Byand

September 3, 2018 —— Turkey was thrust into a full-blown currency crisis when United States President Donald Trump hoisted tariffs on Turkey’s steel and aluminium exports to the US — the country’s most serious crisis since President Recep Tayyip Erdogan’s Justice and Development Party (AKP) came to power 16 years ago. The Turkish lira lost more than 40% of its value in the first two weeks of August, albeit its most recent humble recovery. The pretext for Trump’s punishing attack on Turkey, the seventeenth largest economy in the world, is the continued detention of the evangelical US Presbyterian missionary Andrew Brunson who was arrested in October 2016 on charges of espionage and accused of involvement in the attempted coup of July that same year.

At first sight, the US-Turkey standoff appears to be a uniquely Turkish problem triggered by a very public confrontation between two leading members of the “ring of autocrats” of the 21st century and worsened by the idiosyncratic and often misguided economic approach of both leaders. This is not the case. One cannot look at the Trump-Erdogan conflict in isolation from the global situation.

In the first place, the roots of the conflict are domestic. Public agitation over the fate of Brunson serves Trump’s domestic political agenda, appealing to his Christian right base that considers Brunson a martyr. Trump is using it for his own political benefit for the forthcoming US mid-term elections, where evangelical turnout will be crucial for Republicans holding on to the Senate.

Similarly, Erdogan is seeking to strengthening his domestic support base by appealing to Turkish pride and nationalism at a moment when Turkey and the US have diverging agendas over Syria and other conflicts in the greater Middle East— witness the rapprochement between Turkey, Russia and Iran.

However, the long-term underlying structural motives for the drive to bring the Turkish economy to its knees lie in the bid by the US hegemon to displace and off-load its own crisis onto the back of emerging economies, by means of trade restrictions, economic sanctions, direct confrontation and, most importantly, using the dollar’s reserve currency status to hit the currencies of all emerging economies and beyond. This is not rooted in the personality or psychology of Trump or Erdogan, and this is not just Turkey’s problem. It is a global problem carrying substantial risks of contagion, and hence conflict and war, in Asia, Latin America, Africa and Europe. Currently, the Turkish crisis appears to be the most intense but, as we shall see below, one cannot look at this crisis in isolation, and there is much more going on between the US and the rest of the world.

The global financial crisis and shifts in the global power system

As the tenth anniversary of the collapse of Lehman Brothers approaches, it seems that none of the underlying contradictions of the capitalist world economy have been resolved. Rather, they have only intensified. Soon after the 2008 crisis hit the major economies, governments and central banks took the worthless, or so-called toxic, assets off the books of the banks, which were then transferred onto the states’ budgets rendering legal responsibility to the taxpayer to pay the debts of the banks. The bailout operation and other similar measures, such as the widespread "quantitative easing", has cost more than 25% of global GDP, the landmark operation being the Greek case. This large-scale bailout has increased the volatility of the system without solving the problem. Ten years after, it is becoming increasingly clear that a new period of serious crisis is gripping the global economy.

Every national economy, whether big or small, seems to be locked in an escalating cycle of economic warfare without end: US sanctions against Iran, Russia, Turkey and Venezuela; and US trade war with China, the European Union, Canada and Mexico. These acts of economic warfare, reminiscent of the inter-war period[1], are not only affecting the countries directly targeted; they indirectly affect a long list of other countries that have close economic links with these targeted countries. For instance, Chinese producers buy iron ore for steel from Australia, Brazil, India, Iran, South Africa and Ukraine, and bauxite for aluminium from Australia, Brazil and the poor West African nation of Guinea. All are being affected, some very seriously.

It seems that global trade and the US dollar are used as a weapon by the US President, who sees trade sanctions and tariffs, such as the onslaught he launched against Turkey, as an integral component of his drive to secure US’s geopolitical and economic interests at the expense of the others, even if this hurts its own close allies. Trump's "America First" policy is just this and configures its strategy as a response to the structural crisis of globalisation/financialisation.

