The Currency War

Currency wars are the only means left for countries to climb out of the recession. Recourse to such policies is bound to intensify. They are a symptom of the impasse in which capitalism is currently caught; and they also accentuate it

EVERYONE is talking now of the “currency war” that seems to be breaking out among the world’s leading economies, each working for a depreciation of its currency vis-a-vis the others. The effect of a currency depreciation is to enlarge the exports of the country undertaking such a depreciation and to reduce its imports, since its goods become cheaper compared to those of other countries.

In short, currency depreciation increases a country’s net exports, i.e. its market at the expense of other countries. It enlarges the country’s output and employment, but at the expense of other countries, which is why increasing domestic employment through a currency depreciation is often referred to as an instance of a “beggar-my-neighbor” policy.

If world aggregate demand was increasing then there would be little cause for competitive currency depreciations, since domestic employment in each country would be increasing even in the absence of such depreciation. The reason for countries being engaged in such competitive depreciations, i.e. in snatching each other’s markets, lies precisely in the fact that world aggregate demand is not increasing, i.e. that the world crisis is persisting.

Till now the same people who are now so concerned about the currency war were declaring confidently that the world crisis was over, which just shows the superficiality of their understanding. In fact the crisis is going to be prolonged and acute. This explains the currency war, the desperation of each country to improve its position at the expense of its neighbour, since there is no other silver lining on the horizon.

CURRENCY WAR DEEPENS CRISIS
But the currency war itself will deepen the crisis. If there is uncertainty about what the configuration of exchange rates will be some months from now, and hence about what the size of the market of any particular country will be some months from now, then this acts as a disincentive for private investment everywhere, which only compounds the recession.

In addition, if uncertainty about relative currency values makes wealth-holders shift to gold or oil-futures, or other commodity-futures, as their preferred form of holding wealth, then this gives rise to inflation; and the typical means of combating inflation in contemporary capitalist economies, which is the pursuit of contractionary monetary and fiscal policies, only worsens the recessionary crisis. In short, the currency war is both a reflection of the abiding nature of the current crisis, and a means of its accentuation.

Most Western, especially American, commentators lay the blame for the currency war at the door of so-called “newly-emerging” economies, especially China and other Asian countries (which includes India). Their argument runs as follows: there are serious imbalances in the world economy arising from the fact that the US is running a massive current deficit, while China above all, and some other newly-emerging economies, are running current account surpluses.

This basic imbalance also causes speculative flights of finance capital from crisis-hit USA to China and the newly-emerging economies. If the currencies of the latter were allowed to appreciate, then those of the USA (and other advanced countries) could remain more or less stable vis-a-vis one another and vis-à-vis any other medium such as gold or commodities.

But China and other newly-emerging economies have prevented such an appreciation, and have instead soaked up whatever dollars flow into their economies in the form of higher foreign exchange reserves. It is this which puts pressure on the value of the dollar. Chinese undervaluation of the currency therefore is the “original sin” that starts the currency war. And only last week the US House of Representatives allowed the government to impose countervailing duties on imports from China, on the grounds that such imports derived an “unfair” implicit subsidy owing to China’s undervalued currency.

This entire perception however misses the point. Suppose China allows its currency to appreciate. That would basically mean that Chinese goods would no longer be as cheap as they were earlier. While this fact would certainly mean a reduction in China’s net exports, and, hence, immediately at any rate (since no other country can step into Chinese shoes at short notice), an improvement in the state of current account imbalances in the world economy, it would, other things remaining the same, cause a reduction in China’s employment and output as well.

The only way that China can avoid such a reduction in output and employment, while appreciating its currency, is if it simultaneously increased its government expenditure, or government transfers to the people to raise their consumption. If it did so, then the reduction in net exports on account of the appreciation of its currency would have been offset by the increase in government expenditure, so that its total level of aggregate demand, and hence its output and employment, would have remained unchanged.

But if China did so, i.e. shifted from net exports to government expenditure (which includes transfers to the workers and peasants) as a source of aggregate demand, then there would be no need for it to appreciate its currency at all. The improvement in global imbalances and the stimulus to global aggregate demand that a Chinese policy of “currency appreciation plus enlarged government expenditure” would bring about, could be equally well brought about by enlarged government expenditure alone.

What is equally striking is that the very same commentators, the very same US Congressmen, the very same spokesmen for finance, who vociferously condemn China’s undervalued exchange rate, are also the ones who, day in and day out, oppose with vehemence any increase in government expenditure anywhere and who are all for rolling back even president Obama’s minuscule stimulus package.

Those who advocate an appreciation in China’s (and other emerging economies’) currency cannot possibly hold that an increase in government expenditure for removing unemployment is bad everywhere else, but not in China. They cannot possibly hold that an increase in, say, workers’ wages as a means of enlarging domestic demand for eliminating unemployment (such as would arise if the currency gets appreciated) is good for China, while in the US a situation of unemployment must be met through a cut in workers’ wages. In other words, they cannot possibly advocate the use of precisely those weapons, which are the only weapons available, for overcoming unemployment in China, when they are opposed to their use in the US.

