Posts Tagged ‘currency’

Gold and Exchange Rates (Random thoughts)

February 5, 2012 Leave a comment

This is very geeky, sorry. I posting it because I intend to revisit it sometime in the near future in the context of a review of the Euro-zone crisis.

My post on Moseley’s MELT paper (pdf) argues the so-called “price of gold” is actually the standard of price for a currency. I argued in the paper that dollars do not buy gold, gold buys dollars. Dollars are “sort of” a commodity necessary to convert gold into capital. I said “sort of”, because I really cannot describe it, except along the line of Marx’s argument on loaned capital:

M ==> M ==> C.

Where the first M is the bank’s money to be loaned, and the second M is the actual conversion of this loaned money into industrial capital. We could think of the movement of gold similarly as:

Mg ===> Mc ===> C.

Where Mg is a quantity of gold, Mc is a quantity of a particular currency, and C is the commodity.

The owners of gold, however, have a choice of currencies whose bodily form their gold can assume: euros, dollars, yen, yuan, reals, pesos, etc. And, each of these currencies have their own standard of price, i.e., their own specific exchange rate with gold. Each of these standards of price is an expression of the quantity of a given currency in domestic circulation to the quantity of domestic socially necessary labor time. Since, in each country, the relation between the total currency in circulation and total socially necessary labor time is different, the standard of price for each country currency must necessarily be different.It would seem to follow from this that the relation between currencies, their relative exchange rates, should be determined by the above. For instance, if country A has a standard of price with gold of 10 currency A units per ounce of gold, while country B has a standard of price of 20 currency B units per ounce of gold, the relation between the two should be:

one unit of currency A = 2 units of currency B

However, just as different industries have different composition of capital, so different nations have different compositions. The composition of capital in the US is far higher than that of the People’s Republic of China, or Zimbabwe. The movement of gold between currencies, I think, is determined much like the movement of capital between industries. On the one hand, the standard of prices in various countries arise from the domestic quantitative relation between the currencies and socially necessary labor time. On the other hand, for the owners of gold, these currencies are no more than forms gold must take if it is to become capital — and capital is self-expanding value, the production of surplus value through the consumption of labor power.

This suggests that although the standard of price of a currency is determined solely by the relation between the mass of currency and the mass of socially necessary labor time; it is also being determined by the rate of surplus value within each country as determined by their varying compositions of capital.

I think we are again face to face with Marx’s transformation problem, where the law of value confronts the law of average rate of profit. One law suggests the standard of price of a currency is determined solely by the relation between the total quantity of currency in circulation domestically and the total quantity of socially necessary labor time; the other law suggest the relative exchange rates among all currencies is determined by the law of the average rate of profit. The latter law suggests currencies are exchanging in the world market above or below their actual domestically determined standard of prices.

What use might this argument have?

  1. This might just offer an idea how, without violating Marx’s labor theory of value, imperialist super-profits are obtained.
  2. It could offer a way of modeling the emergence of world market prices, and the dollar as world reserve currency.
  3. It could also explain the empirical data, which shows neoliberal free trade policies produced a US expansion in the 1980s and 1990s.
  4. Finally, it explains why China’s currency appears undervalued on the world market and the US dollar overvalued against what we would expect.

How economists mislead…

November 11, 2010 Leave a comment

Here is a post at Beat the Press from Dean Baker, who is a decent enough economist to embrace the idea of shorter working time; but who, despite this point in his favor, nevertheless brings such defective reasoning to his analysis that it makes us cringe:

The Falling Dollar and Developing country Exports | Thursday, 11 November 2010 05:44

The Washington Post notes that the Fed’s new round of quantitative easing will:

“harm exports from developing countries. That’s because steps to lower U.S. interest rates and put money into the economy have the effect of making other countries’ currencies more expensive.”

If world imbalances are going to be addressed, then developing country exports must be hurt. In economic
theory, rich countries like the United States are supposed to have trade surpluses. This means that they export capital developing countries. The logic of this pattern of trade is that capital commands a higher rate of return in fast growing developing countries in which it is relatively scarce.

There were in fact substantial flows of capital from rich countries to poor countries prior to the East Asian
financial crisis in 1997. However, the harsh treatment of countries in the region by the I.M.F. led developing countries throughout the world to focus on accumulating vast amounts of reserves in order to avoid ever being in the same situation. This meant that developing countries had to run export surpluses with the United States and other wealthy countries.

In effect, the I.M.F, under the guidance of the Rubin-Summers Treasury Department, put in place a dysfunctional system that would inevitably explode. The effort to re-balance trade is about reversing those policies.

Baker should know better.

It should have occurred to him that if an idea appears on the pages of the Washington Post, it is probably wrong. The post makes the argument that quantitative easing will hurt exports from developing countries. As dollars flood the American economy, interest rates will fall, and capital will go looking for someplace with a better return — like China or Brazil — forcing their currencies to appreciate.