Trump is fully aware of the impact of his policies. The US's “aggressive unilateralism”, which first emerged in the 1980s under former President Ronald Reagan, is now pushed to its limits by Trump. Trump is not some bizarre abnormality, but rather represents a coherent policy, the genuine face of the vital interests of a declining superpower that is prepared to initiate a major crisis and huge devastation worldwide to stop its eventual decline. Trump’s coming to power itself is but an epiphenomenon of the deeply embedded structural and historic changes and trends taking place in international political economy and the global system of power.

All such shifts are the results of an increasingly more volatile and chaotic international situation, which is the direct consequence of a process that Giovanni Arrighi, drawing on Antonio Gramsci, called.[2] During that period, systemic chaos is rather unavoidable. The late 20th century saw renewed great power rivalry, system-wide financial excesses and bursting bubbles centred on the declining superpower, the US, and the emergence of new loci of power in Eurasia, in particular China and India. So, the core logic of this shift can be analysed properly within the context of major global structural changes and re-distribution of power, which have been affecting the world system for the last 30 years or so.

When the authority of a global superpower is on the wane, this affects the entire world order and leads to instability. Even though the US still represents the largest and strongest economic and military power in the world, it is nevertheless struggling with severe weaknesses resulting from low economic growth and the protracted decline of its industry. The most important structural transformation that took place in the US-led global economic system after World War II was a massive crisis in manufacturing manifesting itself as(economic stagnation accompanied by double-digit inflation). Falling profitability and weakening competitiveness led to the erosion of the production-led mode of accumulation in the US (the twin crisis of Fordism and the Keynesian management of aggregate demand).

When the productive power (and capacity) of the US started to decline, financial speculation began to play a major role to compensate the loss of profit rates in production and trade. One of the most striking features of the US economy has become the rise of the rentier and the money capitalist. This was further reinforced with the huge upsurge of the US bond markets and, from the late 1980s in particular, of the junk bond market. This vast financial sector expansion greatly advanced speculation. The decline in productive capacity and the ever-widening gap between productive and financial accumulation led to recurrent financial and economic crises in every corner of the world. The global chain of extreme financialisation and speculative profiteering broke in 2007-09, only to be transplanted into the eurozone via the over-leveraged banking sector.

From Quantitative Easing to Quantitative Tightening and the predicament of Turkey

Even if the US economy is in decline in terms of its productive capacity and the share of global trade, one aspect of it still dominates the global economy: Dollar, or the dominant role of the US dollar in international trade and finance. This is the privilege to profit from the use of the dollar by the rest of the world as international reserve currency in global trade. All states have to acquire funds of the internationally acceptable money to be able to pay for goods and services in global trade. A state first has to earn an amount of international currency from abroad before it can buy anything from abroad. This constraint does not exist for the US because the international currency since 1944 is the US dollar. The US does not need to earn dollars abroad, and since 1971 there has been no restrictions to limit the amount of dollars issues by the American state: the US simply prints dollars at home, which gives the US an “exorbitant privilege”.

As a result, the US Federal Reserve could dictate the level of international rates by moving US domestic interest rates, thus determining the costs of credit internationally. All this means that, today, the US borrows practically from the entire world without keeping the reserves of any other currency. Because the dollar is theglobal reserve currency, the US does not have to compete with other currencies in interest rates, and even at low interest rates capital flies to the dollar. The more dollars are circulated outside the US, or invested by foreign owners in US assets, the more the rest of the world has had to provide the US with goods and services in exchange for these dollars. The US even has the luxury of having its debts denominated in its own currency. Let us explain what we mean by this.

When international credit is cheap, economic operators with access to cheap international credit borrow money and invest in projects that seem viable, given the level of low interest rates. However, when the US decides to make credit expensive (sometimes very expensive) to gain competitive advantage or for political economy reasons, suddenly, such "normal" and "sound" investments may find themselves going bankrupt because of this sudden contraction of cheap credit. Because only the US state can issue the international reserve currency, the dollar, Wall Street, the hub of global financial activity together with the City of London, can swing the international economy between oversupplying credit at one time and contracting it at another without even providing a reasonable time of notice. As in real war, so in economic warfare, surprise is the thing to do to win. This is exactly what is happening today.

