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

Keynes And The The Paradox Of Capitalism

Once upon a time, economic downturns were looked on as inevitable. Or incurable. Or even a morally justified, righteous cleansing of an economy burdened by the sins of excess. One result of this thinking was the policy mistakes that contributed to the Depression. One of the few good developments to come out of this experience was perhaps the most important economic breakthrough in the 20th century: John Maynard Keynes' 1936 book, 'The General Theory of Employment, Interest, and Money.'

Keynes pointed out that in a downturn, an economy simultaneously has idle factories, unemployed workers and too little spending. This creates the possibility of a virtuous circle: Getting people to spend more will put the factories back to work, staffed by the previously unemployed workers. Put another way, in the short run, when the economy is operating below its potential, expanding demand can create supply.

Keynesian economics argues that private sector decisions sometimes lead to inefficient macroeconomic outcomes and therefore advocates active policy responses by the public sector, including monetary policy actions by the central bank and fiscal actions by the government to stabilise output over the business cycle.

Keynes argued that the solution to depression was to stimulate the economy (“inducement to invest”) through some combination of two approaches: a reduction in interest rates and government investment in infrastructure. Investment by government injects income, which results in more spending in the general economy, which in turn stimulates more production and investment involving still more income and spending and so forth.

The initial stimulation starts a cascade of events, whose total increase in economic activity is a multiple of the original investment. Not surprisingly, Keynesian theory is being touted as a mantra in these recessionary times when government “stimulus packages” are being hailed as the best way to save capitalism from itself.

Though bourgeois in his outlook, Keynes was a remarkably insightful economist. But even his insights could not fully comprehend the paradox that is capitalism. Indeed, our own experience belies the Keynesian optimism about the future of mankind under capitalism, writes Prabhat Patnaik in this insightful article.

In a famous essay 'Economic Possibilities for our Grandchildren' (1930), Keynes had argued: “Assuming no important wars and no important increase in population, the economic problem may be solved, or be at least within sight of solution, within a hundred years. This means that the economic problem is not, if we look into the future, the permanent problem of the human race.” (emphasis in the original)

He had gone on to ask: “Why, you may ask, is this so startling? It is startling because, if instead of looking into the future, we look into the past, we find that the economic problem, the struggle for subsistence, always has been hitherto the most pressing problem of the human race… If the economic problem is solved, mankind will be deprived of its traditional purpose.” He had then proceeded to examine how mankind could fruitfully use its time in such a world.

True, after Keynes had written there has been the second world war, but thereafter mankind has had six-and-a-half decades without any “important war” of the sort that could interrupt what he had called the “era of progress and invention”. And the rate of population growth has also not accelerated to a point that can be considered to have invalidated Keynes’ premise.

And yet if we take mankind as a whole, it is as far from solving the economic problem as it ever was. True, there has been massive accumulation of capital, and with it an enormous increase in the mass of goods available to mankind; and yet, for the vast majority of mankind, the “struggle for subsistence” that Keynes had referred to has continued to remain as acute as ever, perhaps in some ways even more acute than ever before.

To say that this is only because not enough time has passed, that over a slightly longer time period Keynes’ vision will indeed turn out to be true, is facile. The fact that the bulk of mankind continues to face an acute struggle for subsistence is not a matter of degree; it is not as if the acuteness of this struggle for this segment of mankind has been lessening over time, or that the relative size of this segment has been lessening over time. We cannot therefore assert that the passage of more time will lift everybody above this struggle.

Dichotomy Structurally Inbuilt In Capitalism
Likewise, to say that while enormous increases have taken place in the mass of goods and services available to mankind (the increase in this mass being more in the last 100 years than in the previous 2000 years, as Keynes had pointed out), its distribution has been extremely skewed and hence accounts for the persistence of the struggle for subsistence for the majority of the world’s population, is to state a mere tautology.

The whole point is that there is something structural to the capitalist system itself, the same system that causes this enormous increase in mankind’s capacity to produce goods and services, which also ensures that, notwithstanding this enormous increase, the struggle for subsistence must continue to be as acute as before, or even more acute than before, for the bulk of mankind.

Keynes missed this structural aspect of capitalism. His entire argument in fact was based on the mere logic of compound interest, i.e. on the sheer fact that “if capital increases, say, 2 per cent per annum, the capital equipment of the world will have increased by a half in twenty years, and seven and a half times in a hundred years.”

From this sheer fact it follows that output too would have increased more or less by a similar order of magnitude, and mankind, with so much more of goods at its disposal, would have overcome the struggle for subsistence. The reason Keynes assumed that an increase in the mass of goods would eventually benefit everyone lies not just in his inability to see the antagonistic nature of the capitalist mode of production (and its antagonistic relationship with the surrounding universe of petty producers), but also in his belief that capitalism is a malleable system which can be moulded, in accordance with the dictates of reason, by the interventions of the State as the representative of society.