If we understand Baker in this post, he is agreeing with the Washington Post, and making the argument that exports from the developing countries must fall in order to “re-balance” the world economy — i.e., reduce the US trade deficit. Rich countries, says Baker, are supposed to have exports surpluses, not poor countries.

So why is it now the other way around? Why does China export to the United States more than it imports from the United States? Baker’s answer to this is that China exports so that it can accumulate sufficient dollars to protect it from a financial crisis like the one that hit Asia in 1997.

As Baker alludes, the developing world was hit with a series of financial crises over the decade and a half prior to the Asian Crisis of 1997, because of the US decision to turn these less developed countries into low wage export platforms for American companies seeking to import back into the US. The crisis even dumped Japan into a permanent depression in 1989. This was the exports of capital he refers to.

So, the “dysfunctional” trade imbalances that Baker says resulted from the Asia Crisis actually created the Asia Crisis in the first place. Moreover, despite these rolling financial crises, the US deficit has continued to grow without pause.

But, that doesn’t fit into the story progressive economists want to tell. They want a story that blames China for the US trade deficit and the loss of manufacturing jobs. So, despite their own evidence that the US export of capital is the cause of the US trade imbalance, they need a story that makes Chinese exports the problem.

The only problem with this reasoning is that China’s exports have little or nothing to do with the exchange rate between the dollar and the yuan. The US imports from China are increasing even though its currency has been appreciating against the dollar. It imports from Germany even as the euro is rising against the dollar. And, the Japanese yen has risen from 360 yen per dollar to 80 yen per dollar over the last 40 years, but the US still imports from Japan.

Yen exchange rate with the Dollar (1950-2010)

The reason why this is happening — and will continue to happen despite US quantitative easing — is twofold. First, the US owns the world reserve currency, which allows it to depreciate its currency at will, while paying no cost for this depreciation in terms of reduced consumption from imports. Second, the US dollar is a worthless piece of paper, which can be generated in whatever quantities are needed by Washington to buy whatever its wants.

In effect, the US profits by depreciating its currency because it pays nothing for the exports of other countries. And, the more currency it prints, the more it profits by this depreciation.

Quantitative easing will not result in more US exports, nor in the repatriation of US industry back to the US. Instead, it will force other countries to ship even more output to the US at the expense of the consumption of their own citizens.

When progressive economists apply the fallacies of economics to concrete problems they risk misdirecting activists time and attention to blind alleys. In this case, activists would draw the conclusion that it is China, not the US that is responsible for the off-shoring of US jobs.

In fact, off-shoring is a deliberate Washington strategy to reducing labor costs and destroy domestic unions. Quantitative easing is just the latest weapon in that arsenal.

VII. Superfluous labor and the collapse of capitalism

August 28, 2010 2 comments

If we now return to the definition of depression offered by the wiki, we can see how inadequate it is:

In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by economists as part of a normal business cycle.

Considered a rare and extreme form of recession, a depression is characterized by its length, and by abnormally large increases in unemployment, falls in the availability of credit— quite often due to some kind of banking/financial crisis, shrinking output and investment, numerous bankruptcies— including sovereign debt defaults, significantly reduced amounts of trade and commerce— especially international, as well as highly volatile relative currency value fluctuations— most often due to devaluations. Price deflation, financial crises and bank failures are also common elements of a depression.

The definition is not only inadequate; it contains assumptions about both depressions and recessions that are misleading and altogether an obstacle to understanding the current economic disturbance we call the Great Recession.

Read more…

VI. Prices and superfluous labor

August 24, 2010 Leave a comment

A depression erupts when further investment by businesses becomes unprofitable; this lack of profitability results solely from the fact that labor is so productive that consumption is the overriding limiting barrier to further investment. Once this “insuperable” limit was encountered, money was withdrawn from circulation by the owners of gold who could find no profitable use for it. In response to this, government devalued the national currency against gold and then altogether debased it.

The debasement of the national currency severed the connection between gold and the national currency; and, therefore, between value and price; and between socially necessary labor time and labor time actually expended. On the one hand, there is gold: the expression of the value contained in the output produced. On the other hand, there are dollars: the denomination in the prices of that same output of the labor time actually expended.

Read more…

V. Debasement and prices

August 22, 2010 Leave a comment

There is a syndrome known to afflict people who have undergone surgery to relieve terrible bouts of seizures called split brain. The wiki explains how this affliction expresses itself:

Split-brain is a lay term to describe the result when the corpus callosum connecting the two hemispheres of the brain is severed to some degree. The surgical operation to produce this condition is called corpus callosotomy and is usually used as a last resort to treat intractable epilepsy. Initially, partial callosotomies are performed; if this operation does not succeed, a complete callosotomy is performed to mitigate the risk of accidental physical injury by reducing the severity and violence of epileptic seizures. Prior to callosotomies, epilepsy is treated through pharmaceutical means.