Since the 2007-08 global financial crisis the reliance of financial markets on policy decisions taken by the US Federal Reserve has expanded to unprecedented levels. Immediately after the global crisis hit the US in 2007, the Federal Reserve began what was called Quantitative Easing (QE), a type of Keynesian generation of money — buying up bonds to revive the flow of credit to a shrinking economy. The Federal Reserve bought a staggering sum of bonds from the struggling banks, which increased in eight years up to $4.5 trillion from being only in the range of $850 to $900 billion in 2010.[3]

Since then, four global central banks: the US Federal Reserve, the European Central Bank (ECB), the Bank of Japan and the Bank of England have engaged in QE programs. The result of this QE was that the central banks flooded markets with an unprecedented flow of funds (dollars) through auctions and lending facilities, creating approximately $4 billion in new money each day, and thus financial markets were saved.[4] This operation plunged the interest rates to zero in an effort to prevent an economic collapse. This very large sum of money was in turn invested in any part of the world offering high returns as US bonds paid near zero interest.

The hope was that lenders would go on to pass that liquidity along as credit to companies and households, thus stimulating anaemic economies. A large amount of this liquidity went into junk bonds in the shale oil sector, which in reality subsidised high-cost US shale production despite the fact that only a few shale companies were generating enough cash to pay for their spending and dividends,[5] and into US housing market which experienced a mini boom, both of which played a key role in the initial recovery of the US economy from the 2007-08 financial crisis.

Private investors, who were looking for new and more profitable avenues to park their investments (low interest new money they borrowed from the Federal Reserve) started pumping large amounts of this into emerging markets such as Turkey, Brazil, Argentina, Indonesia, India and China, where the economies were booming and US bonds could potentially bring back high returns. Thus, the corporations as well as private individuals in emerging markets had access to a large amount of cash at their disposal. Even the Russian market received some liquidity dollars until the Trump initiation of the US sanctions in early 2018.[6] As a result, during the last ten years, the supply of cheap dollars to the global system has risen to unprecedented levels, exacerbated by the US, British, German and Japanese QE programmes. Total global debt (the debt of households, governments, corporations and the financial sector) soared to a record $233 trillion in the third quarter of 2017, according to a report from Washington-based Institute of International Finance.[7]

As long as the emerging markets were growing and earning export dollars at times of low interest rates, this debt was easily manageable. Near-zero interest rates, combined with a weak dollar, were key for this, and it was not difficult to pay this level of debt for consistently growing emerging economies. However, even though this low-interest credit has helped boost economic growth in the short-term, heavy reliance on this has made the economies of emerging countries vulnerable to sudden financial changes and surprise economic warfare. If the interest rates begin going up quickly, as is currently the case, then many debtors will not be able to pay their debts and the world may again be facing a 2008-style catastrophe. Therefore the emerging market economies’ huge dollar debt is the key vulnerability even for still expanding emerging economies such as Turkey and Mexico. Turkish banks and large corporations now owe an estimated $229 billion in foreign-denominated debt, which is more than one-third of the country’s GDP. [8]

Late last year, the US Federal Reserve ended its programme of QE and started to reverse it, selling off the financial assets it had purchased, and hence effectively taking dollars out of the financial system. Time was on the side of the US economy given the relatively stable performance of the US economy. Since late 2017, the Federal Reserve has retreating from markets by reducing the amount it reinvests after bonds in its portfolio reach maturity.

Global finance has nowbeen in the new era of Quantitative Tightening (QT).[9] The Federal Reserve raised its policy rates five times, from 0.25% to 1.5%. The Bank of England raised its policy rate once, back to 0.5%. As a result the dollar’s value has begun to rise. US corporations are on track to pay $1 trillion to buy back their own stock by the end of this year. This parasitic practice will further divert funds from productive sectors, which exclusively benefits US corporate investors.

The last couple of weeks has witnessed the most spectacular rise of US financial markets in the aftermath of the global financial crisis of 2007-08 — a massive transfer of wealth to the corporate financial elite, an obvious expression of deepening financial parasitism. The rise in the value of dollar, accompanied by successive interest rate rises by the US Federal Reserve, has suddenly made debt payments for countries, corporations and individuals far more difficult.

