic society, credit rating seemingly became the dominator of modern credit economy; the Moody’s, Standard and Poor and Fitch could shake the entire world with their voices. The global financial crisis (should be called “global credit crisis” if defined essentially) broken out in the United States in 2008 is the severe damage to the international credit relationship triggered by the wrong credit rating information continuously provided to the market by the three US-based credit rating agencies. (II) The major problems with the existing international credit rating system. They include such aspects as follows: 1. The clear position of protecting the interests of the largest debtor has deprived this rating system of the due independence. 2. The credit risks of the global economies are measured against the seriously political and ideological American rating criteria, the ratings provided to the world are biased and distorted. 3. The international community does not have regulatory power and the host government also fails to perform managerial responsibility on the international rating system that is responsible for security of the world’s credit system and dominated by a sovereign rating agency. Lack of supervision enables the international rating system with wrong morality and criteria to have super forces and to cause consequences that the world has to assume. 4. The competition mechanism encourages the rating system to trade rating grades as commodities in order to maximize their own interests, thus making the existing international rating system completely unable to assume the public responsibility for the world. 5. The biggest debtor country in the world takes advantages of the say in the international credit rating sector, over-estimates the creditworthiness of those countries in the international debt system but under-estimates the creditworthiness of those countries in the international credit system, transferring the interests of creditor countries to debtor countries, which resulted in the unbalance of the world economic development. In 2007 before the global credit crisis broke out, the ratings assigned to the top 15 debtor countries in the world – the USA, UK, Germany, France, the Netherlands, Italy, Spain, Ireland, Japan, Belgium, Swiss, Canada, Australia, Austria, and Denmark are AAA for 12 countries and AA for the remaining 3 countries. Based on the high credit grades, they occupied over 90% of the international credit resources (the total amount of global foreign debts). The average foreign debt to GDP ratio of these countries was 146.06% in 2007, Ireland and the UK are the top two countries with the foreign debt to GDP ratio as 870.97% and 400.44% respectively; their debts were well beyond their real wealth creation capabilities, indicating that they could never repay their debts by their self-created value in the very long term. 9 of these countries are deeply stuck in the debt crisis and dragging behind the world economic development. In the first five years of the crisis, the contribution rate of these 15 countries to the world economic growth is 35.41%; the credit ratings assigned to the emerging creditor countries have by no means reflected their wealth creation capabilities and their creditor’s status; for instance, China is assigned A+, South Africa BBB+, Russia BBB, India BBB- and Brazil BB+; in the first five years of the crisis, the contribution rate of these 5 countries to the world economic growth is nearly 50%. The great majority of the foreign exchange revenues of the creditor countries has been lent to the advanced economies; it is the credit assets of the developing countries that have maintained the economic prosperity of the advanced countries and that stability of the world credit-debt system. The current international credit rating system shaped with historical reasons has degenerated into a tool of the world’s biggest debtor interest bloc; they have taken advantage of the high reliance on credit rating information in the process of credit globalization as well as their privilege of say in the rating sector, and transferred the interests of the creditor system to the debtor system, thus making them the source of damaging the international credit relationship and triggering the world economic imbalance. (III) Humankind has no way to enable the current international credit rating system to assume the responsibility for the world simply by rehabilitation. The unprecedented global credit crisis fully exposed the selfishness, utilitarianism and decadence of the 100-year credit rating system, its so-called “authority” and “fairness” are widely castigated and thoroughly challenged; the international community is contemplating, awakening, and strenuously exploring the theory and approach to resolve the crisis. Meanwhile, the fact that the world economy has to continue to rely on the old rating system once again reveals the immanent link between the world economy and the credit rating system; the reality manifests to us that impartial credit rating is needed more desperately than ever before for human credit economic activities. One option is to rehabilitate the current rating system to make it fair; the other option is to establish a brand new international credit rating system. Studies indicate that it is simply impractical to think that the current international credit rating system can be transformed into a positive force to perform the international public responsibilities by attempting to amend it; the key rationale is as follows: 1. It is difficult for the external influence to be effective. The current international credit rating system is first of all an important component of the U. S. economic regime, so its rise and decline concerns the core interests of the U.S.; the international community can by no means influence a sovereign system of the state. 2. There lacks internal motivation as the U. S. government would never take initiative in reforming the current rating system. 3. It is impossible to surmount the cognitive obstacles. Even if the three credit rating agencies do wish to reshape their market reputation, yet their perceptional approach is too deeply-rooted to change due to their position; no valuable reform results can be expected. The global credit crisis is a historical turning point in the great practice of mankind-developed credit economy; it is also the starting point for human beings to perceive the development laws of the credit economic society. The law governing the credit rating and the secure development of human society gives out a historical call that the international community should take actions together to create a new international credit rating system that manifests the essential requirements of the credit economy and credit rating development.
