Capitalism’s currency craziness

Philip Ferguson The Spark August 2006

Every few months exchange rates feature as a point of discussion about the state of the New Zealand economy.  For many people it must seem odd that both a “high” and “low” New Zealand dollar are presented as problematic.  What is going on?  Does it really matter?

A few months ago there was a flurry of concern by economic writers and commentators about the NZ dollar being too high.  In mid-February the NZ dollar was trading for around 66 American cents.  This meant that a New Zealand product with a sale price of $100 would sell in the US for $66.  This was said to present a problem for exporters since the “higher” the NZ dollar, the more US consumers would have to pay and the less competitive New Zealand products would be in the highly lucrative - and highly competitive - huge American market.  If the currency of another country producing the same or similar products was “lower” than the NZ dollar it would be cheaper for American importers and consumers to buy those.

High bad, low bad

On the one hand a “high” NZ dollar is good for New Zealand importers and consumers.  It means we have to pay less for imported goods.  But this, too, can be a problem as a “high” NZ dollar can help stimulate a tendency to import more in dollar terms than is exported.  There may be a flood of imports into New Zealand which takes money out of the New Zealand economy and also leads to balance of payments problems.

At the start of August, a NZ dollar is around 61-62 US cents, and the talk of the NZ dollar being “too high” has abated.

This is good for exporters, since it makes New Zealand products cheaper and more competitive in the huge American market and elsewhere.  On the other hand, it’s not so good for importers since they now have to pay more for what they buy in the US (or elsewhere if they are buying in American dollars).  Also the lower the NZ dollar sinks the harder things can be for workers and the poor as so much of what most New Zealanders purchase is imported.

Isn’t it crazy that neither a “high” nor “low” NZ dollar is good for the economy as a whole and for everyone?

Currencies reflect state of overall economy

The state of a national currency normally reflects the health of a country’s economy, although in recent decades there has been a strong tendency by governments to manipulate currencies to make up for the anarchic state of the global capitalist order.  For instance, for many years the British government kept the British pound artificially high to mask the decay of the British productive economy and Britain’s overall decline on the world stage.  When the government lifted its protection of the pound in the early 1990s, the pound plummeted.

After WW2, with much of the rest of the developed capitalist world in ruins, the United States was the dominant economic power.  US industry and commerce ruled the capitalist world and the dollar was the global currency of exchange, against which other currencies were aligned under the Bretton Woods agreement of 1944.  Other governments agreed to peg their currencies in relation to gold and the US dollar (with the US having most of the gold reserves as well).  The end of the postwar boom and the decline of the US economy in relation to countries like Germany and Japan meant that by 1971 this set-up could no longer be maintained and the Bretton Woods system collapsed.

National economic rivalry came more and more to the fore.  It was every capitalist economy - and every currency - for itself.  The relationship between the dollar and the yen changed dramatically, for instance.  Whereas at the end of WW2 an American dollar was worth over 300 yen, by the early 1990s it was worth just over 100 yen.  As one of the smaller and more vulnerable capitalist economies, New Zealand was hit dramatically and the fourth Labour government finally carried out a massive devaluation in 1984, wiping out hundreds of millions of funds held in NZ dollars.

Again, this seems crazy since these were actual funds which many New Zealanders had saved or created through their work, yet now were gone altogether as if neither the funds, nor the work that created them, had ever existed.

At the same time, the impact on people’s living conditions and livelihoods was entirely real.  Workers, in particular, found themselves much worse off economically.

Speculation and manipulation

The fact that the world economy operates through diverse and competing currencies also opens up all kinds of speculative and manipulative possibilities for making money, at the expense of the overall health of the economy.  Take the case of arbitrage.

Exchange rates vary between different countries and it is possible to take advantage of this.  Say in London ten British pounds are trading for twenty American dollars which in turn are trading for 2000 Japanese yen, but in Tokyo 2000 yen are trading for £12 and $20 American.  Converting the American dollars into pounds in Tokyo and then the pounds back into American dollars in London will turn you a nice little profit.  In this example of arbitrage if you started with $US100 million then, overnight, you could convert this into $US120,000,000 - a $US20,000,000 profit.

