Warnings of a currency war dominated the summit of the International Monetary Fund and the World Bank in Washington this weekend. The cooperation between global politicians, like when the economy plummeted in 2008, is dissolving. Many governments are devaluing their currencies in order to increase exports, thereby increasing contradictions and risking new economic downturns. The meeting, however, ended in a fiasco, with a statement void of content the only result. Below are two articles, on the world economy and on the currency wars.
World economy on its way to a ”double-dip”
The world economy grew by only 2.8% in 2008 and shrank, for the first time for over 65 years, by 0.6% in 2009. It shrank by as much as 3.2% on average in the advanced industrialised countries. The United States, the world’s biggest economy, fell by 3.2%, while the slide was even bigger in several big European countries - Germany, Italy, Britain - and in Japan.
Only the biggest ever rescue packages prevented the crisis from becoming as serious as the Great Depression of the 1930s. The International Monetary Fund (IMF) has instead named it the “Great Recession”, underlining its difference to other recessions.
Capitalism came back from a near-death experience. In the US the longest recession since 1929 did not end until June of this year. However, what is now clear is that stimulus was too limited to be sustainable while governments now conducting massive austerity programmes are deepening the crisis.
Before the summit in Washington, with finance minsters and central bank bosses from 187 countries, the IMF presented an updated World Economic Outlook (WEO) saying, ”downside risks remain elevated”. The recovery in the advanced capitalist countries is at "a low rate considering that they are emerging from the deepest recessions since World War II”. Global output is still below the level of 2008.
Growth during 2010 has been dependent on stimulus measures and a surge in inventory. But over capacity is still widespread, investments low and unemployment very high. IMF estimates global unemployment at 210 million, 30 million higher than three years ago.
Towards a double dip?
The WEO prognosis is that global growth will slow down next year. For the advanced economies (the US, Western Europe, Japan and a few more) from 2.7% this year to 2.2% next year. For the emerging countries, with China in the lead, from 7.1% to 6.4%. The latter countries have considerably higher growth but the IMF warns of their high dependence on exports.
Growth in the US fell in the second quarter to 1.6%, and will most likely be 1% or lower in the second half of this year. State subsidies - ‘cash for clunkers’, investment support, environment bonuses - have ceased. The housing sector in the US is already in a "double-dip” (an economic ‘W-curve’) according to economist Nouriel Roubini. House sales are close to all-time low.
Most economists are predicting long term, weak economic growth in the US and a growing number say a new downturn is most likely. ”Moreover, the recovery remains vulnerable to shocks, and downside risks predominate” the IMF summarises.
The WEO analysis points at a number of weak points in richer economies:
- Household incomes have dropped and therefore consumption. Millions have become unemployed or lost their houses. During this decade, demand has been held up by credit, but now debts are supposed to be paid back.
- Banks and the entire finance market are still shaken. The housing market, a leading factor behind the growth in the US, Britain, Ireland, Spain and other countries, has dropped more than in other recessions and will not play its ”normal” role in spurring growth in the recovery.
- State deficits and debts continue to increase rapidly. Last week, Ireland broke a new world record, with a state fiscal deficit equivalent to 32% of GDP - ten times what is allowed according to EU rules. The Irish state debt has increased four-fold in five years.
Most of the "savings packages” since 2008 have aimed to save the banks - today’s world’s leading "state aid addicts”, something neo-liberals use to accuse pensioners or unemployed of being. Bonuses and profits in Wall Street, the City of London etc have been financed by state deficits.
The European Central Bank (ECB) has a 24-7 emergency offer of liquidity for banks and has bought state bonds to a value of €63.5 billion. In Ireland, the government is guaranteeing the capital of all "savers” and "investors”, including foreign and domestic speculators.
The IMF calculates that loans worth $4,000 billion are to be renewed in the coming two years and points to European banks as particularly in danger. The banks, according to the IMF, need to write off loans worth $2,200 billion. This is $100 billion less than in previous prognosis, but still a gigantic amount, of which a quarter is still undisclosed.
Who should pay?