III. Only by Constructing a New International Credit Rating System Can the World Get Rid of the Credit Crisis
The world economy based on credit relationship has its special laws governing the movement of the internal contradictions; our capabilities to deal with the crisis are subject to our perceptional level to the laws. (I) Credit crisis is a process to adjust the credit relationship. The global credit crisis is a violent damage to the international credit system triggered by the credit defaults arising from the most fragile section in the global credit chain; it is a process that virtual credit relationships are dissolved and real credit relationships are established. Since over half a century ago, the global credit revolution led by Western developed countries has promoted credit socialization, credit relationship globalization as well as credit system internationalization; this process has built the new world economic system characterized by credit economy; this system consists of two parts, namely the credit creation system and value creation system, the essence is the relationship between production and consumption. Briefly speaking, the former creates market consumption demand via credit relationship socialization, while the latter is the material wealth production system, and the two systems are mutually conditional. To be more specific, the credit creation system is comprised of three types of systems, namely, the money, credit and rating systems, among which the credit system is the core carrier; the money system is the value comparison system for the credit system; the rating system decides the formation and development of the credit system; the value creation system consists of three types of systems, namely, the investment, trade and production systems. The international credit system is a credit chain set up by every creditor and debtor, it is the sum total of global credit relationships; it configures the credit resources for the value creation system by means of credit and debt, it is the capital flow artery underpinning the global value creation system, so its circulation status directly decides the trend of the world economy. As the credit relationship is established according to the rating information, so the quality of information provided by the international credit rating system decides the status of the international credit system. Practice and studies indicate that the social credit relationships are virtualized and have bubble qualities because the current international rating system continuously outputs wrong rating information; every credit relationship unsupported by real solvency in the international credit system faces debt repayment crisis, with the rupture of the U.S. sub-prime loan credit relationship – the most vulnerable section in the global credit chain as the breach. The direct indication of credit crisis is the deleverage of funds supply, which makes the parties concerned amid the credit chain in a funds-exhaustion status of crisis. The credit relationship adjustment will experience four phases as per its intrinsic development logic: 1. Debt crisis, refers to the overall turbulence of the international credit relationships triggered by the exacerbation of credit risks of the heavily-indebted countries, and the global credit-debt relationship enters a phase of overall adjustment. The financial system of big debtor countries is the section with the most concentrated international credit relationships. When the long-accumulated contradiction between the credit relationship and wealth creation capability exceeds the critical point, the financial tower built on layers upon layers of credit relationships get to the edge of collapse in an instant. The shock wave thus generated instantly triggered the domino effect for the international credit system. The security of the financial system concerns the survival of a nation; the government relieves the crisis provisionally by means of injecting credit into financial institutions; however, when the government is deeply in debt, it can only rely on increasing the government debt size to implement such a huge bailout program in a short term, which further intensifies the government's credit risk. Consequently, the debt crisis in the financial sector is soon turned into a sovereign debt crisis. The sovereign credit relationship that is at risk of breaking instantly threats the normal operation of the state apparatus; at this moment the government starts to adopt the extreme measure of currency depreciation to prevent the drastic damage of credit relationship as it is unable to address the crisis by continuing to raise huge amount of debts. Thus debt crisis evolves into the currency crisis phase. 2. Currency crisis, the debtor country that is entitled to issue international reserve currency takes the extreme economic action of currency depreciation in an attempt to contain the collapse of the regional credit system; it induces the depreciation of various local currencies one after another, with the currency prices dramatically deviating from the value. The original currency comparison pattern in the international monetary system does not exist any longer, and the currency crisis will expedite the course of credit relationship adjustment. The act of enabling the bill printing press to provoke the world credit war demonstrates the helplessness, hysteric and hopelessness of the crisis-ridden country. Global currency depreciation is extremely harmful: The continual dramatic depreciation of the monetary system with the value measurement function is undoubtedly a fatal blow to the crisis-plagued international credit system; currency