Smooth market functioning

March 15, 1995

Smooth market functioning

So "rogue trader" Nick Leeson blew $2 billion punting the wrong way on the Nikkei 225 index. So the Mexican peso has almost halved in value against the US dollar in three months. So last week the once mighty greenback shrank 10% against the yen and mark, dragging down other "dollar bloc" currencies like the Australian dollar, and stirring speculation that the US dollar's days as the world's reserve currency are now numbered. So what?

After all, there's nothing we can do about it, and the Financial Review and a host of financial commentators reassure us that violent swings in currencies are "no problem".

If it looks very scary to the ordinary person, then there's pundit Max Walsh telling us, "You might think it a messy way to run a global capital market, but it is the only way we have". After all, the global market in foreign exchange is "the deepest, best informed, most smoothly functioning market the world has ever seen".

This is all whistling in the dark. The very same commentators who instruct us not to panic are worried sick themselves: they know that the violent shifts in exchange and interest rates can very easily drive recessed economies deeper into recession and snuff out upturns. They can even ignite serious rebellions, as in Mexico's Chiapas region.

In December the consensus was that Mexico, newly in NAFTA, was cruising towards a year of 4% growth: now it faces recession as domestic interest rates have to be jacked sky high to lure the fund managers into buying pesos.

The appreciating yen could easily lock Japan into a recessionary vicious circle. As the rising yen pushes up the price of Japanese exports, already low profit expectations could fall even further, and the value of Japanese stock market will continue to sag. This will force Japanese banks, already carrying huge sums of debt, to liquidate their overseas assets rather than selling on the falling domestic stock market. But selling overseas holdings to cover domestic debt pushes the yen up further and undermines the competitiveness of Japanese exports, reinforcing the trend to bankruptcy and depression etc etc.

Here, a falling Australian dollar may be good for exports, but it adds to the possibility of higher import prices, higher inflation and, hence, higher interest rates. The Australian recovery could be extinguished.

And no matter how the currencies move, you can be sure the pundits will cite the changes as proof that we need to further tighten our belts.

The truth is that "the deepest, best informed, most smoothly functioning market the world has ever seen" threatens chaos in real economies around the world. In the face of this trillion-dollar-a-day poker game, the carefully cultivated illusion that shrewd and timely adjustments to economic policy levers will carry any national economy through the turmoil is just that — an illusion.

Surely there's an alternative? Why not return to regulated exchange rates, a new Bretton Woods agreement? But that was founded on the supremacy of the greenback, and it is precisely the 50-year decline in the supremacy of US capitalism over its Japanese and European rivals that forced currency deregulation in the first place.

Regional attempts at re-regulation, like the European Monetary System, are sitting ducks for the foreign exchange speculators, who already have devaluation of the pound and the French franc to their credit. As for the plan to impose a worldwide tax on foreign exchange, devised by economist James Tobin, that will founder on the interests of the rival capitalist empires.

The only real alternative to the poker game — in which our jobs and incomes are the stakes — is an economy that operates on principles totally opposed to those driving imperial capitalism: planning instead of market chaos, social need instead of private greed and collaboration and cooperation instead of the frenzy of the traders.

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