“Anyone who studied the depression of the Thirties sees it as given that the economic nationalism of the era made a bad situation much worse. The competitive devaluations of the period and efforts to boost exports and restrict imports were a severe constraint on world trade at a time that ultimately made everyone poorer – hence it became known as beggar-thy-neighbour economics” (Business, Evening Standard, 12/10/10)
Although everyone has claimed that they have learned the lessons of the 1930s, the ruling classes are again engaging in the same policies that proved so calamitous 80 years ago. Deep tensions inside the International Monetary Fund (IMF) have recently emerged over currency manipulation as countries take action to defend their own national interests against their rivals. Like gangsters, they can divide out the loot in ‘good times’ but are at each other’s throats in times of difficulty. As different countries scramble to hold the line and defend their export markets, a dangerous race to the bottom in exchange rate policy where each currency seeks to be devalued against each other, is being prepared. This means cheaper exports and dearer imports.
Guido Mantega, Brazil’s finance minister, blurted out what the others were thinking – that the world is in the middle of a currency war.
In particular, hostility between Washington and Beijing has escalated into something resembling trench warfare. If not an actual war, then they are without doubt on the brink of an out-and-out currency war. Salvos have been launched. The US imperialists have accused the Chinese of currency manipulation because they are refusing to increase the value of the renminbi (which would make their exports dearer). The Chinese, in turn, have attacked the Americans for having a super-loose monetary policy which has resulted in the destabilizing of the flow of capital.
The Japanese, struggling with a declining economy, have intervened with a fusillade to hold down the value of the yen and boost their exports. The Brazilians are using guerrilla tactics to stop the real from rising, after complaining that Beijing’s currency was hurting their exports. But they dare not squeal too loudly as China is their largest customer. The South Africans are taking unilateral action to protect their markets. Meanwhile, India and Thailand have threatened to bring ‘heavy ordnance’ into play.
A surge of “hot money” into Thailand (speculators looking for quick rewards) has driven the Thai bhat to its highest level against the dollar since just before the Asian crisis of 1997-98. The pace of money flowing into the Asian markets has been dizzying. This has forced the Thai government to impose a 15% tax on capital gains and bonds in a desperate attempt to stem the flood. Such measures will be in vain as the flow of such money is unstoppable. The Billionaire speculators, such as George Soros, will be determined to gain their pound of flesh by “betting” against different currencies.
Limits of capitalism
With all the excess capacity throughout the world economy, the capitalists are investing their money in anything but production. This again shows the limits of capitalism where the productive forces have outgrown the nation state and private ownership. The world is awash with “surplus liquidity” – money capital – searching for profitable investment. Why invest in industries already saturated with over-production, when you can speculate in currencies and make billions? This ‘financialisation’ by capitalism, a reflection of its impasse, builds crisis and instability into its very foundations, as we are now seeing. Colossal amounts of fictitious capital (paper wealth not backed by real values) are sloshing around the world economy like loose cargo on the deck of a ship, knocking holes in the sides at every turn. Such unsound investments, as during the credit crunch, threaten to bring down the financial house of cards.
The scale of this financial gambling is truly staggering. As exchange controls were abolished, the quantity of foreign dealings went from $70bn a day in the early 1980s, to $500bn a day in 1988, to $3.2 trillion a day in 2007. Half of this involves derivatives, financial wizardry which makes money out of money. Currencies are resold, swapped or taken as bets on future prices.
To put things in perspective, in 2007 the world GDP was around $65 trillion. The total value of companies quoted on the world’s stock markets was $63 trillion. But the total value of derivatives was $596 trillion – 8 times the real economy. The total currency traded was $1,168 trillion or 17 times world GDP. The bulk of this is clearly fictitious capital as it is not backed by real collateral. This whole insane structure has completely lost sight of the fact that without real production there is no value. They are the “phantom of imagination,” to use Marx’s expression.