crisis makes the global creditor assets shrink, and debtors' solvency decline completely; the credit relationship will undergo adjustment in the form of more default cases. Currency crisis will take on a complicated situation that both the international reserve currency and the international credit system experience adjustment in parallel; the international reserve currency that lacks support of wealth creation capability will be replaced by another currency that has a solid foundation of wealth creation capability; the change of the value measurement basis makes it more difficult to measure the debtors’ default risks. Currency crisis indicates the overall crisis of the entire world value creation system following the rating crisis and credit system crisis; all the constituents of the value creation system are in crisis, which will severely hit the wealth creation capability of the real economy, pushing the global credit crisis to the economic crisis phase. Economic crisis, referring to the continuous recession in the global consumption and production as the credit bubble is squeezed out due to the credit relationship adjustment, and this will be the turning point for the credit relationship adjustment. The economic crisis in the process of the credit crisis is different from the traditional economic crisis in that it does not generate products surplus, rather, it is damage to the existing production capacity of the real economy resulting from the reduction of credit consumption and funds supply during the credit relationship adjustment. The deleverage of funds supply manifested in the debt crisis takes on a reduction status to all debt consumption, including the production consumption engendered in the form of debt; the previous balance between production and credit is broken, and the production sector cannot maintain normal production due to lack of sufficient funds support. Although currency crisis increases funds supply, the macroeconomic and credit environment deteriorates, unconventional liquidity surplus creates overall inflation, making the production sector all the more difficult; in this context, the debtor economies will get into an economic recession period, while the creditor economies will also start to lower their economic growth velocity. The overall long-term downturn of the world economy thus begins, and the credit crisis will evolve into its overall crisis phase. 4. Overall crisis, the deep adjustment of international credit relationship results in the value regression of the world credit creation system, extremely compressing the space of increasing the consumption scale on credit, and the world value creation system deprived of the support of credit consumption enters an overall recession phase. In accordance with extent of deviation of the credit relationship from the material wealth creation capability, the credit relationship takes on three morphologies, namely the realistic, future and virtual credit relationships. These three credit relationships represent the depth in credit relationship adjustment as well as the level of impact to the value creation system. The evolving process of the three forms of international credit relationship has such a pattern: the countries entitled to issue international reserve currency make the world credit creation system while the emerging creditor economies make the world value creation system; the essence of this pattern is that some countries whose own production cannot meet their consumption demand create credit purchasing power to consume the material wealth produced by other countries. Fundamental changes will taker place to the status that the contradiction between production and credit is the driver for the world economic growth across the globe along with the deep adjustment of credit relationship. The deep adjustment of credit relationship is the overall adjustment of credit resources status decided by value creation capability to the credit creation capability. The possession of the right to issue international reserve currency, international financial center (credit transaction center) and say in international credit rating sector enable Western developed countries to have super credit creation capabilities, and to occupy over 90% of the global credit resources through credit relationship; yet the value represented by the credit resources occupied is far deviated from their own wealth creation capabilities. The crisis in the previous three phases fundamentally undermines their credit creation capabilities. The credit relationships broken by the debt crisis cannot be restored to form new credit demand, the currency crisis set the direction that the existing international reserve currency will exit from the leading position, the recession of the real economy ensued from the economic crisis intensifies the deviation of credit relationship from the real material wealth. At this junction, the international financial center and the say in the credit rating sector will move to the emerging creditor economies; the world credit creation system will witness an overall decline, exerting tremendous and far-reaching impact on the world value creation system. The future and virtual credit relationships with developed debtor economies taking too high a proportion will witness a dramatic adjustment as they deviate too much from the wealth creation capabilities of their own countries, to realize the self-balance between the credit and production; the immanent laws governing money supply, wealth creation capabilities and inflation will play their roles once again; the states are no longer able to resort to monetary and fiscal means to maintain the credit relationship deeply in crisis; their local value creation system will also suffer from fatal impairment. It still takes more time for the bubble credit relationship formed in an unconventional manner in the creditor economies when they are coerced by the global inflation to be subdued; as their space for credit creation is so limited that it is difficult to make credit relationship creation as impetus for economic growth; the vanishing of the credit creation system manipulated by Western debtor countries forces emerging creditor economies to