Governments in Greece, Portugal, Spain and Ireland have been pressurised by international capitalists - who speculated in these countries in order to make enormous profits - to adopt brutal crisis programmes. Wages, pensions, child benefits, public expenditure and jobs have been slaughtered. But the capitalists have tasted blood; they aggressively see the crisis as a golden opportunity to attack the conditions of the working class. That’s why last week, Ireland’s loans were 4 percentage points more expensive than Germany’s.
The IMF concludes the advanced economies ”need to strengthen household balance sheets, stabilise and subsequently reduce high public debt, and repair and reform their financial sectors”, at the same time as the IMF’s leitmotiv is worry over low growth. To both cut the debts and stimulate growth, however, is an impossible task, like driving forward and reversing at the same time.
In practice, the line of the capitalists and the IMF as their organ, means stimulus for banks and big business, but cuts and neo-liberal ”reforms” for the rest. It means "reforms to rapidly growing spending programs, notably entitlements, and tax reforms that favour production rather than consumption”. The IMF wants "labour market policies” to "enhance growth and job creation”. What it means can be seen in Spain - lowered pensions (”entitlements”) and making it easier for employers to sack workers (”labour market reform”).
However, even the IMF has to admit austerity hits the economy. A cut in public expenditure by 1% reduces economic growth by 0.5% over two year’s time. This is the reason the economies of Spain, Ireland, Portugal and the Baltic states are shrinking. And if more states cut their budgets, its increases the depressing effect on the world economy.
What should governments do, when interest rates are already zero and stimulus packages are ending, but demand as well as growth remains weak? The IMF is now expecting the US central bank, the Federal Reserve, to start a second round of ”unconventional measures”, or ”quantitative easing”. This means the Fed will grant itself billions of dollars to buy state bonds (IOUs).
This is hocus pocus on a high scale. ”"No one is sure whether or how quantitative easing and other unorthodox monetary policies work", the Financial Times concluded on 6 October. The IMF has a similar position, "Relatively little is known about the effectiveness of unconventional monetary easing measures and fiscal tightening”. The most likely result is that both interest rates and the dollar will drop, benefitting US exports. Whether it will increase demand in the US is more doubtful, since crisis measures tend to make both households and companies more careful.
Most economists link their hopes for a real recovery in the world economy to a changed balance between the states. Countries with high savings - firstly China, Germany and Japan - should consume more. China’s big surplus against the rest of the world is pointed at, as a culprit for global imbalances (see below).
There are, however, two driving forces behind the imbalance - China’s investments, production and exports as well as the credit-driven deficits of the US. The fact that big business in the US and Europe has moved production to China and imported consumer products in the West have become cheaper are important parts in this symbiosis.
But changing this imbalance is not easy. The IMF admits: "Over the medium term, however, domestic demand [in emerging economies] is unlikely to be strong enough to offset weaker demand in advanced economies, and global rebalancing is therefore projected to stall”.
To change the balance in the world economy would, in other words, slow growth in China, India and more countries with the strongest growth in 2010.
Capitalist economists seemingly agree that this crisis lacks parallels; that the recovery is very vulnerable; and it’s the working class that should pay the bill. For socialists, the task is to explain that there is no capitalist way out - the system has to be abolished by a conscious and organised worker’s movement. The crisis and exploitation of capitalism has to be replaced with democratic socialism.
Capitalism increasingly parasitic
- More than half of the stock market trade in the US is done by computers, with no humans involved. Logarithms calculate differences in prices within micro seconds (million parts of seconds). Even the fastest broadband is too slow, so share sharks are now paying extra to have their computers physically close to the share trade in New York, Stockholm etc.
- Of total increased incomes in the US (1976-2007), 58% went to the richest 1% of the population. The consumption of the big majority was kept up by credit.
- In 1988, the assets of banks in Britain were equivalent of double the GDP. In 2006, they were five times the GDP.
- With increasing economic problems, the EU is now investigating how the state can increase its support for venture capital and exports!
