Emerging Markets are blowing up and some are blaming the Federal Reserve Bank and all of its talk about slowing the pace of its insane counterfeiting of dollars.

Says Ambrose Evans-Pritchard:

This has the makings of a grave policy error: a repeat of the dramatic events in the autumn of 1998 at best; a full-blown debacle and a slide into a second leg of the Long Slump at worst. Emerging markets are now big enough to drag down the global economy. As Indonesia, India, Ukraine, Brazil, Turkey, Venezuela, South Africa, Russia, Thailand and Kazakhstan try to shore up their currencies, the effect is ricocheting back into the advanced world in higher borrowing costs. Even China felt compelled to sell $20bn of US Treasuries in July. … “The big risk is that Fed tapering will spark a rush for US dollars. That is when the Fed will stop being complacent,” said Lars Christensen from Danske Bank. “Central banks around the world think they have been doing something they shouldn’t do with all this stimulus, and they want to unwind it as quickly as possible. But the danger is that they will go too far and trigger a relapse like 1937.” … If the Fed really thinks that the rest of the world will have to “adjust to us” as it insists on draining global liquidity come what may, it may have a very rude surprise, yet again.

How might we understand what it taking place in the aftermath of all the Fed talk about easing off is mad counterfeiting? How might this be explained within the context of labor theory?

*****

The real origin of currency crises

According to Robin Harding:

“The world is doomed to an endless cycle of bubble, financial crisis and currency collapse.”

The operative term in Harding’s pessimistic statement, of course, is not “doomed”, but “endless”. For the most part bourgeois apologists for capitalism seldom conceive of crises; however, when they do concede to the possibility of crises, the sort of crises they imagine are nothing more than endless loops in which each crisis is followed by capitalism’s renewal — what Kurz has referred to as the eternal self-renewal of capitalism. It is a myth story bourgeois apologists must maintain to convince themselves after so many near misses:

“The primitive idea that capital periodically immolates itself, so as to later arise like the Phoenix from the ashes, thus passing from eternal destruction to eternal self-renewal, is an aspect of mythological rather than historical and analytical thought.”

According to these apologists, even in crises the mode of production must continue on in some fashion, since, even when wracked by continuous crisis, there is no conceivable alternative to capitalism. Thus crises become opportunities to tinker here or there with the operation of the mode of production — by adjusting the rate at which money is counterfeited, by adding to or reducing public debt, by increasing or reducing regulation — that is, to restructure labor.

Capitalism, in this view, is not a mode of production with materially given limits, but a play on Broadway following a script written by the invisible hand. In this play, the boundaries of capital must not be breached: the illusion of the fourth wall between the productive forces and society must be maintained at all costs. The players are all on the stage (the politicians, central bankers, opinion makers) while the rest of us remain seated in the audience. Of course, this play isn’t really about us, about our labor — it is about “the international financial system”, “the economy” or “imbalances in the global economy”. Like any good audience, we have no input into what occurs on the stage, although we are allowed to react appropriately to the action.

Fortunately for us, however, this crisis isn’t scripted like some endless run of the play, “Cats”. There is a definite trajectory to this crisis and it ends badly for the capitalist class. The world is not “doomed to an endless cycle of bubble, financial crisis and currency collapse”, as Harding asserts. Each crisis draws capital closer to its ultimate demise made necessary not by the crisis itself, but by efforts to overcome it.

*****

The state’s role as manager of the national capital

Since the removal of commodity money from circulation as money in the world market in 1971 — a world historical event in which money itself was freed for the first time in modern history from the commodity, from material wealth itself — Harding tells us:

“the world has become used to the “trilemma” of international finance: the impossibility of having free capital flows, fixed exchange rates and an independent monetary policy all at the same time.”

There is, bourgeois economics explains, a trade-off that must be made between competing alternatives: If there is to be a free flow of capital between nations, there cannot be fixed exchange rates or a national monetary policy. If there are fixed exchange rates, there cannot be free capital flows between nations or national monetary policy. And if a country is to have a national monetary policy, it cannot have free flow of capital or fixed exchange rates. According to Harding,

“Most countries have plumped for control over their own monetary policy and a floating exchange rate.”

The argument Harding is making is more than a little bit disingenuous: “monetary policy” is a code word for managing the national capital. So Harding is making the veiled assertion that the total capital of a nation can only be managed through monetary policy. In fact there are a spectrum of ways the national capital can be managed up to and including detailed centralized planning. But the point is well taken: Harding’s argument is that state management of the economy is incompatible with free capital flows between nations and fixed exchange rates.

But even this is disingenuous, since Harding is confining his examination to the period after 1971, i.e., after the collapse of Bretton Woods, when currencies already were no longer tied to gold. Which is to say, in 1971 the nations within the world market were finally forced to free their currencies from any fixed relation with commodity money entirely. It was the culmination of a process where commodity money ceased to be compatible with capital in one sphere of exchange after another.