reconstruct external economic growth driver; from now on these countries will witness a low economic growth period. The overall crisis is the terminal point of the credit crisis, while building a brand new balanced relationship between global production and credit will signify the end of crisis. Essentially, the global credit crisis is the contradiction between the credit and debt as a consequence of the imbalance between production and consumption across the globe when the Western developed countries take advantage of the right to issue international reserve currency and the say in the international credit rating sector, persistently over-consume the material wealth through liabilities beyond its own wealth creation capabilities, so that the world wealth production can hardly sustain the consumption of these countries; and the contradiction is presented in the form of credit crisis. Such dramatic adjustment of credit relationship directly impacts on the interests of debtors, and they will resort to every means to maintain the existing credit-debt relationship; such an action are interactive with the force of credit economic laws. This situation determines that the adjustment of credit relationship will undergo an extremely long period, and man will experience the trial of the most grim moment in the global credit crisis. (II) The traditional way can hardly check the recession of the world economy. In the second fifty years of the 20th century, the driver of the world economic development changed from the contradiction between production and consumption to the contradiction between production and credit; the form of expression of contradiction also changed from economic crisis to credit crisis. Therefore, the approach that mankind deals with the crises should reflect their different essential requirements. The economic crises happened in history were production surplus crises in the advanced economies, and the crisis-stricken countries adopted credit expansion policies to increase the market consumption capabilities, which enabled them to survive one crisis after another. To rescue economic crisis through repeatedly expanding credit scale is a process to successively accumulate debts and to promote the credit risk from quantitative change to qualitative change. The power of capital promotes the combination of credit with consumption: being in debt becomes a mode of consumption, credit consumption becomes an economic system in developed countries; the development and occupation of the credit resources is a new form of capital appreciation and the principal means to resolve economic crises, the fields and scope of the development of credit resources embody the width and depth of credit consumption as well as the level of debt burden. The scope of the development of credit resources includes the country, society and the entire world; the depth of the development of credit resources is presented as the realistic, future and virtual credit; the form of the development of credit resources includes monetary and fiscal policies, various market financing instruments and various financial derivatives. The crises in the past 50 years have repeatedly proven: Stimulating consumption increase by means of credit makes the total level of debt of the major developed countries exceeds multiple times of the amount of wealth created in the year; over-consumption of the future makes these countries so highly indebted that it is absolutely impossible to repay the debt through wealth increase, approaching the critical point of credit crisis. The ongoing credit crisis is the consumption surplus crisis in developed economies, so it is difficult for the debt-ridden countries to survive this different crisis by resorting to expanding credit once again. Consumption surplus means the consumption capabilities that the developed economies have acquired in the form of credit and debt far outweigh their realistic material wealth production capabilities; it is the absolute surplus of virtual consumption that severely lacks the support of real wealth, whose essence is the excessive imbalance between the consumption and production as a result of the stimulation of the consumption growth by a long-term reliance on expansion of debt size. The fundamental difference between consumption surplus and production surplus is that the former is the surplus of consumption capability developed in the form of credit, and what the credit consumption capability represents is the virtual wealth surplus, a manifestation of consumption capability exceeding production capability; while the latter is the surplus of real wealth creation capability and products, a manifestation of production capability exceeding consumption capability. In the twentieth century, what the developed capitalist countries faced were largely production surplus crises, and three different approaches were used to resolve the crises: One approach was the hard-landing way by which production capacity was cut and excessive products disposed; another approach was the war way; still another was the credit way. Especially since the world credit revolution, after the dollar became the form of expression for the value of the material wealth in the world, a broad global consumption market could be provided for capital by increasing the dollar supply and continuously tapping credit demand by means of credit, which resolved the problem of production surplus to a certain extent; the historical change in the real economic structure made it difficult for production surplus in the general sense of the term to appear again in developed capitalist countries; actually, the advanced economies that are entitled to issue international reserve currency and the say in the credit rating sector controlled the leading power to adjust the global consumption demand through the way of credit; this has enabled them to create the legend that production surplus crises could be successfully resolved one after another by means of credit such as exploiting monetary and fiscal policies in half a century. Long-standing and excessive credit consumption makes the accumulated debts of these countries overwhelmingly exceed their real wealth creation capabilities; by the