It follows that those who are advocating an appreciation of the Chinese currency must believe either that such appreciation would cause no unemployment in China, which is patently wrong, or that unemployment in China does not matter, which is patently chauvinistic. Which one is it? As a matter of fact it is a patently chauvinistic argument being put forward via a theory that is patently wrong. Let us see how.

WRONG THEORY
The fundamentally wrong theory that finance capital puts forward, via numerous economists and commentators who echo its views and are adulated professionally for doing so, is that the free and unfettered operations of markets in a capitalist economy automatically brings about a state of “full employment” (which means not that everybody is employed but that the only unemployment which remains is either voluntary or frictional or because the search for jobs, which are in any case lying around unfilled, takes time).

Even in the midst of the greatest crisis since the 1930s Depression, this position has not been abandoned. It received a jolt at the start of the crisis but it has once more regained its hegemony, thanks to the assiduousness of the propaganda by financial interests. How else does one explain the fact that even in the midst of almost 10 per cent unemployment rate in the US, there are strong demands for Obama’s stimulus package, which was extremely paltry to start with, to be withdrawn?

The belief obviously is that even without such stimulus, the economy would automatically move to full employment, provided wages are sufficiently flexible (ie, are sufficiently cut), a view which was held by Herbert Hoover, US president before Franklin Roosevelt, and which was resoundingly disproved by the collapse of Hoover’s policy that accentuated the Great Depression.

Now, on the basis of this theory, where aggregate demand does not matter, where Say’s Law, that supply creates its own demand, holds, a currency appreciation by China and other emerging Asian economies cannot possibly cause unemployment in those economies; it can only have the salutary effect of removing world imbalances.

When US treasury secretary Tim Geithner says that countries like China, by interfering in the determination of their exchange rates, are not allowing free markets to function as they should, he is implicitly suggesting that if China allowed the foreign exchange market to function, it would be good for all including China, i.e. that an appreciation of the Chinese currency, which a “free” foreign exchange market will bring about, is not a cause for worry from the point of view of employment and output in China. He is in short, like all spokesmen of finance, downplaying the unemployment-generating effect of a currency appreciation.

It may be argued that this is an unfair inference to draw, that those who are asking for an appreciation of the Chinese currency (and of other Asian currencies), really have in mind something altogether different. They recognise that such appreciation will cause unemployment in China, but would like the Chinese State to step into the breach by increasing its expenditure, in which case it would have begun to play the role of a locomotive for the world economy as a whole, i.e. taken over in part a role which the US has been playing single-handedly, but which it can no longer afford to do.

But if this is the argument, namely that China should absorb more goods domestically and thereby boost world demand, then there is no reason why for doing so, it should appreciate its exchange rate at all. In other words, the argument that China should henceforth play a leading role in stimulating world demand is quite independent of the argument about the need for China to appreciate its exchange rate.

‘BEGGAR-MY-NEIGHBOR’ POLICY
The fact that it is exclusively the latter argument that is advanced by spokesmen of finance and all right-wing forces, suggests something quite different, namely that within the existing world market, China and other Asian countries should yield a larger share to the US and other advanced capitalist economies, i.e. the solution to the capitalist crisis in these latter economies should come about through unemployment and recession in China and other Asian economies, much the way that perpetrating “deindustrialisation” on the colonies was the means of achieving prosperity in the metropolis in the old days.

This strategy is sought to be camouflaged by the absurd theory that such unemployment will automatically disappear, through the spontaneous functioning of markets; but it is nothing else but a “beggar-my-neighbour” policy being sought to be imposed by the advanced capitalist countries on the newly-emerging economies.

The need for this arises because at the moment there are no prospects of an expansion in the level of world aggregate demand. The leading capitalist country, the US, is not in a position to provide a lead in this regard because any expansion on its part will increase its current account deficit in the prevailing situation (i.e. in the absence of recourse to protectionism on its part); countries like China are still not large enough to lead the world in the matter of boosting aggregate demand; and a coordinated expansion of world demand by several countries simultaneously providing a fiscal stimulus, is totally unacceptable to international finance capital which is always opposed to any State activism of this sort.

With the total size of the world demand thus constrained, “beggar-my-neighbor” policies and currency wars are the only means left for countries to climb out of the recession. Recourse to such policies is bound to intensify. They are a symptom of the impasse in which capitalism is currently caught; and they also accentuate it.

Prabhat Patnaik/People’s Democracy

Climate Change: Copenhagen Meet Will Be Nothing More Than A Talk Shop

As with everything else, Barack Obama’s policy on climate change differs little from that of his predecessor George W Bush

In the course of his current trip to Asia, US President Barack Obama has ensured that the upcoming United Nations Climate Conference, due to take place in Copenhagen December 7-18, will be nothing more than a talk shop.

