Socialist Worker

Recovery runs into a new currency crash

by Alex Callinicos
Issue No. 2388

The corporate rich, along with their celebrity hangers-on and intellectual apologists, had their annual bash at Davos in Switzerland last week. They should have been starting to feel happier.

Finally, the US economy has started to speed up. It’s still a weak recovery—the rate of unemployment is falling mainly because of the number of people who are dropping out of the labour market altogether.

The fall in unemployment in Britain has been so fast as to make a fool of George Osborne’s handpicked choice as governor of the Bank of England, Mark Carney.  

Once again, the reason isn’t so cheerful for the bosses. The Bank predicted that productivity would rise as the recovery developed, and in fact it has been falling. This means companies seeking to increase output have had to take on more workers.

All the same, there seems to be some light at the end of the tunnel in the US and Britain at least (don’t ask about the eurozone). Why then did the financial markets end last week in chaos, with a sharp drop in share prices on Wall Street?

This started with a plunge in the exchange rate of the Argentinian peso. Under Nestor Kirchner and his successor Cristina Fernandez, Argentina defied the International Monetary Fund after defaulting on its foreign debt in 2001.

It was able to get away with this because the past decade’s boom in primary commodities boosted the value of Argentina’s exports. Fernandez even encouraged weaker eurozone economies to reject austerity and default on their debt. 

But then the commodities boom ended, leaving Argentina to struggle with a rising balance of payments deficit, shrinking foreign exchange reserves, and an inflation rate of 25 percent. 

Argentina has openly defied the neoliberal playbook, so it’s not surprising that it’s getting a caning from the financial markets. But the currencies of several other big “emerging market” (EM) economies—Turkey, Brazil, South Africa, India, and Russia—fell sharply on Friday last week. 

Most have at least paid lip service to neoliberal orthodoxy, so why are they too in trouble?


The Financial Times shrewdly commented, “the important point about crises in emerging markets is that they do not start there. Instead, they are almost invariably triggered by the actions of investors or central banks in the developed world.”

The key players are the US and China. It was China’s boom that sucked in food and raw materials from all over the world, pulling up commodity prices and generating euphoria in the North about the EM economies.

So money flooded into the BRICs—Brazil, Russia, India, and China—and those states in the South deemed candidates also for “rising power” status, such as Turkey and Mexico. Much of this money came courtesy of the US Federal Reserve Board, through its programme of “quantitative easing” (QE). 

This pumped £51 billion a month into the battered financial system. Rock bottom interest rates in the US and Europe encouraged investors to make riskier but more lucrative bets on the EM economies.

But now the Federal Reserve is “tapering” QE, cutting it to £42 billion monthly. The recoveries in the US and Britain are leading financial markets to bet that interest rates will rise soon. This makes the EM economies look less attractive. 

Meanwhile China is slowing down. The central bank is struggling to strangle a financial bubble resembling the one that blew up the Western banks in 2007-8. The HSBC manufacturing purchasing managers’ index for China in January was 49.6 percent, a prediction that industrial output will fall. 

The Chinese slowdown is already ending the commodities boom, thereby removing the main factor that encouraged Northern investors to bet on the EM economies in the first place. As the Marxist economist Michael Roberts puts it, “it’s a double whammy: a tightening of credit from the West and a fall-off in demand from the East.”

So, appropriately enough, the world economy now resembles one of those Swiss clocks where you can’t have both figures out at the same time. Worse still, the troubles of the big Southern economies could undermine the Anglo-American recovery.

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Alex Callinicos
Tue 28 Jan 2014, 18:48 GMT
Issue No. 2388
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