Home > economics, political-economy > CLUELESS: QE to Infinity, or How national currencies die

CLUELESS: QE to Infinity, or How national currencies die

November 16, 2012 Leave a comment Go to comments

Based on what I have described of Bernanke’s policy failure so far, is it possible to predict anything about the future results of  an open ended purchase of financial assets under QE3? I think so, and I share why in this last part of this series.

In his speech to the joint Bank of Japan and International Monetary Fund gathering in Japan in September, Bernanke did not offer any explanation for why the previous 3 attempts failed. This suggests either he does not know the source of this failure or he did not wish to share the reasons with his audience. Since there was more than ample evidence of skepticism among researchers in advance that QE1, QE2 and QE-Twist would fail, as well as empirical evidence that quantitative easing never worked in Japan over the last two decades, we can assume Bernanke understands full well, at least insofar as monetarist economic theory can explain it, why the policy has not worked.

I want to propose that Bernanke’s unwillingness to share the reason for the failure of the previous iterations of quantitative easing with his audiences in his two speeches this year suggests discretion rather than ignorance. So what is he up to with QE3? Based on his 1991 paper, it is likely Bernanke is treating the present crisis as one caused by a contraction of the money supply in line with his argument on the causes of the Great Depression. However, it seems to me that there is a fundamental difference between the present crisis and the Great Depression. With regards to his theory of the cause of the Great Depression, Bernanke wrote,

“The length and depth of the deflation during the late 1920s and early 1930s strongly suggest a monetary origin, and the close correspondence (across both space and time) between deflation and nations’ adherence to the gold standard shows the power of that system to transmit contractionary monetary shocks.”

However, in the present crisis, there is no gold standard, and, therefore, no ability for gold to transmit a contractionary monetary shock. If Bernanke believes the present global downturn is caused by a contraction of the money supply, it would be interesting to know exactly how, in Bernanke’s view, a contractionary monetary shock is presently being transmitted throughout the world market. And, since he is not telling us, we have to tease the answer out of his speeches. Gold has long since been replaced by monetary policy managed by the central banks of most nations. If I had to bet, I would put my money on the probability Bernanke thinks other central banks are the most likely source of transmission of a contractionary monetary shock and QE3 is aimed to break their resistance .


Does Bernanke believe central banks are responsible for deepening the current downturn? In Japan, Bernanke made this statement:

“In some emerging markets, policymakers have chosen to systematically resist currency appreciation as a means of promoting exports and domestic growth. However, the perceived benefits of currency management inevitably come with costs, including reduced monetary independence and the consequent susceptibility to imported inflation. In other words, the perceived advantages of undervaluation and the problem of unwanted capital inflows must be understood as a package–you can’t have one without the other.

“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. The resultant rebalancing from external to domestic demand would not only preserve near-term growth in the emerging market economies while supporting recovery in the advanced economies, it would redound to everyone’s benefit in the long run by putting the global economy on a more stable and sustainable path.”

The statement is rather interesting, since it not only suggests Bernanke sees the root cause of contraction of money supply originating with the policies of various emerging market central banks, but it also suggests Bernanke’s QE3 is not just aimed at producing inflation in the US but globally. Although Bernanke pleaded capital inflows and inflation could result from a number of causes, he was careful not to deny his policies are contributing to the problem.

Other central banks are trying to counter Washington’s quantitative easing by orienting their monetary policy to resist Bernanke’s effort to drive up prices of their exports. These countries are actually behaving like any other actor within the dollar zone: as inflation takes hold, they are trying to contain their costs of production. Since the domestic firms have no control over the inflating costs of inputs purchased elsewhere, they must control their internal costs. This means, among others things, reducing their consumption, switching to cheaper substitutes and trimming labor costs, to increase the production of surplus value. Nation states can forcibly implement these goals at once by devaluing their currencies, i.e., pegging their currency against the dollar.

The downside of the strategy of maintaining a peg to the dollar as Bernanke noted, however, is that it does not solve the problem, but only displaces it to excessive accumulation of dollar reserves. This is because the problem is not exchange rates but overaccumulation of capital. This overaccumulation of dollars begins with material production that must be exported to maintain the conditions of capitalist production. This problem has nothing at all to do with central bank monetary policy but is the fundamental problem of capitalist relations of production. Production is carried on for profit and overaccumulated capital must be exported into new markets.