The “floating exchange rate system” means, first of all, that all currencies float against commodity money, whether or not they “float” against each other. Since all of these currencies are valueless, the exchange rate between the currencies in itself is of absolutely no significance whatsoever. The end of Bretton Woods occurred precisely because each country had already asserted its control over its own national capital to control the flows of capital into and out of its borders. In order to control its national capital, it had to establish control over the flows of capital into and out of its territory and this made the eventual removal of gold from circulation within the world market (the collapse of Bretton Woods) necessary.

The measures taken in this regard are no different than those taken by the Soviet Union in its own development only it occurs in reverse order. The regime of accumulation, in this instance, is that the capital of each nation is managed by its respective state as a single organism. In other words, the state assume the functions of a national capitalist vis a vis its respective proletariat — it becomes a fascist state. This advance in the mode of production resulted in an increased rate of accumulation of capital that must now find new markets. Control by the state subjected the national capital to its will, but, at the same time, subjected the state to the forces of the world market. As Engels argued presciently in 1880,

“The capitalist relation is not done away with. It is, rather, brought to a head. But, brought to a head, it topples over.”

The act by which the fascist state seizes control of the national capital at the same time puts an end to its domination of society. As Harding explains, despite bringing the national capitals under the control of individual states, the individual states find they have less control over their national capitals than before. State-managed national capitals find their position is subject to the policies of the country that dominates the world market, the United States:

“… a global cycle in credit and capital flows – driven by the US Federal Reserve’s monetary policy – means that even a floating exchange rate does not give a country control over its own destiny.”

Removing commodity money from circulation within the world market as a whole in 1971 did not return control of the national capital to individual nation states, but to the single state that controls the world reserve currency. In the same way they each asserted control over their national capitals by replacing gold with their valueless fiat, the US assumed management over all national capitals when gold was removed from international trade.

*****

Measures to manage currency crises

Harding says Professor Hélène Rey of the London Business School has a solution to this problem: Impose capital controls

“Prof Rey’s own conclusion was that it is hopeless to expect the Fed to set policy with other countries in mind (which would be illegal). She recommended targeted capital controls, tough bank regulation, and domestic policy to cool off credit booms.”

Harding, however, thinks this cannot work. In this he is only echoing Federal Reserve Chairman Ben Bernanke, who last fall lectured other central banks to simply let their currencies adjust to Fed policies. Said Bernanke in Tokyo in October of last year:

“Of course, an alternative strategy–one consistent with classical principles of international adjustment–is to refrain from intervening in foreign exchange markets, thereby allowing the currency to rise and helping insulate the financial system from external pressures. Under a flexible exchange-rate regime, a fully independent monetary policy, together with fiscal policy as needed, would be available to help counteract any adverse effects of currency appreciation on growth.”

According to Bernanke then, as the Federal Reserve rapes the planet, other central banks should simply lie back and enjoy it. The only monetary policy that is important at this point is that of the fascist state headquartered in Washington.

While agreeing with Bernanke that capital controls would be a mistake, Harding does offer a third course. He wants to revive Keynes’ failed idea of a jointly managed international currency, that is, he wants to replace the multiple currencies within the world market with something on the order of a euro for the whole world market.

“Five years ago, after the collapse of Lehman Brothers, there was appetite and momentum for a new kind of international financial system. That appetite is gone – but we desperately need to get it back.”

If you recall, around the time of the crisis several countries, including China, Brazil and Russia, argued for a global currency. This, Harding argues, makes sense because there is no mechanism in place to force some nations to reduce their surpluses:

“The flaws in the international financial system are old and profound, and they defeat any effort to work around them. Chief among them is the lack of a mechanism to force any country with a current account surplus to reduce it. Huge imbalances – such as the Chinese surplus that sent a flood of capital into the US and helped create the financial crisis – can therefore develop and persist.”

Now why am I not the least bit convinced by this idiotic explanation of the currency crisis?

Simple: the problem most countries are today addressing is not their account surpluses, but the staggering twin budget and trade deficits Washington is able to run since the dollar serves as world reserve currency. This ability to run deficits means, for instance, Washington can funds its massive military entirely on capital loaned to it from other nations. It is, as the French explained in the 1960s, an exorbitant privilege bestowed on the US because it controls the world reserve currency.

Who in their right mind thinks Washington will forego hundreds of billions of dollars in surplus value inflows each year simply because Brazil complains about this ability? Harding makes the entirely silly argument that the problem faced by the world market are countries, like China, that run surpluses. But the “huge imbalances” of China are made possible only because the Washington’s almost limitless capacity to absorb those surpluses. In fact, the export of US industry to China is premised on the fact the US pays for none of the imports from China. By exporting its industry to China, the US gained access to a mass of low waged labor power and massive profits that it shares with China. Moreover, the excessive accumulation of dollars China realizes through this process ends up financing US military adventures.

