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Posts Tagged ‘exchange rates’

CLUELESS: QE to Infinity, or How national currencies die

November 16, 2012 Leave a comment

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.

Read more…

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.