Japan's Accidental Intervention in the Currency Wars?

The Japanese situation makes clear the need to restore democracy to the world's economy. We need to take power back from the capital markets and the speculators and return it to politicians who are responsive to their people. At a time of such dire national crisis, how can it be right that Japan's politicians have to be distracted by the need to appease those whose only interest is to extract value from the country?

The unexpected response by the foreign exchange traders to the greatest natural disaster in Japanese history was to force up the value of the Yen. As usual in economics, the raised value of the Yen cuts both way for the Japanese. In the short term it will make it cheaper for them to import the goods and resources they need to rebuild. In theory, in the longer term it will make their exports more expensive and so will impeded recovery. In fact, given the failure of electricity supplies and the consequent decline in production, this is likely to be less of a concern to the people of Japan.

It is, however, of concern to Japan's competitors. Hence the decision by the G7 countries to intervene in the foreign exchange markets by selling their stocks of Yen in order to reduce its price. The figure shows the immediate success of this market intervention yesterday, both proving the self-interest of G7 governments and giving the lie to their repeated statements that the markets rule supreme.

But why the rapid rise in the Yen (illustrated in the second graphic) in the first place, when the performance of the economy from which it arises will clearly be severely impacted by the destruction of infrastructure and power shortages? The answer appears to be that Japanese institutions and the government are expected to repatriate Japanese savings held overseas. The resulting firesale of US bonds and stocks could be the event that pulls the plug on the USA's 40-year beano at the expense of the rest of the world.

In spite of the very low returns, the Japanese and Chinese have continued to hold US debt, allowing US citizens to consume way beyond the level their productive effort merits. The power of the dollar as the global reserve currency permits this, but that power has been challenged during the recent 'currency wars'. If the Japanese crisis forces that US to the negotiating table to agree a fairer system of international exchange, it might prove to be a dark cloud with a silver lining for us all.
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Currency to Serve People and Planet

We need to see the Irish tragedy as part of a wider picture: the ongoing currency wars and the struggle for domination of the global capitalist economy. Since 1945, the US has enjoyed extraordinary power as a consequence of the Bretton Woods Agreement that the dollar should be acceptable in the place of gold as a global numeraire. Since the US reneged on its promise to support its currency with gold in 1971, its government has been able to print dollars at will, and claim goods in return. This, more than anything else, explains the decadent US lifestyle - and its planetary consequences.

Europe's response, after years of decline and unfair competition, was to establish the Euro. This was a fatally flawed strategy since, unlike the USA, Europe is not a natural currency area, and there is no single democratic body that matches the currency area. Hence it has always operated like a strait-jacket, with some currencies having interest rates too low for their needs (hence the Celtic boom and bust) and others having interest rates too high. It was Germany's currency, the Mark, which gave the Euro its credibility, and the German economy that provides the ballast for the currency. Hence what worked for Germany has been forced onto the other members of the Eurozone, with disastrous results for their national economies.

Yet the problem of dollar dominance persists. Hence Skidelsky's call for a 'bancor', or bank gold, a proposal for a neutral currency to facilitate world trade and form the basis for national currency holdings. This should be the call of the Irish people: global justice and a balanced system of international trade. This has been the call of the Chinese for some time. It is only because we live in the Anglo-American media bubble that our perceptions of the dollar demise are so distorted.

I have been calling for some time to consider the possibility of linking the new global currency to carbon emissions, thus putting an automatic brake on economic activity on a global basis, and rationing CO2 emissions by country. Another possibility is that the exchange rates between countries might be fixed in an inverse relationship with wages, so that no country can undercut another by restricting rates of pay. In this way, a neutral global currency could not only stabilise the financial system but also end the 'race to the bottom' that globalisation has brought in its wake.
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Chinese Check Us

For a while now it has been obvious that China is the dominant global power, and that it has accumulated, by a combination of skilful strategem and sheer hard work, the power to pull the plug on the US economy at any moment. It is almost exactly a year since Hilary Clinton's humiliating visit to Washington, when she almost begged the Chinese not to do this. When we hear that China is now offering to also buy the Greek debt – for which we might read by the Greek economy, given the way things stand in that country just now – it raises intriguing questions about why China became a 'state capitalist' country in the first place.