He was a liberal and saw the state as standing above, and acting on behalf of, society as a whole, in accordance with the dictates of reason. The world, he thought, was ruled by ideas; and correct, and benevolent, ideas would clearly translate themselves into reality, so that the increase in mankind’s productive capacity would get naturally transformed into an end of the economic problem.

If the antagonism of capitalism was pointed out to Keynes, he would have simply talked about state intervention restraining this antagonism to ensure that the benefit of the increase in productive capacity reached all.

The fact that this has not happened, the fact that the enormous increase in mankind’s capacity to produce has translated itself not into an end to the struggle for subsistence for the world’s population, but into a plethora of all kinds of goods and services of little benefit to it, from a stockpiling of armaments to an exploration of outer space, and even into a systematic promotion of waste, and lack of utilization, or even destruction, of productive equipment, only underscores the limitations of the liberal world outlook of which Keynes was a votary.

The State, instead of being an embodiment of reason, which intervenes in the interests of society as a whole, as liberalism believes, acts to defend the class interests of the hegemonic class, and hence to perpetuate the antagonisms of the capitalist system.

Antagonisms In Three Distinct Ways
These antagonisms perpetuate in three quite distinct ways the struggle for subsistence in which the bulk of mankind is caught. The first centres around the fact that the level of wages in the capitalist system depends upon the relative size of the reserve army of labour.

And to the extent that the relative size of the reserve army of labour never shrinks below a certain threshold level, the wage rate remains tied to the subsistence level despite significant increases in labour productivity, as necessarily occur in the “era of progress and innovation.” Work itself therefore becomes a struggle for subsistence and remains so.

Secondly, those who constitute the reserve army of labour are themselves destitute and hence condemned to an even more acute struggle for subsistence, to eke out for themselves an even more meagre magnitude of goods and services.

And thirdly, the encroachment by the capitalist mode upon the surrounding universe of petty production, whereby it displaces petty producers, grabs land from the peasants, uses the tax machinery of the State to appropriate for itself, at the expense of the petty producers, an amount of surplus value over and above what is produced within the capitalist mode itself, in short, the entire mechanism of “primitive accumulation of capital” ensures that the size of the reserve army always remains above this threshold level.

There is a stream of destitute petty producers forever flocking to work within the capitalist mode but unable to find work and hence joining the ranks of the reserve army. The antagonism within the system, and vis-à-vis the surrounding universe of petty production, thus ensures that, notwithstanding the massive increases in mankind’s productive capacity, the struggle of subsistence for the bulk of mankind continues unabated.

The growth rates of world output have been even greater in the post-war period than in Keynes’ time. The growth rates in particular capitalist countries like India have been of an order unimaginable in Keynes’ time, and yet there is no let up in the struggle for subsistence on the part of the bulk of the population even within these countries.

In India, precisely during the period of neo-liberal reforms when output growth rates have been high, there has been an increase in the proportion of the rural population accessing less than 2400 calories per person per day (the figure for 2004 is 87 per cent). This is also the period when hundreds of thousands of peasants, unable to carry on even simple reproduction have committed suicide.

The unemployment rate has increased, notwithstanding a massive jump in the rate of capital accumulation; and the real wage rate, even of the workers in the organized sector, has at best stagnated, notwithstanding massive increases in labour productivity. In short, our own experience belies the Keynesian optimism about the future of mankind under capitalism.

But Keynes wrote a long time ago. He should have seen the inner working of the system better (after all Marx who died the year Keynes was born, saw it), but perhaps his upper class Edwardian upbringing came in the way.

But what does one say of people who, having seen the destitution-“high growth” dialectics in the contemporary world, still cling to the illusion that the logic of compound interest will overcome the “economic problem of mankind”?

Neo-liberal ideologues of course propound this illusion, either in its simple version, which is the “trickle down” theory, or in the slightly more complex version, where the State is supposed to ensure through its intervention that the benefits of the growing mass of goods and services are made available to all, thereby alleviating poverty and easing the struggle for subsistence.

But this illusion often appears in an altogether unrecognizable form. Jeffrey Sachs, the economist who is well-known for his administration of the so-called shock therapy in the former Soviet Union that led to a veritable retrogression of the economy and the unleashing of massive suffering on millions of people, has come out with a book where he argues that poverty in large parts of the world is associated with adverse geographical factors, such as drought-proneness, desertification, infertile soil, and such like.

He wants global efforts to help these economies which are the victims of such niggardliness on the part of nature. The fact that enormous poverty exists in areas, where nature is not niggardly, but on the contrary bounteous; the fact that the very bounteousness of nature has formed the basis of exploitation of the producers on a massive scale, so that they are engaged in an acute struggle for existence precisely in the midst of plenitude; and hence the fact that the bulk of the world’s population continues to struggle for subsistence not because of nature’s niggardliness but because of the incubus of an exploitative social order, are all obscured by such analysis. Keynes’ faith in the miracle of compound interest would be justified in a socialist order, but not in a capitalist one.