The hidden conflict within the fascist state for control of economic policy (5)
I have been going through this process in order to clarify for myself the logic of the current discussion of so-called negative interest rates — an oxymoron if ever there was one. This is part five of the series; part one, part two, part three and part four can be found here. I hope it also will have some use to readers.
Part Five: The dollar and the increasing possibility of 21st Century Currency Warfare
Can monetary policy be rescued from oblivion? Probably not. There are just too many difficulties with the idea of negative interest rates on currency.
As I explained in part four of this series, Haldane proposes that the way around the zero lower bound on monetary policy may be to impose a negative interest rate on the holders of state issued currency. If a way could be found to force the holders of currency to pay interest on the currency in their bank accounts, wallets, pockets — and even in their mattresses — the distinction between credit money and currency could be forcibly imposed on society by the state despite a zero interest rate environment.
Once stripped of its deceptive wrapping as mere monetary policy, what Haldane is proposing is the outright expropriation of your savings account, your checking account and even the currency in your wallet and cookie jar. This goes well beyond monetary policy and begins to encroach on the limits of national economic policy itself. Under the most charitable interpretation, his proposal is well into the sphere of fiscal, even currency, policy despite the attempt to conceal it behind protective coloration as a negative interest rate on currency.
For the moment, however, let’s ignore this potential objection to his proposal. Instead, let’s treat it as a proposal for a measure similar to what FDR did in 1933: pure and simple devaluation of the currency.
What are the difficulties to be considered?
FDR’s 1933 currency devaluation
A surprising number of people — almost everyone — do not realize FDR imposed a draconian devaluation on the American population to halt the contraction of the American economy in 1933. Although for some totally bizarre reason FDR retains a favorable image among vaguely Leftish radicals, he actually should be best known for having imposed the most draconian reduction of wages in the history of the United States.
And he did this by simply changing the peg on the dollar against gold.
Under the gold standard, if a state wanted to devalue its currency (or impose a negative interest rate on the currency) it was pretty simple. The currency was pegged to gold at, 20.67 dollars to a troy ounce of gold; thus, if you wanted to devalue the currency you simply did what FDR did: change the pegged from 20.67 dollars to a troy ounce to 35 dollars. Once this devaluation was imposed, it would now take 75% more dollars to redeem a troy ounce of gold. On the other hand, if a commodity’s price was $20.67 before the devaluation, it would now cost $35, or the seller would get only 0.60 of an ounce of gold for his product.
Suppose you wanted the currency to depreciate by a set percentage each year?
Over the course of a year you would simply progressively increase the quantity of currency it takes to redeem an ounce of gold from the bank. If you aimed to devalue the currency by 10% a year, over the course of a year the treasury simply increased the peg until it reached 22.74 dollars. At the beginning of the year, you could have bought one ounce of gold for $20.67; while, by the end, it would take $22.74 to make the same purchase.
There is a problem with this: it is easy to evade. Knowing the state is deliberately depreciating its currency, people avoid the currency. They stick to gold, which the state cannot counterfeit and cannot depreciate. Eventually, they reject state issued currency altogether and the state loses any power to enforce its fiat. Thus, if the state deliberately sets out to depreciate its currency, a two tier system of prices would emerge at first; one denominated in commodity money and the other in state issued currency. Ultimately, citizens would refuse to accept the currency under any circumstances. This was the historical experience of the United States during the Civil War.
However, the state could still do it as long as it could prevent gold from circulating in the economy. So, when FDR set out to depreciate the currency in 1933, he simply outlawed private ownership of gold by executive order. His executive order was soon reinforced by a law to this effect passed by Congress in 1934. That law made it illegal to use gold in commerce and to specify gold in contracts. To enforce depreciation of the currency against gold, the state had to prevent the emergence of a two-tier price system and the use of gold as the natural alternative means of exchange.
Devaluation of the currency against what?
The discussion about negative interest rates on the currency is designed to accomplish this same measure today. How can the fascists devalue the currency in order to make it possible to get off the zero lower bound. But here is where the argument gets completely silly: gold is no longer used as money in the economy, the gold standard is dead and never coming back.
This presents a big problem: How can the fascists devalue the dollar against itself? In 1933, there was fiat and gold and the two monies circulated side by side in the economy. When currency was devalued, it was devalued against gold. There is only one form of money in circulation today: valueless inconvertible fiat. You cannot devalue fiat against itself. A dollar is always worth a dollar — no matter what this worth might be. (Frankly, since fiat has no value, you can’t devalue it at all — but let’s leave that aside for now.)
Economists, simpletons that they are, try to get around this problem by suggesting fiat should be devalued against credit money. I would suggest the discussion is deliberately misleading: Washington cannot devalue the dollar against itself. Even if this eventually became possible — in a bitcoin like replacement for currency — it will not happen before the next recession.
Competitive currency devaluations
Washington, however, can devalue the dollar against other state issued fiat currencies. When economists speak of devaluing the dollar whether they know it or not they are speaking of devaluing it against euros, yen, yuan, etc.