This is direct US financial policy that is deliberately precipitating a major new economic/financial crisis across the emerging world, especially in Iran, Turkey, Russia, South Africa, Argentina and India. The stronger dollar means that emerging markets in particular are facing uncertainties: for companies, and individuals, in these countries that have issued dollar-denominated bonds, their interest payment burden just got a lot heavier, and investors are worried about the ability of emerging market debtors to pay off their dollar-denominated debt. The Institute of International Finance (IIF) estimated in July 2017 that global debt amounted to 327% of the world's annual economic output (GDP) by the first quarter of 2017 and that principally emerging market borrowing drove the rise.[10] According to estimates, by the end of 2018, there will be approximately $1 trillion less global QE than in 2017, and the peak for total emerging market dollar debt falling is due to come in 2019, with more than $1.2 trillion maturing. In other words, there will be an equivalent of $1.2 trillion less in the world in 2019. This is simply to choke off dollar supply.[11]

So far, the currencies of Venezuela, Argentina, and Turkey have been seriously hit. The Indian rupee, South African rand and Brazilian real have also come under serious pressure. Of course there are particular factors operating in each country influencing this situation, but the underlying causes of the increased turbulence are the same for all — rising US interest rates and the uncertainty generated by Trump’s trade and currency war abroad and huge tax cuts at home to boost US corporate profits at the expense of everybody else. The Trump administration is breaking all the rules and international agreements to benefit from the increased chaos in global financial markets.

China, the emerging superpower of global economy, however seems to have been affected the least so far from US trade and financial policies. This is mainly because, during the last ten years, while the US and other leading Western economies were endlessly pumping printed money and pushing further financial speculation globally, China concentrated on further developing its productive capacity: the Chinese economy nearly doubled in size, overtaking Japan and has now become the second largest economy in the world. China also has a great financial advantage comparing with other emerging market currencies: China has never been fully open to unrestricted financial flows, so there is no question of any serious capital flight.[12] Furthermore, China has a current account surplus on its balance of payments, so there is no danger of a financial deficit.

The turbulence, however, goes beyond the financial markets of emerging powers: currency traders in Australia, New Zealand and Canada (all reliant on foreign investment and commodity exports) are watching the US dollar rise with increased nervousness, according to the Wall Street Journal. [13]

Interregnum

The motivations for this trade and currency war are also political: the US punishes Turkey, Iran and Russia for having a divergent geo-political agenda in Europe, the Middle East and Central Asia that strategically clashes with its own. However, whereas it is clear that the economic warfare between the US and Turkey (as well as other emerging powers) has deep structural causes, it remains to be seen whether this can be translated into political divergence, something which would have serious implications as regards to Turkey's NATO membership and global peace. Political and security dynamics have a relative autonomy and cannot be reduced to financial economics alone.

The ability of the US government to control the global supply of money through the dollar is considered to be the US’ most effective weapon — far more deadly than its grand military machinery. The value of the US dollar is now rising strongly against all other currencies, in particular the currencies of emerging economies. The Trump regime is also initiating provocative trade wars and sanctions against Russia, Iran, China and Venezuela. Turkey is not alone in this: it suddenly has a lot in common with Iran, Russia, and China. The US seems to be aiming at a domestic and international economic advantage by pushing the global South into bankruptcy. This global financial and trade offensive, launched by the Trump administration, has already created huge uncertainty in Asia, Latin America and the EU. Peter Gowan, in his seminal work,, noted that “the US economy depends not only upon constantly reproduced international monetary and financial turbulence. …” and that “Wall Street” in particular “depends upon chaotic instabilities in ‘emerging market’ financial systems”.[14]

This is yet another clear manifestation of the fact that the world is currently going through a dangerous. Interregnum, here, as referred by Gramsci, can be understood as a period where one arrangement of hegemony is waning, but another is yet to fully emergence. It is poised between inward-looking old hegemonic power(s), and reluctant new emergent ones. The US is a declining superpower, with a crumbling infrastructure and a shrinking share of the global economy. China is an ascending superpower, with a burgeoning industrial and technological infrastructure, a growing share of world trade and increasing self-confidence, but not ready yet to lead the world. The post-World War II arrangements that centred power on the Euro-Atlantic hub and Japan under the primacy of the US were shattered first by theof the 1970s and then by the global financial crisis of 2007-08, and currently is fast losing ground in the midst of economic nationalism, trade wars and sanctions. A new international system is in the making due to the arrival of new dynamic actors that demand a redistribution of power.

