Currency wars: Another phase in the capitalist breakdown

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Currency wars: Another phase in the capitalist breakdown
9 October 2010

The semi-annual meeting of the International Monetary Fund and the World Bank
which convenes in Washington today is marked by the most serious breakdown in
global economic relations since the trade wars and competitive devaluations that
characterised the Great Depression of the 1930s.

As their economies continue to stagnate and the risks of further global
financial turbulence increase, the major powers, spearheaded by the United
States, are waging an increasingly open economic war against China, demanding
that its currency, the renminbi (the yuan) rise significantly.

The ever-worsening global economic situation and the descent into the kind of
conflicts not seen since the 1930s underscores the fact the collapse of Lehman
Brothers in September 2008 did not set off a conjunctural downturn, from which
there would be a “recovery”, but was the start of a breakdown of the entire
economic framework set in place after World War II.

One fact alone points to the extent and depth of this process: the calls by
so-called liberal economic commentators for trade and currency war measures. In
the wake of the Great Depression, the Smoot-Hawley Act, passed by the US
Congress in June 1930 to impose a series of tariff barriers, was anathema in
liberal economic circles. It was regarded as one of the principal causes of the
downward spiral in world trade from 1929 to 1932 and the division of the world
into antagonistic trading blocs, leading eventually to world war.

Two weeks ago Washington Post economic commentator Robert Samuelson invoked
Smoot-Hawley as he called for trade war against China. Ten days later Financial
Times economics commentator Martin Wolf, who has issued many warnings in the
past about the consequences of a lack of economic co-operation, declared that
the time for a currency war against China had come as there was “no
alternative”. What was unthinkable yesterday has become necessary today.

The mounting global economic tensions have sparked a call from the Institute of
International Finance (IFF), representing more than 400 of the world’s leading
banks and financial institutions, for a new currency pact to be agreed by the
world’s leading countries by the time of the G20 meeting scheduled in Seoul,
South Korea, next month.

A letter from the IIF’s managing director Charles H. Dallara issued on Monday
warned that the world economy faced a situation as critical as that confronted
in the early months of 2009. At that time industrial production, world trade and
stock markets were contracting at a faster rate than the corresponding period
following the October 1929 share market crash.

“As countries struggle to cope individually with the lack of upward momentum in
global growth—and in many cases unacceptably high unemployment—urgent action is
needed to arrest the disturbing trend towards unilateral moves on macroeconomic,
trade and currency issues,” he wrote.

Calling for policymakers to engage in “multilateral negotiation” to deliver a
set of consistent and mutually-reinforcing measures to address the problems,
Dallara warned that a “communiqué of platitudes” from the G20 only risked
further undermining market confidence.

Billionaire financier George Soros added his voice to the calls for China to
take action over its currency in a comment published in today’s Financial Times.
“The chances of a positive outcome are not good,” he wrote, “yet we must strive
for it because in the absence of international cooperation the world is heading
for a period of great turbulence and disruptions.”

However an examination of the origin and development of the currency wars shows
why such co-operation is impossible.

In the early months of 2009, when governments around the world were carrying out
stimulus packages aimed at boosting their economies, there was talk of global
collaboration. But it was short-lived. By the end of 2009 new contradictions had
emerged as the near-bankruptcy of Dubai and the Greek financial crisis pointed
to the emergence of the so-called sovereign debt crisis.

By May of this year the European banking system faced collapse and was only
propped up through the provision of a €750 billion bailout. The crisis effected
a policy reversal as financial markets dictated their agenda to national
governments. Henceforth, they demanded, fiscal stimulus packages had to be ended
and a program of sweeping spending cuts initiated, aimed at wiping out social
gains won by the working class over the entire post-war period.

At the same time, the economic stimulus provided by the lowering of interest
rates had run its course. In both the US and Japan short-term interest rates set
by the central bank are so low that monetary authorities have resorted to
“quantitative easing”—the purchase of government bonds—in a bid to lower
long-term rates.

But these measures have failed to boost economic growth. In six of the world’s
major economies—the US, Japan, Germany, France, the UK and Italy—gross domestic
product in the second quarter of this year still had not returned to where it
was in the second quarter of 2008. Moreover, these economies are estimated to be
operating at about 10 percent below their past trends.

With stimulus packages and interest rate cuts either ruled out or ineffective,
national governments are seeking to expand exports, by reducing the value of
their currencies, as the sole remaining measure available to provide an economic
boost. But, by its very nature, an export stimulus cannot boost the world
economy as a whole. Rather than providing a life raft, competitive devaluations
are, as a comment in the Wall Street Journal recently noted, more like
shipwrecked sailors trying to stay afloat by climbing on each other’s shoulders.

At present the conflict takes an economic form. But other, even more deadly
consequences, are certain to follow.

A review of the present situation brings to mind the words of Leon Trotsky in
the founding program of the Fourth International written in 1938.

“The bourgeoisie itself,” he wrote, “sees no way out … it now toboggans with
closed eyes toward an economic and military catastrophe.”

The only way to avert the disaster being prepared is through the building of the
independent political movement of the working class in the fight for a program
of socialist internationalism—the overthrow of capitalist property relations and
the reactionary system of rival nation-states and the reconstruction of the
world economy to meet social needs. This is the perspective of the International
Committee of the Fourth International.

Nick Beams

http://wsws.org/articles/2010/oct2010/pers-o09.shtml

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