end of the last century, the major capitalist countries in the world had already been in the eve of credit crisis. In the first decade of this century, the unprecedented credit crisis broke out in the home town of economic crises, and this crisis engulfed the entire world with a momentum like a tsunami, this is by no means the transmigration of the economic crisis occurred eighty years ago, which was engraved on the memory of several generations of people; rather, it is a consumption surplus crisis that is completely different from economic crises and that the human society has never experienced before. The crisis-stricken countries continue to adopt the credit way to rescue this deeply influential credit crisis; compared with the last century, the current government could not remain calm and unhurried as it does not enjoy the credit resources advantages any longer, because there is no room to adjust interest rate and exchange rate, fiscal deficit is at a very high level, and monetary and fiscal policies perform practically no function; raising the debt revenue and increasing bill printing amount become the last credit resources to which the government can resort. Injecting funds into the financial system at the forefront of the crisis resulted in the government holding the financial shares while the financial institutions holding treasury bonds, and it triggered sovereign debt crisis while containing the financial system from crash. The decline of the government's solvency will surely push the crisis in the financial system to a new stage; in order to relieve the sovereign debt crisis, the austerity policy adopted by the government will trigger social and political crises. The act of exporting debt through currency depreciating by countries that issue international reserve currencies brought about other countries’ following devaluation of their local currencies, pushing the credit crisis to the phase of global currency crisis, increasing the credit supply by abnormal approach failed to effectively prevent the deepening of crisis as well as the consequential economic and social impact; additionally it deteriorated the international macro-economic and credit environment, further impaired the balance between the production and consumption across the globe, making the prospects of the world economy look even dimmer. Cognitive and interest limitations are the root cause of people’s difficulty in finding the right approach to rescue this crisis. Up to the present people are still using the concept of financial crisis to define the credit crisis, which makes it difficult for the human society to discover the inherent law of development for the crisis using the right cognitive methodology, to break through the constraint of traditional theories and methods and to innovate a constructive idea to rescue crisis. The crisis-affected countries are not willing to lose the vested interests by cutting the excessive consumption, and run the risk of retaining the credit consumption bubble that is doomed to burst. Cutting the surplus consumption in order to realize the balance between consumption and production is the essential requirement of the credit economic law for the world economy to get out of the crisis; economic recession is the inevitable turning point for the crisis-ridden countries to touch the bottom of crisis and realize economic recovery. Any means and approach that is deviated from the immanent law of development of credit crisis would be difficult to save the world economy. (III) Reconstruction of the double systems is the only way for the world economic recovery The double systems refer to international credit system and rating system, treating the reconstruction of these two systems as the road map for the world economic recovery is decided by their position in the world economy. Modern world economy is a credit economy composed of global credit creation system and value creation system; the credit creation system is a system to create consumption demand through credit supply while the value creation system is a system to produce material wealth. Essentially, the world economy is the process of movement of the relationship between production and consumption or between production and credit. The consumption created by credit is fulfilled by the interaction of the money system, credit system and rating system, among which, the money system is the foundation of measuring the value of the credit system, the rating system is the premise to establish and stabilize the credit system, and the credit system assumes the function of providing funds for various economic and social organizations, resembling blood transfusion, it can be compared to the heart and engine of the world economy. Credit vs. rating is the principal contradiction of the world economy, and rating is the principal aspect of the contradiction. Objectively, the credit socialization is a process that credit relationship is established and credit system is formed, it relies on the credit risk information provided by rating for survival and development, and the quality of credit system is subject to the rating quality. The global credit crisis is the general outbreak of the contradiction of untrue credit relationships established on long-standing wrong rating information by the international credit system and rating system in violation of objective laws. The adjustment process of the credit system is a process of dissolution of the credit relationships that are not underpinned by real solvency, it is presented in the form of debt crisis, and its essence is that the proportional relationship between the credit creation system and value creation system is adjusted across the globe to solve the problem of the extreme imbalance between production and consumption. The essence of the world economic recovery is to realize the rebalance between production and consumption; in the premise of the credit relationship as economic basis, it means to cut the surplus consumption shown in the credit relationship lacking the support of solvency, in order to make the relationship between production and credit regress to a reasonable level. The idea that the world economic recovery means the world economy should be restored to the pre-crisis level or maintain a strong growth deviates from the essential requirement of credit crisis; the act of increasing credit supply to rescue the credit crisis is the very expression of such an idea. The above-mentioned analysis tells us that human beings must seek the solution to the crisis from studies on the cause of crisis. 