In an attempt to stem the crisis, between September 27th and October 11th, central banks in South Korea, Malaysia, Indonesia, Thailand and Taiwan collectively purchased $28.74bn, according to IFR Markets. This was an attempt to strengthen the dollar and maintain their competitiveness. But such action has made no difference. These currencies continue to rise in relation to the US dollar, rendering their exports more expensive.
The Americans want the Chinese to revalue their currency while allowing the dollar to fall to permit the world economy to “rebalance.” What they mean is China should cut back on their exports and increase their imports of American goods. The soaring US trade deficit is adding to the pressure. The Chinese, of course, are having none of it. They want to maintain and increase their exports to keep their high growth rates. If they fail to achieve this, then they will be faced with factory closures, social unrest and increasing instability. They are determined to avoid this at all costs having witnessed strikes and occupations in recent times.
The biggest force undermining the dollar is the US Federal Reserve with the aim of allowing their exports to be more competitive. Paradoxically, the biggest defender of the dollar is the People’s Bank of China, which is trying to do the opposite. The weakening US economy has pushed the Fed to consider a new bout of quantitative easing, which will cause inflation and weaken the dollar, and assist US exports. This devaluation of the dollar has sent the price of gold and silver sky high as speculators put their money into safe-havens. The world’s central banks are poised to be net buyers of gold this year for the first time since 1988. This dash to a hoped-for safety has also served to push up the euro as a more reliable reserve currency, much to the annoyance of the Europeans.
“Almost anything is better than paper money… any fool can run a printing press,” stated Nelson Bunker Hunt, the former billionaire oil baron. The fool in this case is the American Administration.
A currency war between the capitalist powers could result in tit-for-tat protectionism as they try to boost their exports at the expense of their competitors. The US economy is slowing, as is industrial output in Asia. Europe remains firmly in the doldrums. This has given rise to the danger at some point of an all-out trade war between the competing powers.
This increased antagonism arises from the dire economic situation on a world scale, with every country attempting to escape its problems by boosting exports. They want their competitors to take on the burden. Clearly, not everyone can do this at the same time but still they persist.
The prospect of further quantitative easing in the US and Britain, which would weaken their currencies, has raised tensions. The resulting flow of excess money towards emerging markets puts pressures on their real exchange rates, and pushing them to engineer depreciations of their own. This is a very slippery slope indeed.
Frictions have boiled over with barbed comments from Wen Jiabao, the Chinese premier, Jean-Claude Trichet, of the European Bank and Jean-Claude Juncker, of the EU finance ministers’ group and others. The Europeans blow hot and cold depending upon the current strength of the euro. The weak euro has played to their advantage, especially the Germans. Its recent rise has led to European voices being raised again about China, with whom they have a large bilateral deficit.
The US has no such scruples. The House of Representatives recently voted for a bill that would permit the blocking of Chinese imports in retaliation for an undervalued (“manipulated”) renminbi. The Commerce Department plans to slap tariffs on Chinese goods deemed to be “undervalued.” This is a watered-down version of the Schumer-Graham plan which wanted to hit all Chinese imports with a 27.5% tariff – a clear violation of the rules of the World Trade Organisation. “They cheat to steal our jobs,” said Mike Rogers, a Republican representative from Michigan. For the moment this is more a threat than a declaration of war.
Despite all the interventions, central banks have had little effect in holding back their rising currencies against the sliding dollar. The Japanese yen was at a 15-year high against the dollar in Mid-October, despite spending $25bn in an attempt to weaken their currency. The same is true of the currencies of Thailand, Philippines and Malaysia. With likely quantitative easing, the dollar will fall further. The dollar has already dropped more than 6% since the start of September.
This has provided the world’s currency speculators with an unexpected bonanza. They have made billions betting and speculating against the yen and other currencies
Clearly there is no armistice in sight. “Today’s phoney war could quickly turn into a real dogfight,” states The Economist. “The conditions driving the divergence of economic policies – in particular, sluggish growth in the rich world – are likely to last for years.” (16 October) The economic trench warfare is set to continue and escalate further. This war of words could turn into a full-scale trade war and threaten to tip the global economy into another Depression. The ruling classes are tobogganing to disaster with their eyes closed.