And if you have a vast fortune to play around with, you can simply divert it into buying shares, foreign currency and so on, all without contributing anything whatsoever to growing the global economy in real terms, let alone improving the economic conditions of the vast section of the world which remains without even many of the basic necessities.

These kinds of economic activities mean no new goods have been created, but a profit is turned because of the vagaries of the currency markets.  While there is no increase in actual products, let alone productivity, the $20 million profit made in the arbitrage example above is real enough.  But, somewhere along the line, that real profit has to be paid for out of the productive economy - the economy where new value in the form of actual commodities, whether goods or service, are created.

In this case, the parasitic economy, which is a fundamental part of the operations of capitalism - and more so today than in the first century of industrial capitalism - has sucked money out of the productive economy.  The overnight $20 million profit a wealthy person has just made from arbitrage, because it has to be paid for out of the real economy, is $20 million not invested in producing food for the hungry and better machines and technology to improve life for all.  And, these days, billions and billions are invested in such parasitic activity.

Under capitalism, of course, it is the profit motive which drives economic activity, so it makes sense for the rich to make money from the parasitic economy and to speculate in exchange rates, future commodity prices and just about anything else they can.

Profit versus human need

At the end of the day, currencies and money are just pieces of paper.  But the turbulent, unplanned nature of the world capitalist economy leads to dramatic shifts in the relationships between these pieces of paper from different countries and these mere pieces of paper actually have significant impacts on people’s lives, especially for people in the Third World - on what they can afford to buy to eat, to clothe themselves, to pay for shelter, indeed just to live.  Thus a blip on the currency market in New York, London or Tokyo can kill people in Africa.

Increasingly, blips in exchange rates affect workers in the First World too.  We may not die - yet - but our standards of living are certainly affected by the turbulence of currencies brought about by the unplanned nature of economic life in a capitalist world.  It is one of the craziest aspects of capitalism today that currencies - pieces of paper - rule over actual human beings and worsen our conditions of life.

How much more sane it would be to have human beings rationally plan the global economy, producing and distributing goods and services on the basis of human need.

3 Responses to Capitalism’s currency craziness

  1. Andrew says:

    Your currency arbitrage example is a lovely thought by would in reality rarely, if ever happen. I will give you $1000 right now if you can show me a triangular arbitrage that would make me 20% in a triangular transaction. If that were the case everyone would be doing it all the time, hell you would be doing it right now.

    In reality, these examples can exist through market imbalences, though we are talking about a few percetage points, not 20%. These loopholes rarely exist for long and exposure to market risk means that as currencies fluctuate the deal can go bad as well as good.

    There are people, however that make a heck of a lot of money with trades like these, but all i am pointing out is that you make it all sound so easy when in fact is is very complex and many people loose millions as well as make millions from it.

  2. Paul Drake says:

    Andrew; currency speculation or arbitrage turns over huge amounts of capital to the very few (thank god) who know how to work the currency exchange system. Such people are George Soros and our very own John Key.
    Soros has admitted to revealing a very dangerous flaw to this system.

    What Philip was talking about makes a lot of sense, Marx teaches that the basic value of all goods especially manufactured goods is the basic value of labour + the value of the raw materials and overheads etc.( In capitalism that includes profit)

    Therefore (correct me if I am wrong) the sum total of the above values decides the value of those currencies it has to because why are currencies at differing values in the first place?

    Apart from arbitrage (also by means of arbitrage) capitalists are always chasing countries with cheap labour and cheap currency in which to invest. In this country we all know the capitalists who go off shore to invest in the the cheap labour market causes many of the closures in our facturies.

  3. Paul Drake says:

    I pressed the submit button too soon! The above mentioned exposes those activities known as “free trade” to be an absolute lie some poor bastard is paying with hard labour.

    What I would like to discuss on this post is the idea of a global currency and a fair basic wage set in that currency. What would happen to foreign investment and currency speculation?

    Paul D.

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