Half Empty or Half Full?

A video from 60 Minutes opens with a fiber optic engineering manager happy to get a $9.25 an hour part-time retail job at Target.   The situation is tough all over the world and to solace the restless natives governments are looking to change the international currency regime to generate domestic jobs. The trouble is that what benefits one country creates problems for another country.  Beggaring your neighbor works only when there’s a neighbor who allows himself to be pauperized. This kind of zero-sum competition has been called the “currency wars”.


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The BBC explains how the game went sour. “Deficit countries, like the US and the UK, borrow from the rest of the world, so they can import more than they export. Surplus countries, like China, Japan and many other Asian countries, do the opposite. They lend to other countries to help finance their exports.”

Whoopee on the credit card is sweet while it lasts, but sooner or later things max out and so the US wants China to float its currency, which will make its exports more expensive and return jobs to America. The country needs to start earning money again to pay for the debts. Not surprisingly the Chinese have vowed to resist because their currency policies have transferred vast amounts of money to their elites. Unless the Chinese agree to give back some the options for countries like the US and the UK are either to reduce government spending — which will make Paul Krugman very unhappy  — or print money, which will lead to problems of a different sort.

Alan Kohler argues that the situation has benefited key constituencies so handsomely in both China and the West that they just won’t give it up.

there is something deeply fascinating, and more than a little disturbing, about watching four great American firms – Google, Microsoft, Amazon and Apple – battle it out to control the future of consumption while China fights to make sure it keeps making the things they invent.

The smartphone revolution has resulted in the world becoming “appified”, with some 350,000 apps and more every day, and huge wealth being amassed by the US firms behind it.

The smartphones are all made in China or other emerging counties with low exchange rates. They get the business because workers there don’t get paid much and have no purchasing power because of the way their governments artificially hold down the currency.

Those countries – or rather their governments – are also amassing huge wealth by skimming fat margins from the products that are manufactured there and exported back to the countries that invented them.

Apart from the slice that’s captured and banked by the elites and cronies in those countries, the money is recycled back into financial manipulation to suppress the currency.


The trouble is, somebody’s got to buy all these smartphones, and with the job situation so bad, the elites are feeling the pressure to do something and about the only thing they can try to do — short of dealing themselves out of a lucrative game — is to make the other country’s elites give up some pie. Good luck on that says Kohler.

It’s hard enough to keep your citizens employed and happy these days without exporting jobs to other countries whose currencies are cheaper than yours and whose carbon remains unpriced.

So the free market must be interfered with, or in the case of climate change not interfered with, in order to preserve domestic harmony at the expense of one’s neighbours’ domestic harmony. … So the US dollar has to fall to make those industries more competitive. And the Chinese yuan falls with it because the Communist Party government has enough cash to make sure that it does.

Will the G20 leaders be able to sort their way through this stuff next month and come up with a solution to the currency wars? Unlikely.

A V Rajwade argued that this marks the dead-end in a road which saw services grow at the expense of manufacturing in the West.  The ‘creative economy’ turned out to be at least in part based on credit. And now, with the credit running low, at the edge of the cliff, it is either jump or turn around and face the music. The search to find somebody else to push over the edge must be overpowering.


Nobel laureate Robert Mundell has correctly identified the impossible trinity: an independent monetary policy, a liberal capital account and managed exchange rates. The favoured fashion of the last three decades has been to give up the third. The problem is that this has a cost that the real economy has to bear, through lost output and jobs, or consumption. On the other hand, the better off and the financial sector benefit through trading profits in volatile currency markets, and short-term capital movements chasing speculative profits.

No wonder in the US (and the UK) the manufacturing sector and jobs occupy an increasingly smaller portion of the pie, which itself is not growing very fast. No wonder, again, that though until the beginning of the 1980s, the financial sector’s share in corporate profits was around 15 per cent, it had gone up to 40 per cent just before the crisis, even as the manufacturing sector’s share in GDP has fallen sharply. And the 40 per cent share of the financial sector still does not include profits made by hedge funds, private equity, trader bonuses (which are often up to 50 per cent of trading profits) and other beneficiaries of financial sector profits outside the corporate sector.

Visions of unsold wheat, wool and minerals danced in Australian Treasurer Wayne Swan’s head. “Australia would be a “major loser” if other nations turned to protectionism should the debate over flexible currencies fail to be resolved, Treasurer Wayne Swan has told parliament.”


“We don’t want to see this debate descend into another bout of protectionism – the race to the bottom,” he said on Tuesday. “Countries like Australia would be major losers if that was to occur in the global economy.”

As if Swan had a choice except to watch how the big boys played it out. Given a currency war it is hard to see how anyone could really “win”, except in comparative terms. In absolute terms everybody would lose. Yet maybe better that then to stop borrowing, or that state pension or that benefit for key constituences.  The recent French riots show that nobody takes anything away from the unions, even if there’s nothing left to take away.

A bigger slice of a smaller pie: that is how elites define their own success in the Third World anyway. Never mind if the pie shrinks to a fraction of its former size, so long as the favored few have most of it. For them life will remain sweet in gated communities, the party will go in Prince Prospero’s dark castle. That’s how it is in Zimbabwe; why not for the rest of the world? For California at least, there’s the consolation of dreams: wind turbines, solar panels and Green Jobs. Maybe they can sell some of windmills to the Chinese. No wait, they’ll make the windmills in China to start with.

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