1. It is fundamental for the world economic recovery to establish a new international credit system. The process of credit socialization promoted by the world credit revolution is the process for the international credit system to come into being; when the international credit system unnoticeably became the basis and core component of the world economy, the contradiction between capitalist production and consumption made this system gradually deviate from the support of the wealth creation capability to evolve into the virtual and bubble-featured development stage. From the macro perspective, the current international credit system consists of the credit system and debt system, and the credit system distorted normal credit-debt relationship and developed in an imbalanced way for a long time; developed debtor economies enormously occupied the material wealth created by the debtor economies in the form of debt in the context that their wealth creation capabilities were insufficient by means of lavishly issuing of currency, excessively developing the future credit resources, and “innovating” credit relationship; however, the developed debtor economies have not made their due contribution to the world economic growth, and it is out of the question that they could repay their debts through their own material wealth creation; rather, they could only break through the debt ceiling time and again and maintain their survival by continuously eroding the interests of creditor economies. Actually the current international credit system serves as a tool to transfuse the interests of the creditor economies to the debtor economies in the form of credit and debt; the collapse of the solvency in the debtor economies enabled the process of adjustment for this system, thus the world economy lost the driving force for growth and entered an unprecedented term of recession. Practice tells us that what is presented by the global credit crisis is a world economic crisis triggered by the severely imbalanced international credit system, creating a new international credit system that fully represents the fundamental principles of credit relationship is actually recovering the world economy. The international credit system concerns the secure development of the world economy, this perspective that the holistic interests of the human society is concerned, must be adopted in putting forward the principles and objectives for constructing a new international credit system. The guiding principle for constructing the new international credit system is to comply with the decisive role of wealth creation capability on the credit relationship and to develop credit relationships based on real solvency; its fundamental principles are: (1) To effectively contain the countries entitled to issue international reserve currencies from creating credit demand by over-issuing currencies beyond their wealth creation capabilities, and to encourage the currency that is underpinned by value creation capability to be emerging international reserve currency; (2) To strictly limit the development of credit demand based on the material wealth that could be created in the future, and to include the debt ceiling into the global economic governance mechanism; (3) To strictly prohibit the innovation of virtual credit demand. Every set of credit relationship need to be guaranteed by the debtor’s solvency, the credit system of all countries and regions should have the balancing capacity to repay the debt, the international credit system should achieve the overall balance between the debt service resources and debt level so as to make the international credit system become a credit consumption system with adequate solvency as the precondition, and also become a positive force to push forward the balanced and sustainable development of the world economy. The current and future material wealth creation capabilities are the cornerstone of new international credit system, and the credit consumption capability indicates the ceiling of the world economic growth; human beings must discard the model of the world economic growth that is driven by debt increase and at the cost of credit crisis; promoting the world economic recovery is to achieve the balanced growth between production and consumption and production and credit. Therefore, the first and foremost task of the world economic recovery is to enable many tremendous proportional relationships in the world economy to get into a healthy development status and to achieve a quality growth by cutting the surplus credit consumption and adjusting unreasonable credit relationship. For this purpose, economies in the creditor’s and debtor's status alike should assume the responsibility of reforming the international credit system. The economies whose debts exceed their own solvency should take the initiative to lower the systematic risk of debt service by cutting the debt volume, instead of trying to maintain the fragile credit relationship by borrowing new debts to pay back the old; these economies will face a protracted period of economic recession, instead of growth; economic recession is an indispensible course of recovery, and this historical process in the world economy should be taken on their own initiative. The economies that have the real solvency should weigh their debt ceilings, raise debt rationally and have effective debt management, and avoid debt crisis; these economies are the backbone to establish the new international credit system, the balance between the debt and economic growth is decisively significant for the stability of the international credit system. The economies in the creditor's status should cut their creditor investment in the economies hit by the debt crisis; these economies are the active force in promoting the construction of the new international credit system; they will certainly prevent