By Jane Hardy
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Band of warring brothers

This article is over 11 years, 9 months old
The spending review comes at a time of high international tension, as governments around the world compete to escape economic ruin. Jane Hardy analyses the global "currency wars".
Issue 352

Financial pundits have given up scrabbling for the green shoots of recovery. New York professor Nouriel Roubini said on 14 October, “The growth rate is so low it’s going to feel like a recession even if technically it’s not a recession.” On top of that he has predicted that there is a 35 to 40 percent chance of a double dip recession. The recovery in the US, the heartland of global capitalism, looked extremely fragile. In mid-October the dollar hit a 15-year low and unemployment increased, and 18 months into the so-called recovery jobs are still being shed. The long-term unemployment rate is almost double that of the 1980 and 1990 recessions. The recovery in Japan has come to a standstill. Driven by fears of the economy going into recession the government has agreed to pour in another $63 billion to stimulate the economy.

In 2008 the global ruling classes pumped unprecedented amounts of money into their economies in the largest nationalisations in history. However, the banding together to avert a meltdown of the banking system in the first phase of the crisis has completely collapsed. This temporary cooperation has been replaced by governments trying to gain short-term advantage by devaluing their currencies and protectionism.

The leader in the Economist on 16 October talked about the global economy being on a “war footing” as international currency wars broke it. There was a chorus of countries blaming each other for gaining unfair advantage by using a selection of weapons from their arsenals such as quantitative easing (printing money), currency manipulation and capital controls. Japan and Korea intervened directly in their economies and Brazil and Thailand have introduced controls on capital.

The IMF meeting in October descended into a stand-off over exchange rates. China continues to draw the wrath of the US ruling class for refusing to allow the value of the yuan to rise. In a thinly veiled retaliatory move, in September the House of Representatives passed a law allowing firms to seek tariff protection against countries with undervalued currencies. The US argued that a more flexible yuan was essential to the recovery of the global economy. China countered this by arguing that quantitative easing was causing distortions and causing other countries’ currencies to rise.

Some members of the European ruling class argued that a “further round of aggressive monetary easing” by the US Fed would be irresponsible as it would make US exports more competitive than those of its rivals. One currency strategist said, “In narrow terms the US is winning the currency wars as a weaker dollar will help its economy, but it could damage the other big economic blocs of China, Japan and Europe.” Russia’s finance minister Alexei Kudrin in a meeting with European Union officials blamed the US (and others) for global currency instability.

One reason for the exchange rate turmoil is the way in which the US is trying to solve its structural problem by pumping more money into the economy. This structural problem is at the heart of global capitalism and was at the root of the 2007 crisis. Massive surpluses from China (and other countries running trade deficits) had to find a home. Financial markets in the West were only too happy to recycle this debt which created huge property bubbles.

As the global economy stagnates, there is an increased temptation for the ruling classes of individual states to gain short-term advantage or protect their economies. For those institutions or commentators that represent the wider interests of global capitalism, there are fears of a return to the 1930s. In the 1930s countries used trade barriers and devalued their currencies to try and protect their economies from the ravages of the Great Depression. This only sent the global economy into a further downward spiral.

However, China has a big problem in letting the value of its currency increase. What it fears is an explosion of social and political unrest as workers in exporting firms lose their jobs. Earlier this year strikes in factories were not only for wages, but raised the demand for independent trade unions. Clearly there are splits within the Chinese ruling class, with some sections calling for political reform as a way of staving off potential unrest and growing disparities in wealth.

But even if China did agree to revalue the yuan, this is not a magic wand for the economy of the US and a solution to joblessness. Two new reports from the Brookings Institution paint a grim picture of rising poverty in the US. Over the past decade the number of poor people in the suburbs has jumped by 37 percent to 13.7 million, compared with 12.1 million people living below the poverty line in the cities.

Increasing numbers of people are using safety-net programmes, such as food stamps or unemployment insurance. One worker from a non-profit group said that people are having to make tough choices: “It’s mortgage or food.”

Economists have searched in vain for signs that the US economy has reached “escape velocity” – growth that will bring down unemployment. In October 95,000 jobs were lost. Although private employment grew by a tiny 0.1 percent, the public sector has been haemorrhaging jobs. The decline in jobs in local government, mostly in schools, was the largest since 1982.

Deflation is a big risk for advanced economies. When prices start falling people and companies often put off purchases and this reduces demand as they wait for prices to fall further. The US experienced such a deflationary spiral during the 1930s and Japan experienced one in the 1990s. If deflation is widespread, it can be toxic for banks. As Japanese banks discovered in the last decade, deflation means bigger losses for banks and more failed loans. A second credit crisis could emerge.

It is clear that the global economy is teetering on the brink of another recession. There is no easy way out for the ruling classes of powerful economies such as the US, China and Europe. They all have an interest in the global economy coming out of recession, and understand the dangers of tit-for-tat protectionism. At the same time they are trying to protect their own backyards, not least because they fear the consequences from their own working classes.

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