By Elmar Altvater
[This article published in the Swiss weekly WOZ October 14, 2010 and in attac Germany’s “Sand im Betrieb” Nr. 86 is translated from the German on the Internet, http://sandimgetriebe.attac.at/9194.html. Elmar Altvater is a political scientist and economist in Berlin.]
The hurricane of the financial crisis is not over since the next thunderstorm, a monetary crisis and a currency war are on the way. The Brazilian finance minister first spoke of this and then the head of the International Monetary Fund (IMF) at the annual meeting of the IMF and the World Bank in October 2010 in Washington.
The situation is serious. The “structural imbalances” decried for years at every meeting of the G8 industrial nations are falling out of control. A worldwide economic upheaval approaches. Can the US dollar keep its position as the reserve currency? Can world trade, financial transactions and agreements on oil deliveries be carried out in US dollars as in the past when the political-economic elites of the US aggressively demand an upgrading of the Chinese Renminbi Yuan? This portends a devaluation of the US dollar. If other cou9ntries follow this demand, we will have a currency war as on the eve of the worldwide economic crisis of the thirties.
For more than a decade, the balance of payment surpluses have climbed in several regions (East Asia, oil-exporting countries) while the US shows a rising deficit in its balance of payments. Are the savings and the deficient domestic demand in China, Japan, India and their export surpluses really responsible for the destabilizing deficits of the US, as the US claims?
LOGISTICS OF CURRENCY DEVALUATION
The argument is absurd that Asian countries, first of all China, follow a protectionist policy and prevent an upgrading of their currency to realize export advantages. If the Asian countries saved less and consumed more, the US and its citizens would renounce, save and export more and reduce the balance of payment deficit. The competitive position of a country is decided on the currency markets, above all in the real economy.
Dollar devaluation would relieve US taxpayers from the billions in losses of their financial system, from the debts from the time of the consumer frenzy and the war against “terrorism.” Only countries whose currency is regarded as the reserve currency have the possibility of externalizing losses and shifting debt-repayments to future generations. Other states cannot do this. The value of the dollar reserves outside the US dwindles with devaluation. A flight from the US dollar would sink prices in these countries and devalue their currencies. This wou9ld raise the price of exports, a double gain for the reserve currency land, the US and a double loss for everyone else.
No wonder enthusiasm for dollar devaluation is not very great. From its currency reserves, China has given massive support credits to a series of states to strengthen them in the financial crisis of the last years and expand its geopolitical influence. The threshold country China helps the Euro in Greece for example. If the upgrading of the Yuan compared to the US-dollar is not prevented in the long run, at least the Euro will not lose value and Chinese exports to Europe will rise in price.
Therefore the struggle over exchange rates is a confrontation over worldwide economic hegemony.
Which currency of the world is predestined to be the fixed star of world currency around which other currencies circle like planets and satellites? The availability and security of the world currency gives mass and energy to the fixed star. Gold is very safe but is only available in limited quantities – a bad quality given the boundlessness of the capitalist accumulation process. But if gold is hoarded and the devaluation of the world currency threatens, gold will again become the object of speculative cravings. This is happening now.
However paper money or electronic money will be made available through money creation by the central bank together with commercial banks. Therefore only one currency with a differentiated and global system of commercial banks can rise to the world money. Is the Chinese banking system in that position? This can be doubted.
Dollar reserves abroad only exist because the US spends more than it has. The dollar is strong as the reserve currency because the US piles up deficits and thereby ultimately weakens the dollar. That is a dilemma named after the economist Robert Triffin in 1959. A currency will only be accepted if its value is protected from inflation and devaluation in relation to other currencies.
On top of that the state of the world currency must guarantee property rights and the security of world trade, energy flow, direct investments and financial investments. In the case of the US the power complex consisting of Wall Street, the White House, the Pentagon, the central bank system and the IMF see to that.
In 2009 the president of the Chinese central bank, Zhou Xiaochuan, referred explicitly to the Triffin dilemma in discussing the future of the US dollar: “Countries that make available the reserve currency cannot simultaneously maintain its value and supply the world withy liquidity,” Zhou said.
Availability and economic and political security of the currency were the prerequisites enabling the US dollar as an oil-currency to be established with a coup after the collapse of the fixed exchange rate system of Bretton Woods at the start of the 1970s launched by the former US Secretary of State Henry Kissinger. The oil crisis of 1973 showed the importance of the security of the energy supply to the world. The US declared itself competent for that security. The US financial system was sufficiently diversified and defended everywhere in the world to further the climbing dollar revenues of oil-exporting countries from the Middle East.
Firstly, this was advantageous for the US currency since the US dollar could be strengthened as the oil- and world currency for financial contracts. Secondly, this was advantageous for the international banking system because the financial institutes could earn fabulous sums in the credits. Thirdly, US hegemony in the world which took a beating from its military defeat in Vietnam and the devaluation of the US dollar in the late 1970s was supported in this way. These are advantages of the land of the reserve currency that reinforce its hegemony.
If this hegemony is put in question, the US Empire reacts with military severity. After Saddam Hussein changed the oil-for-food program of the UN from the dollar to the Euro, the US marched into Iraq accompanied by its “Coalition of the Willing.” In March 2003 the Organization of Petroleum Exporting Countries declared that oil in the future would be invoiced without exception in the dollar.
All attempts at trading the oil price in another currency or establishing an oil exchange not dominated by the US were nipped in the bud. Even the Iranian oil burse discussed for years could not prevail against the traditional oil trading centers in London and New York. The dollar sits on its oil currency throne armed with the most modern military technology. How long can this last?
China cannot fulfill all the conditions of a new reserve currency. The Yuan is not available globally because the Chinese banking system is not so far developed. For a long while China has not played its card of political and military power.
In 2010 the Chinese central bank head Zhou Xiaochuan, artfully proposed complementing the US-dollar with special drawing rights (SDR). Moreover China enters into bilateral swap businesses, for example with Argentina where both peso and Yuan currencies are exchanged without falling back on the US-dollar or other currencies. These measures could be interpreted as the beginning of a monetary bilateralism of the US dollar and the Yuan.
The Pax Americana, the global dominance of the West and the freedom of economic trade under the hegemony of the US, is being replaced by a “post-American” order. Will this be Chinese with the Yuan or European with the Euro? Can the decline and fall of US hegemony be stopped?
What moderately stable constellation will rise out of the chaotic fog of the current currency conflict or whether an end of the dollar will occur is uncertain. At the monetary conference in Washington, the assembled heads of state will gaze upon the setting of the sun.