Currency War: To Be or Not To Be
By Farooque Chowdhury
12 October, 2010
Countercurrents.org
It is now currency theatre. Exchange rates are policy weapon. A currency war is raging. The war is still to rage. Opinions differ.
But the reality is there, a charged reality, a reality with high unemployment, countries with huge debt problem, countries artificially devaluing their currencies. All these are symptoms of crisis the capitalist system is going through.
Economic super powers baffled with financial crisis are facing each other. Exchange rates are being used to puzzle out domestic problems. This in turn may lead to a trade war around the world, may derail the fragile global recovery, the cherished dream of the mainstream.
George Soros, the billionaire currency investor reputed to have made $1bn by “breaking the Bank of England” during the Black Wednesday fiscal crisis in 1992, has warned: A global “currency war” pitting China versus the rest of the world could lead to the collapse of the world economy. Guido Mantega, the Brazilian finance minister coining the phrase – Currency War – said: We're in the midst of a currency war. Zoellick, the World Bank head, however, doesn’t foresee that the world is moving into currency war. Although he admits: There is tension. “Tensions can lead to trouble ...” Strauss-Kahn, the International Monetary Fund head echoed: A currency war risks undermining the global recovery. “The momentum [of economic co-operation] is decreasing.” The recently concluded IMF meeting, now a cooperation conclave for competitions, witnessed exercises without concrete action on exchange rates. The final communiqué seemed a setback for the US. A significant sign it carried.
Japan, Brazil, Peru and other countries are trying to beggar thy neighbor. Brazil has doubled a tax on foreign purchases of local bonds, South Korea has warned of new trading limits, and Greece and Turkey are trying to expand exports. Countries are seeking to devalue currencies to boost exports and jobs. China with its $2,450bn in reserves in June 2010, 30 percent of the world total, 50 percent of its own GDP and largest in the world, has reaffirmed plans for currency appreciation at its own pace. Soros wrote in the Financial Times: “China has emerged as a leader of the world.” “They control not only their own currency but actually the entire global currency system,” he said.
A nervous Europe pitifully learns from Joseph Stiglitz, the Nobel economics laureate: Euro may not survive. Its future is looking “bleak”. Memories of strong euro during its childhood days make speculators nostalgic. The US and Britain have flooded their economies with liquidity and have kept interest rates extremely low. Thus they have effectively devalued their currencies. Germany with huge trade surpluses, and Ireland, Portugal and Greece with deficits are putting intense pressure on euro. Europe fractured now with cracks is having row over exchange rates.
Banks are again in “business as usual”. Investors have claimed that China was deliberately keeping the yuan, the Chinese currency, low to keep exports cheap. This is hurting US competitors. Manufacturers in the US contend that the yuan is undervalued by as much as 40 percent and this has cost millions of US manufacturing jobs by making Chinese goods cheaper in the US market and American products more expensive in China.
With high unemployment, a miserable GDP, and declining economic power the US finds no other way than running its printing presses to the limits and pointing the finger of accusation: China is keeping its currency low. Geithner tells: China's actions set off “a dangerous dynamic.” Along with the US economy czar, the IMF seemingly has taken a tougher line with China, which has refused to let the yuan appreciate more rapidly fearing that it could lead to social turmoil. US House legislation says China is a currency manipulator. But still China produces profit for a section of US capital.
The reality is pushing pundits to change positions. Matías Vernengo, Assistant Professor, at the Economics Department and the Latin American Studies Program of the University of Utah, wrote in TripleCrisis (Oct. 5, 2010): The current unemployment crisis has led Paul Krugman to suggest that the US would be justified in raising tariffs on Chinese goods. In the recent crisis, Krugman seems to believe that the impossibility of using fiscal policy, for political reasons, renders the US similar to a developing country.
China, it seems, has all the desire to avoid Japan’s Lost Decade. China wants to buy Greek bonds. But European policymakers are worried that this would push up the euro against the yuan. There are contradictions between China and the Eurozone countries. The strained Sino-Japanese relation is also there.
Contradictions among capital are surfacing with long-term implications. The trend in currencies shows competing economic interests. With manipulation and speculation, and with a secular deficient domestic demand the matured capitalist world is striving to survive by resorting to export-led growth. The conflict over exchange rates means that major capitalist countries are now trying to conquer their crisis by conquering bigger portions of markets. The coming months will be challenging.
The global financial system is still in a period of significant uncertainty and remains the Achilles’ heel of the economic recovery, said IMF. “Nearly $4 trillion of bank debt will need to be rolled over in the next 24 months,” said a Telegraph news story referring IMF. The IMF’s Global Financial Stability Report said: Governments will have to inject fresh equity into banks, particularly in Spain, Germany and the US, as well as prop up their funding structures by extending emergency support. “Progress toward global financial stability has experienced a setback since April ... [due to] the recent turmoil in sovereign debt markets.”
With this backdrop the currency conflict has increased the world system’s vulnerability. Capitals’ present striving for increasing exports is only for the sake of its own survival. It is trying to increase overseas market but is not willing to assist domestic consumers. Its “struggle” for competitiveness is its “struggle” for higher profit. But it cannot escape contradictions. The currency conflict shows deep rooted contradictions counting days for surfacing. It shows signs of significant shifts going on in geopolitics.