the international credit relationship from ultimate falling-apart by sacrificing creditor’s interests; they will surely experience an economic slowdown. The adjustment of the existing credit relationships and the establishment of the emerging credit relationships will accompany the entire process of constructing the new international credit system; the human society baptized by the credit crisis should have a clear understanding of this. 2. Building a new international credit rating system is the premise for the world economic recovery. That the infinity of production expansion requires the credit increase to meet its needs is the root cause of the pro-cyclicity of the world economy; the task of credit rating is to make a scientific assessment of credit resources ceiling available for every debtor, to determine the balance of credit supply and demand for every credit relationship, to realize the overall balance between the global credit supply and demand as well as the effective balance between the credit creation system and value creation system, in order to avoid solving the procyclical risk of the world economy via the credit crisis. Credit rating is the only active strength that can prevent the consumption surplus crisis generated by the procyclicality of credit increase to meet the demand of production expansion. The international credit rating system exerts its impact on the world economy as the credit relationship established to reveal the credit risk of every debtor across the globe determines the stability of the international credit system; thus, whether the international credit rating system can represent the essential requirements of the international credit system becomes the premise of the world economic recovery. As the international credit system concerns the sound development of human economic society, the public responsibility of the rating system is decided therefrom; objectively, it requires that the benefits of credit rating agencies should be subject to the public interests; Introducing the general market principles into the credit rating sector would make credit rating agencies forsake the public interests in pursuit of their own benefits. The biggest vulnerability of the international credit system lies in the interaction of credit default risk: it is a set of dominoes, the risk of each falling piece can generate systematic risk; thus the universality of the credit rating system is decided; objectively, an international credit rating agency that can represent the common interests of the human race is called for to reveal the global credit risks, as any local or regional credit rating agency can hardly assume the responsibility for the entire world. What is embodied by the international credit system is the interest relationship between capital owners and occupants; this capital combination morphology realizes its appreciation through getting involved in social reproduction in the form of credit relationship, it is a cross-border interest transaction, so the impartiality of the credit rating system is decided therefrom; objectively, a credit rating agency that does not represent the interests of any particular group is called for to provide the market with impartial rating information. The international credit system is a global circulation regime for capital, and the comparability of the credit information of every debtor is the basis of effective circulation of capital; so it is decided that the credit rating criteria be international and consistent; objectively, internationally unified rating criteria are called for to measure the credit risks of different debtor economies so as to ensure the comparability of the rating information. The fundamental difference between the new international credit rating system and the old one is as follows: The new system embodies the essential requirements of the international credit system from the regime and mechanism perspective, represents the holistic interests of the human society; the new credit rating methodology to seek balance between credit resources supply and demand is utilized for providing early warning of the world procyclical risk promoted by the infinite expansion of production; it is able to assume the rating responsibility for the world, and it is a preventive system against global credit risks in the true sense of the term; in contrast, the old system violates the development laws of credit economy from the regime and mechanism perspective, represents the interests of the world’s biggest debtor group; its credit rating methodology boosts the global credit frenzy, it is unable to assume the rating responsibility for the world, and it is a destructive force for global credit system. The ideas on the reconstruction of the double systems vs. the world economic recovery go beyond the economic thoughts and theories that are familiar to the human race; when the human society still have difficulty in realizing the world economic recovery by using the traditional ideas and methods it should resort to the thought on credit economy to find the solution of rescuing the credit economic crisis.
System(I) Now is the best time to reform the existing international rating system. First, the evolvement of the crisis and failure of the bail-out action further raise awareness of reform of the international community. The reform ideas are brought together and become the mainstream thoughts and actions. Second, the theoretical and roadmap preparation of the international rating system reform has been completed. The international leaders of thought have figured out the essential law from the human practice in developing credit economy, established the historic position of rating system in the development stage of credit economic society, found out inherent connection between rating system and modern economic activities, offering scientific guidance in determining correct direction of the reform. Third, Rating agencies from creditor countries have commenced on working with institutions of various countries to build a new international rating agency, which indicates the major force of the reform is stepping onto the arena of history. The new international credit rating system mode should be made up of three major parts - international credit rating regulatory organization, international credit rating agency and international credit rating criteria: 1. International credit rating regulatory organization The non-sovereign agency consists of the rating regulatory bodies of various countries and its responsibilities include: planning development of the international rating system, formulating the international rating regulatory rules, guiding various countries to build their own rating systems, regulating rating agencies' behaviors and promoting credit rating criteria to upgrade. 