Given that overaccumulation of capital is the fundamental problem of the capitalist mode of production in any case, and that the accumulation of dollar reserves is only the superficial expression of this fundamental problem in the form of currency exchange and trade relations, I think we can expect what is superficial to give way to what is necessary. Another way to put this: the need of national capitals to export is fundamental, while the money form this export takes is contingent on competitive forces. Second, given absolute overaccumulation within the world market, exports now require the constant increase in prices — inflation.

If these two conditions are assumed to be true, national currencies other than the dollar are toast — dead, defunct, finished. Currencies that are not allowed to appreciate must accumulate dollars reserves that are mostly worthless to the domestic economies. Currencies that are allowed to appreciate will suffer deflation and depression as their exports fall and imports increase.

This recalls Bernanke’s statement in his 2002 speech when he argued currency devaluation was one means of fighting deflation:

“Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.”


Of course, Bernanke was careful to qualify such an intervention as extraordinary and hedge it with the understanding that the Treasury Department is the point agency on the question of Washington exchange rate policy:

I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.

Of course, Bernanke was being totally disingenuous in this statement. Since monetary policy is only aimed at the depreciation of state issued fiat currency, devaluation of the exchange rate of the currency against other national currencies is a natural consequence. Whether Bernanke intends it or not, and whether this devaluation is the official policy of Washington or not, is entirely beside the point. In fact, Washington can only depreciate its fiat currency by measures that simultaneously devalue its currency against other national fiat currencies.


For reason which must become obvious in time, QE3 has to call into question the survival of most, if not all, other national currencies. I should point out my conclusion is the opposite of most Marxist observers including Robert Kurz. Kurz made the mistake of focusing on trade deficits and deficit circuits involving Japan and Germany. These two nations generate a lot of trade surpluses and rely on others to absorb these surpluses by running trade deficits. The largest by far, most important, deficit nation is the United States, but its status as global debtor state is misleading — and surprisingly Kurz overlooked the significance of the dollar’s world reserve currency status in his 1995 essay, where he wrote:

“The United States has succeeded in and continues to succeed at—although it should be economically impossible—going deeply into debt to foreign capital while simultaneously having very high trade deficits, for the simple reason that the dollar played and to some extent still plays (in a diluted form) the role of world money. This means that the U.S. can pay off its foreign debt with its own currency, instead of first having to obtain foreign currency by generating a trade surplus in order to pay the interest on and amortize its foreign debt. In reality, it makes its foreign creditors pay part of its debt by means of raising and lowering the dollar’s exchange rate, although this method appears to have now lost a great deal of its efficacy and will sooner or later lead to a generalized flight from the dollar, which would result in a drastic collapse of the currency’s value and a world trade crisis. The weakness of the dollar and the crisis of the international monetary system over the last two years clearly demonstrate that the trend points in this direction.

“Because of this duality formed by the deficit of its foreign debt and its negative balance of trade, the United States has also become over the last 15 years the two-sided sponge of the world economy: one side sucks foreign money capital, and the other pays for its gigantic import surplus with that borrowed money, sucking up an enormous mass of foreign industrial products. This grotesque disproportion is concentrated almost entirely in the Pacific region. All the palaver about the alleged “Pacific Century” which awaits us is melting into thin air, since it is founded upon the deficit circuit between East Asia and the United States. The Japanese loan money to the U.S. in order to realize trade surpluses in their exchanges with the U.S., and they use these trade surpluses to obtain the funds which they can loan to the U.S. It is obvious that this paradoxical economic situation, in which all of Southeast Asia now participates, will have to fall to Earth within a few years.”

I think Kurz should have drawn the opposite conclusion: while the biggest nations of the euro-zone are constrained by the lack of monetary policy, and other nations are constrained by lack of a reserve currency, the US has no constraint in this regard. Its currency is the world reserve currency; so it faces no constraint on its ability to print to pay its debts. Moreover, by printing valueless fiat backed by fictitious debt instruments, the US actually creates a necessary market for the surplus output of other nations.

In any case, however things evolve the world market wants its pound of flesh and its seems national currencies are the price that must be paid. I think most Marxist scholars are looking toward some sort of imposition by the majority of nations on the US — perhaps, the emergence of the yuan or euro or some other national currency to contend with the dollar or even outright imposition of some new international currency to replace the dollar as the world reserve currency.