The use of that phrase implies that China is following the rules of the same economic game, perhaps with different motives. It is clear that China has understood the money-work nexus that lies at the heart of the capitalist game but there seems no reason to assume that they have any respect for the game itself. They have responded to its rules by keeping a rigid control over their own currency (a fact much bemoaned in Washington and the pages of The Economist alike), and working extraordinarily hard to displace the need for most of the other labour in the global marketplace.

Meanwhile the the shift in the designation of the Chinese currency away from the yuan (as it was traditionally called) to the renminbi (or people's currency) implies a shift from a domestic to a global currency. In much the same way that China accumulated pieces of eight that the Spanish had minted in their new world colonies, it is now accumulating hoards of US paper. Although the renminbi is surely the most powerful currency in the world today, it is not held as reserves by foreign governments. So long as China is prepared to buy US debt and use it as a trading currency then the dollar is secure. Once it decides its economy can grow on the basis of domestic consumption alone it could easily just walk away, leaving the dollar to crash.

In conclusion we can see that China is winning the work game and is also winning the money game. So far China has used this power to gain access to the world's rapidly diminishing resources, especially by striking deals in Africa that are far more favourable than those that Western nations have offered. Compared to our primitive and short-term economic thinking, the Chinese appear to be demonstrating a master play: as they have adopted our industrial methods and excelled us in their use, so they are playing the economic game we invented better than we are.

On a more conspiratorial note, what are we to make of the inscrutable Mr Li who, according to John Lanchester's book Whoops! was instrumental in creating the algorithm that lies behind explosion of collateralised debt obligations that led US traders to destroy the global financial system:

'Li had been sent to North America on a government scholarship in the late 1990s to learn about capitalism. . . In 2000, while working at J.P.Morgan, Li managed to apply a piece of mathematics called a Gaussian copula function to the creation of CDOs' (p. 97) His paper, published in the Journal of Fixed Income, was attractively titled 'On Default Correlation: A Copula Function Approach'. It offered a way to model how different types of stocks move up or down in value together. This enabled the financiers to reduce the risks associated with mortgage-backed CDOs to a single number and the trade took off.

To imagine Mr Li on a mission for the Chinese government is too appealing to be true, but one way or the other it seems that the 'state capitalist' power has out-manoeuvred the 'market capitalist' power and we are all just waiting to see when they will assert their authority. Tweet

Dollar, Euro, or Ebcu?

The unaccountable power of credit-rating agencies has now come under attack from the EU's most powerful politician, Jose Manuel Barroso, the president of the European Commission. Clearly the speculation against national economies is dangerously destabilising for all the European economies, but behind this attack we may also see a glimpse of the struggle for currency hegemony between the dollar and the euro.

The political purpose behind the establishment of a European currency was to provide an alternative to the dollar, whose role as global trading currency enabled the US to fund its superpower military strength and its unsustainable lifestyle at the cost of the rest of the world's people. The credit-rating agencies, all based in the US, can turn market sentiment against the weaker European economies, thus undermining the currency they share. Hence Angela Merkel's suggestion that Europe needs to establish its own credit-rating agencies.

The European financial crisis is rapidly cycling out of control. We are moving beyond the dealings of young men sitting at computer screens and onto the streets. The anger between some Greek citizens and their government is matched by an anger between different European nations. The EU currency straitjacket is, as was predicted, leading to tension between the vastly different economies it forced together. In currency wars, as in military wars, it is the elites who make the decisions and divide up the spoils, while the poor pay the price.

Green economists have long argued for a political response to this crisis that opens up the question of how money is created. At the global level we suggest a neutral currency, which enables trade between countries without allowing this to accrue benefit to the country that controls the trading currency. If such a currency were linked to carbon dioxide emissions as an environment-backed currency unit (Ebcu) it could also ensure that the global economy stayed within planetary limits. Tweet