A patient with a split brain, when shown an image in his or her left visual field (the left half of what both eyes take in, see optic tract), will be unable to vocally name what he or she has seen. This is because the speech-control center is in the left side of the brain in most people, and the image from the left visual field is sent only to the right side of the brain (those with the speech control center in the right side will experience similar symptoms when an image is presented in the right visual field). Since communication between the two sides of the brain is inhibited, the patient cannot name what the right side of the brain is seeing. The person can, however, pick up and show recognition of an object (one within the left overall visual field) with their left hand, since that hand is controlled by the right side of the brain.

The same effect occurs for visual pairs and reasoning. For example, a patient with split brain is shown a picture of a chicken and a snowy field in separate visual fields and asked to choose from a list of words the best association with the pictures. The patient would choose a chicken foot to associate with the chicken and a shovel to associate with the snow; however, when asked to reason why the patient chose the shovel, the response would relate to the chicken.

The split brain syndrome is an altogether apt analogy for what happened when the dollar was debased from gold.

Read more…

IV. Devaluation and debasement

August 20, 2010 2 comments

Depressions are real events. No amount of currency devaluation can halt or prevent one. A depression arises when the capacity of a society to produce exceeds, either temporarily or permanently, any possible productive use for that output. It occurs, in other words, when, under the given economic circumstances, hours of work are longer than is required by society. This cannot be altered, nor in any way meaningfully effected, by the devaluation of a nation’s currency.

But, devaluation can shift the burden of a depression. This is clearly evident when one nation devalues its currency to a greater or lesser extent than other nations; it is also evident in the case where one nation devalues earlier or later than other nations. The country that devalues earlier, or devalues more severely can enjoy additional growth at the expense of its peers. But, despite this, there is no net effect on the depression.

Read more…

Saint Paul loses it…

October 23, 2009 1 comment

gnomePaul Krugman had a little fascist temper tantrum today in the New York Times.

The object of his inflamed state is China, who, Paul tells us, is depreciating the yuan to gain an unfair advantage over its competitors.

How is it engaged in this unfair competition?

It is linking its currency to the dollar, and as the United States lets the dollar depreciate against its competitors, China is profiting from this unfair advantage-seeking by the US.

It is all so unfair.

China has always done linked the yuan to the dollar, and it is completely understandable, since, as Paul admits:

There’s nothing necessarily wrong with such a policy, especially in a still poor country whose financial system might all too easily be destabilized by volatile flows of hot money. In fact, the system served China well during the Asian financial crisis of the late 1990s. The crucial question, however, is whether the target value of the yuan is reasonable.

Saint Paul is being disingenuous: It was okay for China to accumulate reserves of US dollars back in 1997 when one nation after another was going belly up for lack of dollars, but its continuing accumulation at this point is somehow wrong today.

And, pray tell us, Mr. Krugman, what was the result of the financial meltdown? Was it not that numerous countries were starved of dollars again, and needed to be bailed out by Washington? Was it not that China, and a handful of other countries, having accumulated dollars well in addition to what was seen as reasonable, were able to stabilize their national economies in the midst of this crisis by drawing down on those accumulated reserves?

Of course it was.

Was China supposed to stand by and hope that, as the US bailed out not only it biggest banks and it preferred partners, it would also get around to bailing out China’s swollen export sector – an export sector which had spent the last few years providing consumer goods to the US free of charge?

If, as the dollar lost value, China exports cut through Euro-zone capacity like a hot knife through butter, who’s fault was this – China, who was seeking only to insulate its industry from vagaries of US monetary policy, or the US, who was using dollar devaluation to impose an imperial tax on its trade partners?

According to Krugman:

If supply and demand had been allowed to prevail, the value of China’s currency would have risen sharply. But Chinese authorities didn’t let it rise. They kept it down by selling vast quantities of the currency, acquiring in return an enormous hoard of foreign assets, mostly in dollars, currently worth about $2.1 trillion.

Now this is coming from an economist who has called on the US to further flood global economy with dollars above the $2.8 trillion already spent to bail out Goldman Sachs, the auto industry, and state governments. Note the amount: $2.8 trillion – which is provided by CNN – spent so far on the crisis. In other words, in less than two years, the US has pumped more dollars into the global economy than entire accumulated reserves of China, and this (unlike China) without producing a single new object that could be eaten, worn, or occupied by a human being!!!

A flood of worthless paper greater than the accumulated wealth of the largest single holder of American fiat in roughly 18 months!!!


Again from Paul:

Many economists, myself included, believe that China’s asset-buying spree helped inflate the housing bubble, setting the stage for the global financial crisis. But China’s insistence on keeping the yuan/dollar rate fixed, even when the dollar declines, may be doing even more harm now.

This is typical of the American Fascist argument: The US floods the world with worthless fiat dollars, but it is China that is responsible for the American housing bubble.

How the fuck did that happen?

Who the fuck in Compton or Saddleback went to China and financed their sub-prime home purchase with dollars earned by China through the sale of tainted sheet-rock?

Let’s find that mother-fucker and string him up.

And, let’s also find and beat the asshole who called for a housing bubble to replace the collapsed internet bubble.