This is basically what has caused the breakdown of the global order and forced the ruling elites in many countries to pursue unconstrained economic and political nationalism and populist authoritarianism. Leadership, order, and regional and global governance are no longer assured. With the breakdown of the key economic and financial structures put in place after World War II, every major power, especially the declining hegemon, the US, seems to be focusing on the protection of its own interests, leading to financial and economic warfare and extending the possibilities for a new global war. We do not know with certainty yet what the ultimate impact of the current standoff between Trump’s United States and a number of emerging powers, from Turkey to Argentina, India and Russia, will be. However, it is almost certain that our world is, once again, entering a historic moment where uncertain global circumstances and the authoritarian populist agenda of unpredictable political leaders have coincided to initiate a major shift in the way world economy and finance are organised.

Vassilis K. Fouskas and Bülent Gökay are the authors of Power Shift. The Disintegration of Euro-Atlanticism and New Authoritarianism, forthcoming by Palgrave-Macmillan in November 2018. This is their third joint monograph covering a period of over 20 years of collaborative research and completing a trilogy on the structural decline of the US as global superpower.

A version of this article first appeared at Open Democracy

[1]of June 1930, that raised already high import duties on more than 20,000 goods to their highest level in 100 years in American history, was considered by some historians as a contributing factor to the start and severity of the Great Depression and also fed political extremism helping to push Adolf Hitler into power in Germany.

[2] https://newleftreview.org/II/56/giovanni-arrighi-the-winding-paths-of-capital (accessed in August 2018).

[3] https://www.forbes.com/sites/laurengensler/2017/09/20/federal-reserve-september-meeting-unwind-balance-sheet/#44ad904e48bb and https://www.nytimes.com/2010/11/04/business/economy/04fomc.html

[4] https://www.forbes.com/sites/investor/2013/01/30/how-the-fed-is-helping-to-rig-the-stock-market/#71853de4da7f (accessed in August 2018).

[5], 14 December 2017, https://www.ft.com/content/5469ca98-e065-11e7-8f9f-de1c2175f5ce (accessed in August 2018).

[6] https://www.cnbc.com/2016/09/23/russias-central-bank-criticizes-the-easy-money-policies-of-its-peers.html (accessed in August 2018).

[7] http://uk.businessinsider.com/global-debt-his-record-233-trillion-debt-to-gdp-falling-2018-1 (accessed in August 2018).

[8] http://www.intellinews.com/turkey-raises-stakes-in-economic-war-with-tariff-hikes-on-us-goods-146939/ (accessed in August 2018).

[9] https://www.ft.com/content/bbcdffa6-5865-11e8-806a-808d194ffb75 (accessed in August 2018).

[10] https://seekingalpha.com/article/4087450-dangerous-emerging-markets-dollar-debt (accessed in August 2018).

[11] William Engdahl, “Washington’s Silent Weapon for Not-so-quiet Wars”,, 20 August 2018, https://journal-neo.org/2018/08/20/washington-s-silent-weapon-for-not-so-quiet-wars/ and Dan Glazebrook, “Trump just triggered a new financial crisis. Here’s why”,, 17 August 2018, https://www.rt.com/op-ed/436206-turkey-crisis-trump-financial/ (accessed in August 2018).

[12] In May this year, late Samir Amir talking in Beijing at a conference, one of his last public appearances before he died, where he advanced a very timely wise warning to Chinese leadership saying that “don’t open your financial markets fully and keep your currency under your control”.

[13] https://www.wsj.com/articles/u-s-dollars-rise-puts-canada-australia-new-zealand-in-spotlight-1535284801 (accessed in August 2018).

[14] Peter Gowan,, London and New York: Verso, 1999, p.124.