An estimated 40 world leaders and representatives of 190 nations are due to take part in the Copenhagen conference, which has the task of producing a new agenda for tackling global warming to replace the Kyoto Protocol of 1997.

On November 15, Obama gave his consent to a plan worked out at the Asia Pacific Economic Cooperation (APEC) summit in Singapore that delays any binding agreements on climate change until next year at the earliest. The deal was supported by many of the world’s leading greenhouse gas emitters, including the United States, China, Russia, Japan, Indonesia and South Korea.

According to figures published by the International Energy Agency, China was the leading emitter of carbon dioxide in 2007, closely followed by the US. When it comes to carbon dioxide emission per head of the population, however, the US is far ahead of any other country, with 19.1 tons, dwarfing China’s 4.6 tons.

As was the case with the Kyoto Protocol—which expires in 2012 and was never ratified by the American government—the US is playing the main role in undermining any binding agreement to curb greenhouse gas emissions. Obama has adopted the Bush administration’s policy of demanding that China accept binding targets before the US takes any measures.

The hypocrisy of Obama when it comes to the issue of climate change is brazen. In September, Obama addressed a United Nations conference, proclaiming “the historic recognition on behalf of the American people and their government [that] we understand the gravity of the climate threat.” Aside from a change in rhetoric, however, Obama’s policy differs little from that of his predecessor, on climate change as with everything else.

After his talks with Chinese President Hu Jintao, Obama declared that the United States and China were seeking a deal at the Copenhagen summit that would “rally the world.” The agreement struck in Copenhagen should have “immediate operational effect,” he added.

In fact, just one day previously Obama had struck a deal with the Chinese president at the APEC meeting that robs the Copenhagen summit of any substance. This is how the US administration seeks to “rally the world.” Obama has still not confirmed whether he will attend the conference in Copenhagen.

While leading industrial nations pointedly refuse to undertake measures to tackle climate change, environmental experts and scientists are warning of the grave consequences of a failure to curb greenhouse emissions.

At an international climate change conference held in Oxford, England at the end of September, the German climatologist, Stefan Rahmstorf, declared that a one-meter rise in sea levels was likely this century. If world governments do not arrive at effective agreements to halt global warming, the rise in sea levels will be even more dramatic.

A sea level change of just one meter will have an enormously disruptive impact on a large portion of the world’s population that resides in coastal areas. Low-lying coasts and islands will be submerged, dispossessing tens of millions of people. A two-metre sea rise will flood or submerge entire cities.

Rising temperatures and the associated disruption of weather patterns will have devastating consequences for agricultural production, water distribution and disease management worldwide. As always, the poor will feel the effects most acutely.
The inability of the major capitalist powers to agree to any effective countermeasures is rooted in two factors, both inherent in the capitalist system.

First, though climate change is a global problem that requires a global solution, international cooperation is prevented by the conflicting interests of different nation-states. These conflicts have been intensified by the economic crisis.

Despite the efforts by Obama to put a positive gloss on his talks this week with President Hu, the differences between the two countries are considerable and continue to mount. China is Washington’s leading creditor, as America’s budget deficit soars to a record $1.42 trillion.

The US and Chinese administrations accuse one another of maintaining cheap currencies to further their interests, and both countries are involved in tit-for-tat punitive trade sanctions.

Similar rivalries are growing between other leading world economies. Every major power fears that any concession with regard to environmental protection could disadvantage its domestic business interests in the furious struggle for the domination of world markets.

Second, a rational, scientific response to climate change is blocked by the subordination of every aspect of economic and social life to the principle of private profit and the interests of the corporate and financial elite.

In a report dealing with the issue of developing vitally needed renewable non-toxic energy sources, the UN estimated that governments worldwide would need to invest $500-600 billion per year. While this sum is large, it is still a fraction of the funds made available by the US government to bail out its banks (as much as $23 trillion by one account). Across the globe, capitalist governments, following the lead of the US, have made clear that their priority is profit returns for big business and the banks, not a healthy planet.

The option favoured by Obama himself is a free market approach to global warming, involving “cap and trade” measures, whereby the government would provide huge incentives to corporations to modestly reduce carbon emissions, while turning pollution into a tradeable commodity.

The failure of major capitalist nations to undertake any serious measures to combat growing environmental dangers is an indictment of the capitalist system. It is also a blow to all those environmentalists and “Greens” who argue that it is possible to pressure capitalist governments to undertake “environmentally friendly” policies.

Climate change and other pressing environmental problems can be solved only through the utilisation of mankind’s intellectual, productive and financial resources as part of a rationally organised, democratic effort carried out on an international scale. This requires the socialist reorganisation of society.

Stefan Steinberg