2. International credit rating agency The non-sovereign organization is a professional credit information service institution consisting of private institutions from various countries. Its responsibilities include: developing a unified international rating standard, getting involved in the rating business in each country, forming the dual-rating mechanism for all debtors for exercising check and balance and preventing rating risks. 3. International credit rating criteria The international credit rating regulatory organization can formulate rating criteria development plan and encourage rating agencies to carry out and keep improving the criteria. The international credit rating agency should focus on development and enhancement of the criteria and ensure its objectivity through mechanisms. (II) Four cardinal principles for constructing the international credit rating system. Experiences and lessons should be drawn from the global credit crisis while reforming the international credit rating system; the development laws of credit economy and credit rating should be complied with; four cardinal principles should be upheld while taking the overall interests of the human society into consideration: 1. Global Principle Ensuring from designing of the regime and mechanism, unified criteria are applied in conducting a rating for every economy across the globe and following up its risks, to make each rating comparable. 2. Independent Principle The following points should be incorporated into the three components of the international credit rating system: non-national, non- political, zero interest-related, non-competitive and impartial. 3. Consistent Principle Use the consistent rating criteria to measure the credit risks of different economic entities to ensure the objectivity of ratings. 4. International Regulatory Principle Use the consistent international rating regulatory criteria to supervise all of the rating behaviors of rating agencies, international supervision cannot be replaced by national oversight. (III) The general objective and three stages of reforming the international rating system. 1. The general objective of reforming the international rating system is: to build a rating system and mechanism which can impartially reveal credit risks of each credit-debt relationship across the globe to lay a solid foundation for reconstructing the international credit system in order to promote the world economic recovery; to prevent the reoccurrence of global credit crisis through the powerful warning function of the rating system. 2. It will probably take six years in the three stages to realize the objective: In the first stage of two years, the main task is to initially shape a framework of the new international rating system with basic operational conditions. In the second stage of another two years, the main task is to test and improve the new system during the operational process to basically enable it to provide rating information services for the whole world. In the third stage of yet another two years, the major task is to materialize the coordinated development mechanism for the rating system with the credit system on the macro level; to fully build the new international credit system with support from the new international rating system and to realize the economic recovery by using the double systems to push the world’s economy step out of the crisis. (IV) It involves the joint efforts of the international community to reform the international rating system. Reforming the international rating system is the mission and responsibility proposed to the human society by the global credit crisis; it is an epoch-making change to the world economic governance regime. As it concerns the safe development of the human economic society it cannot be successful unless the international community pools their efforts together. 1. Publicity should go first The world's media resources should fully report and communicate the international rating system reform to make the international community understand, support and participate in the reform in breadth and depth. 2. Governments should support Governments should recognize from the crisis that reforming the international rating system is consistent with their economic and social management responsibilities, supporting the reform is promoting social advancement. 3. Creditor countries are a major force driving the reform. The creditor countries are more concerned about the safety of their creditor assets and naturally want to promote the reform should take lead in reforming and participate in the reform with debtor countries. 4. Credit rating agencies are the subject to implement the rating reform Rating agencies of the whole world should join hands to undertake the historic mission to achieve the objective of the reform. The proposition of reforming the international rating system to promote the world economic recovery is a practical question; it is even more a theoretical question. It would be impossible for us to find the correct approach and method to rescue the crisis if we could not scientifically explain the process of movement of the credit crisis from the theoretical perspective and discover its movement law. The realistic significance of exploring the law is to spark people’s meditations on the objective of and approach for recovering the world economy, and its historic significance is to innovate the theory on credit economics, lighting the way forward for the world economy with the torch of credit thought; it calls for human wisdom, consensus and action to fulfill this great mission that complies with the historical trend.