Harding wants to make the imbalances that characterize world trade go away, when not a single country that is running a surplus account balance wants this surplus to go away — not Germany, Japan, China, Korea, etc. And Washington definitely does not want the exorbitant privilege bestowed on it by its control of the world reserve currency to go away. Moreover, there is a symbiotic relation between the surplus producing countries and the United States that Harding willfully ignores. If the US (or, having replaced the dollar, some other entity) is not able to expand its twin deficits each year without limit, the surplus nations will be unable to sustain their surpluses. This explains why, as Harding puts it,

“After the financial crisis there was a flood of proposals along these lines from the UN, from the economist Joseph Stiglitz, and even from the governor of the People’s Bank of China. None has gone anywhere.”

On the other hand, if the US exorbitant privilege is indispensable even in an altered form, this cannot be said of the currencies of the rest of the world. If anything is doomed in this crisis, it is likely the currencies of every other nation but the United States. And their demise, even if it results in the dollar surviving this general die off, will constitute still another step in the inevitable advance of the mode of production toward its own demise.

*****

Currency crises and the production of surplus value

So what explains why nations pursue surplus account balances? Harding offers two rather unconvincing reasons, First, there is no world central bank to bail out failing national capitals:

“Indeed, running a surplus is wise because there is no international central bank to rely on if investors decide they want to pull capital out of your country. There is the International Monetary Fund – but Asian countries tried that in 1997, and the experience was so delightful they have been piling up foreign exchange reserves ever since to avoid a repeat.

The argument here is, I think, unconvincing because it tries to explain accumulation of excess reserves in many countries by one incident: the Asian currency crisis of 1997. In fact, the IMF has been long known for its ruthless policies since well before 1997.

The second reason offered by Harding is that the dollar is a national currency and, therefore, an unreliable asset in a crisis, since the Federal Reserve pursues its monetary policy in the interest of US national, not global, capital.

“Only the Fed makes dollars. In a crisis, there are never enough of them – a shortage that will only get worse as the world economy grows relative to the US … “

However Harding argues at present the problem is not too few dollars, but too many — to the tune of $1 trillion in counterfeit a year. Counterfeiting dollars is the privilege enjoyed by Washington about which other nations complain.

The biggest problem with Harding’s reasoning here is that if there is no international central bank, there is no reason why a nation cannot insist, as the US does, to be paid in its own currency. For instance, Germany could demand other nations pay for its exports in the German currency: the euro. Germany doesn’t and for a good reason: it is not interested in the particular currency in which it is paid, but in surplus value realized through the transaction. The accumulation of reserves takes whatever form since the aim of exports is not the currency in question but the concern of every capital — even one organized along national lines — surplus value, profit.

Remember: as I argued above all currencies are valueless tokens since the removal of commodity money from circulation within the world market. One valueless currency is every bit as valueless as the next and, therefore, not to be preferred over another. The only concern is that the buyer, whoever this is, has a sufficient quantity of valueless tokens to pay for its imports. In most analyses (probably all of them) exports are treated as a different category than profits, but this is a mistake of form for content. The exports of any nation is nothing more than surplus value produced in the territory controlled by the particular fascist state. Since every fascist state is the manager of the national capital, its aim is always and everywhere to maximize the production of surplus value. The exports of a nation represents the surplus value produced by the national capital as a whole.

The accumulation of dollars in the reserves of a nation as a result of exports has only the significance that Washington is the ultimate consumer of the surplus product of other nations. Crises do not explain the overaccumulation of reserves, overaccumulation of reserves, of capital in the form of currency reserves, explain crises. Currency crises are driven, therefore, by the fact that the aim of the fascist states’ management of their respective national capitals is the production of surplus value, of profit.

Since the production of surplus value is the starting point of economic policy of each national capital then it follows this accumulated surplus value must take the form of a currency other than that of the state in question. The exporting state must accumulate the currency of the importing state. This accumulation gives rise to the wholly fallacious argument that such accumulation is “unsustainable”. The argument made by simpleton economists is that, sooner or later, the importing nation must, somehow, run out of money to run deficits. (This is the same argument made by simpleton economists that Washington will, sooner or later, run out dollars to finance its budget deficits.) As a matter of fact, this is not possible in the case of the United States precisely because its currency is the world reserve currency and it can counterfeit dollars in any quantity necessary to pay its bills.

*****

Conclusion

Moreover, these simpletons miss the point that the crises begins with the overproduction of capital in the form of export surpluses. Since the crisis begins with overproduction of capital, not with exchange relations like national account balances, these national account balances must give way to the logic of capital, i.e., to the production of surplus value. And this sets the stage for not for an endless cycle of currency crises, but the demise of currencies themselves and, therefore, of money.

In each currency crisis the demise of money and commodity exchange itself is graphically prefigured.