Speculation played a big role when world food prices exploded in 2008
and again this summer after the natural catastrophes in Russia and
Currency war - a new stage in the crisis
”Governments are risking a currency war if they try to use exchange rates to solve domestic problems”, IMF boss Dominique Strauss-Kahn stated before the summit. Afterwards, he was clearly disappointed: "The language [of the summit statement] is not going to change things. Policies have to be adapted.”
The finance minister of Brazil was first to declare that an "international currency war” had begun. Japan, South Korea, Taiwan, Switzerland, Colombia and later Brazil are among those states taking measures to lower the value of their currencies.
Slow growth in rich countries has created a big flow of capital to "emerging economies”, such as India and Brazil, which have increased the value of their currencies. In the European Union, politicians are worrying about the euro again rising against both the dollar and the Chinese renminbi.
In Japan, the Bank of Japan has bought dollars in a failed attempt to slow the rise of the yen (at its highest level compared to US dollars since 1995). It has also declared it will start “quantitative easing” (see article above), i.e. buying state bonds, but also private equities, hoping to start economic growth as well as hold down the value of the yen.
The expected next phase of quantitative easing in the US is believed to be much larger than Japan’s, with the Federal Reserve purchasing bonds for $100 billion a month.
The IIF (Institute of International Finance), an organ for 420 big banks globally, has warned against protectionism as a result of competing exchange rates. Protectionism (trade tariffs etc) was a decisive factor behind the Great Depression in the 1930s. Every national capitalist class tried to save themselves at the expense of others.
Dollar vs Renminbi?
USA vs. China
Today’s big currency conflict is between governments in the US and China. One wing of US capitalism and, to higher degree, politicians wants to blame unemployment and closed factories on China. They demand the Chinese currency, the renminbi, be revalued, in order to make the US a market for "fair” for domestic production. The Chinese dictatorship and its capitalists, on the other hand, see increased exports as decisive to staying in power and therefore want to keep the renminbi down.
The common economic interests of the two powers led China, while the world economy was still growing, to accept an appreciation of the renminbi’s value by 20% compared to the US dollar in 2005-2008. With the crisis, however, Beijing froze the renminbi again. With new threats of measures from the US and some recovery in the world economy, the renminbi has started to move again this year, increasing by 2.3% since June. But the demands from US economists and politicians are for a 20-40% revaluation.
The lower chamber of the US Congress, the House of Representatives, recently agreed a draft law against ”unfair subsidies” of currencies - a direct threat to punish Chinese products with tariffs. The draft has yet to pass through the Senate and president Obama.
”Has the time for a currency war with China arrived? The answer looks increasingly to be yes.” Financial Times chief economics commentator, Martin Wolf, wrote last week. He says China’s low exchange rate represents a kind of protectionism.
A new Plaza Accord?
The White House apparently wanted the IMF to take on the role of forcing China to obey. After the failed summit, Obama is now hoping to get support from the G-20 meeting in South Korea in November.
The model often used is the Plaza Accord in 1985, when the Japanese government accepted a rise of the yen compared to the dollar. In Beijing, however, this example is seen rather as a warning, since it meant the beginning of Japan’s economic stagnation, which now has lasted for two decades.
More expensive exports from China would slow world trade. A downturn in exports from Asia, if more currencies followed the renminbi, would slow down the entire world economy.
China’s growth is based on massive investment. The share of investment increased from 32 to 40% of GDP between 1997 and 2009, while the share of households fell from 45 to 36%. To "increase consumption” could mean a drop in investments, today’s engine of the Chinese economy. These in turn rely on a bubble since they are often financed with extreme land prices as security.
An increased value of the renminbi would not solve the domestic problems of the US either. A more expensive renminbi would increase prices in the US. A big drop for the dollar could create increased problems in borrowing for the US state as well as households and companies. The US also has deficits in its trade with many countries.
The "currency war”, still in its infancy, could, in the worst case scenario, develop into a trade war. Growing imperialist contradictions between above all the US and China is also about control of natural resources and military-strategic power.
As with the crisis in general, the currency confrontation has no capitalist way out. Governments and capitalist will fight each other, but all the time they will try to put the burden onto workers and poor.