According to the Economist in an article titled, Devaluations didn’t work, however, devaluation — well — doesn’t work. And they quote some bourgeois simpleton from HSBC, to this effect:
“attempts by individual central banks to boost growth and inflation via currency depreciation have been collectively self-defeating”
The argument is similar to one made by Keynes in 1933 that currency devaluation may work to boost the exports of one country, but it will not work to boost the exports of all countries together. This, of course, assumes if every state tries to devalue its currencies at once, the relative exchange rate among them will more or less remain the same. If the exchange rate among them remains unchanged, no state gets the advantage of lower prices and boosting exports.
The simpleton quoted by the Economist concludes:
“In the absence of a major monetary revolution, big movements in currencies are more likely simply to redistribute deflationary pain than create decent economic growth, particularly if nominal interest rates are already at the zero rate bound. Greater policy-induced currency uncertainty may also contribute to unusually weak world trade growth, consistent with the post-financial crisis experience.”
As the simpleton points out, what occurred in the 1930s was a one-off event: the link between gold and currency was broken. You can only abandon the gold standard once and this has already been accomplished. Once it was completed in 1971, with the collapse of Bretton Woods, currencies no longer had any link to gold and therefore could not be further devalued against gold. (If anything, Washington and London now work together to suppress gold price, not devalue their currencies against it.)
However, this does not mean that no further currency devaluation is possible. The problem with this simpleton reasoning is that currency devaluation only has to work for one country: the one that owns the world reserve currency. Since Washington’s dollar is used in most international transactions, if it could successfully devalue its currency against other currencies, it could export deflation everywhere the dollar is used in transactions.
The dollar’s unique position in the world market
The questions are,
- Can Washington successfully devalue the dollar against other currencies; and,
- What are the implications if it can.
The fallacy of the dominant bourgeois simpleton argument against currency devaluation is that it begins with the assumption that all currencies are created equal. In fact, they are not. Most currencies in the world market are purely local (national) currencies — valid means of exchange only in their particular states. Very little of the credit available within the world market is denominated in these local currencies.
By contrast, owing to historical developments, the US dollar progressively came to replace gold as standard for all prices in world trade. Thus the standard for the purchasing power of any currency — except, perhaps, the euro — is stated relative to dollars.
Think about what that means with this thought experiment:
Suppose at the time of the Great Depression it had been possible to counterfeit gold as simply as one could counterfeit dollars. Each country could have counterfeited gold, and thereby devalued gold against its currency, to pay for imports. The prices of imports would have fallen and relative to the price of domestically produced goods.
Something like this has occurred over the last 80 years in that the dollar has achieved a position in the world market very similar to what is implied in the gold standard. However, instead of all countries having the capacity to counterfeit “gold”, the US alone has it.
The dollar and currency warfare in the 21st century
Thus, Washington can drive down the prices of internationally traded commodities relative to the purchasing power of all other currencies. In doing so, it would set domestically produced commodities at a disadvantage in all other countries at once. The impact of dollar currency devaluation is not at all like what would be accomplished by devaluing euros, yen, yuan or reals. Other countries would be swamped with US produced commodities and by commodities from other countries priced in US dollars.
As the purchasing power of various local currencies appreciate relative to the dollar — or, more accurately, as dollars depreciate relative to the local currencies — their citizens would prefer cheaper imports. Countries that had small or even negative trade balances would find themselves slipping into massive import deficits. To control these import deficits, they would be forced to a. depreciate their currencies, b. reduce domestic consumption, or c. restructure.
In Washington, no such impact would be felt — so it could just keep printing currency until everyone else cried “Uncle!”
Continuous quantitative easing
How does Washington accomplish this sort of 21st century currency warfare? Haldane makes a suggestion: continuous quantitative easing. If the US ran continuous QE, however, Washington would be required to greatly step up its deficit spending. And it would have to accept a widening trade deficit.
To put this another way, Washington would have to conduct economic management of the world market as a whole, not just the US. Needless to say, no one likes US dominance now and they would not be amused by this.
However, what other countries like or don’t like carries no weight in Washington and should play no part in our analysis. The only question that concerns us is whether other countries, seeing their currencies undermined by Washington, could fight back. If you are the governing party of a country whose currency was being undermined by Washington’s currency warfare, what could you do?
You could try to maintain the exchange rate parity of your currency to the dollar — impose a peg of some sort. As the purchasing power of the dollar collapsed, so would the purchasing power of your currency. Which means the purchasing power of the wages of the working class would be crushed by your attempts to protect your domestic industries.
Think of it this way: if Washington devalued its currency, you could respond by adopting dollars as your local currency. Now, instead of maintaining a peg, you just adopted dollars like Greece did euros. How is this working for the working class of Greece?
It does not matter whether you fix a peg to maintain the parity exchange rate of your currency with dollars or adopted dollars outright, the result is the same: working class would still get fucked. States are not the source of surplus value, the working class is and currency devaluation is designed to increase surplus value. All the governing party of a non-dollar country can do is maintain the purchasing power of its currency and watch its domestic industries collapse or increase the depreciation of its currency and impose a harsh austerity on its working class.