Dumenil and Levy are the sort of knuckleheads I am referring to on this. In their 2011 book, “The Crisis of Neoliberalism”, they wrote:

“There are, however, symptoms that new trends are under way, meaning new power hierarchies. As of 2009, Russia and China are already pushing in the direction of the creation of a new international currency under the aegis of the IMF, a substitute for the dominance of the dollar. Brazil is seeking alliance with oil-producing countries and tends to limit the use of the dollar in its exchanges with its neighbors. Such initiatives multiply, testifying to new political trends internationally. The president of the IMF, Dominique Strauss-Kahn, declared that he wanted to double the resources of the IMF to $500 billion. Japan signed an agreement to lend an extra $100 billion. As of early 2009, European leaders made declarations in favor of increased IMF funding. Zhou Xiaochuan, the governor of the Chinese central bank, suggested the use of the IMF’s special drawing rights to create a synthetic currency. The declaration made during the G20 meetings, in April and September 2009, confirmed these trends. A new crisis, questioning U.S. hegemony, was probably necessary. Will it be sufficient to impose new arrangements measuring up to the task to be performed? Possibly, a crisis of the dollar.

This is just the sort of stupid shit Marxist reformers are always going on about — it ain’t going to happen. The G20 is not going to sit down at the table and force the US to accept a new world reserve currency. No one in their right mind should expect the US to voluntarily give up its unconstrained ability to print money at will for whatever it wants. Even if the United States was willing to do this, it would not change the fact that whatever currency emerged to replace the dollar would have to be continuously depreciated to maintain the real wage of labor power below its value.

I feel safe in predicting this will not happen and banking on it is foolish in the extreme. First, because it is not our fight and the bastards can kill each other over it without taking us with them — it is only a question of which predator rules. Second, because capitalist relations of production are not established by discussions among well dressed statesmen, diplomats and state functionaries over international conference tables. And, finally, because this fight has already been decided in advance before the first blow is passed, by the dollar, which has already been established as the world reserve currency.

Marx has a quote that I think is appropriate to this sort of problem and can be applied to this conflict among fascist states over what should be the world reserve currency with only minimal changes:

” A portion of the old capital has to lie unused under all circumstances; it has to give up its characteristic quality as capital, so far as acting as such and producing value is concerned. The competitive struggle would decide what part of it would be particularly affected. So long as things go well, competition effects an operating fraternity of the capitalist class, as we have seen in the case of the equalisation of the general rate of profit, so that each shares in the common loot in proportion to the size of his respective investment. But as soon as it no longer is a question of sharing profits, but of sharing losses, everyone tries to reduce his own share to a minimum and to shove it off upon another. The class, as such, must inevitably lose. How much the individual capitalist must bear of the loss, i.e., to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers. The antagonism between each individual capitalist’s interests and those of the capitalist class as a whole, then comes to the surface, just as previously the identity of these interests operated in practice through competition.

“How is this conflict settled and the conditions restored which correspond to the “sound” operation of capitalist production? The mode of settlement is already indicated in the very emergence of the conflict whose settlement is under discussion. It implies the withdrawal and even the partial destruction of capital amounting to the full value of additional capital ΔC, or at least a part of it. Although, as the description of this conflict shows, the loss is by no means equally distributed among individual capitals, its distribution being rather decided through a competitive struggle in which the loss is distributed in very different proportions and forms, depending on special advantages or previously captured positions, so that one capital is left unused, another is destroyed, and a third suffers but a relative loss, or is just temporarily depreciated, etc.”

As Marx argues, these sorts of issues are not settled at an international conference table, but by ruthless competition between contending national capitals in which each national capital uses its advantages over other national capitals to imposes its will. Frankly, whatever Marxist think about the “progressive” characteristics of this or that country (Brazil, China, Japan or Germany) in comparison to the policies of the United States, is really quite beside the point. Betting against the US dollar in favor of the euro, real or yuan on this is just another hopeless tilting at windmills. Marxists should be thinking beyond money and exchange relations entirely.

Each of these fascist states have used their control of their currency to ruthlessly exploit their working classes, and now they must pay. This fight will be decided by the fact that the US already has the dominant position in the world market and is using that position to drive its potential rivals face first into the concrete. Once it has done this, it will likely have performed its last historical act. Since the planet is already being run by banksters, what difference does it make which cabal of banksters its going to be? Marxist reformers need to pull their heads out of their asses and begin to think of a world without money. The answer to Bernanke’s monetary policy is not Jens Weidmann‘s monetary policy, but the abolition of money itself.

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