Immanuel Wallerstein

Currency War? Of Course

Currencies are a very particular economic problem. For currencies are the one true win-lose relationship. Whatever the merits of revaluing or devaluing a particular currency, these merits are only wins if others are losers. Everyone cannot devalue simultaneously. It is logically impossible and therefore politically meaningless.

The world situation is well-known. We have been living in a world in which the U.S. dollar has been the world’s reserve currency. This of course has given the United States a privilege that no other country has. It can print its currency at will, whenever it thinks that doing so solves some immediate economic problem. No other country can do this; or rather no other country can do this without penalty as long as the dollar remains the accepted reserve currency.

It is also well-known that the dollar has been losing its value in relation to other currencies for some time now. Despite the continuing fluctuations, the curve has been downward for perhaps thirty years at least.

The countries of northeast Asia – China, Korea, and Japan -have pursued currency policies that other countries have criticized. Indeed this is the subject of constant media attention. However, to be fair, it is by no means easy to establish the wisest policy at the moment, even from the selfish perspective of each country.

I consider the underlying issue simpler than the convoluted explanations of most policy analysts. I start with a few assumptions. The status of the dollar as the reserve currency of the world-system is the last major advantage that the United States has in the world-system today. It is therefore understandable that the United States will do what it can to maintain this advantage. In order to do so, it requires the willingness of other countries (including notably those of northeast Asia) not only to use the dollar as a mode of calculating transfers but as something in which to invest their surpluses (particularly in U.S. treasury bonds).

However, the exchange rate of the dollar has been steadily slipping. This means that surpluses invested in U.S. treasury bonds are worth less as time goes by. There comes a point at which the advantages of such investment (the principal advantage being that it sustains the ability of U.S. enterprises and individual consumers to pay for imports) will eventually be less than the loss of real value of the investments in the treasury bonds. The two curves move in opposite directions.

The problem is one which is posed in any market situation. If the value of a stock is falling, owners will want to divest before it becomes too low. But rapid divestment by a large stockholder can impel a rush to divest by others, thus causing even greater losses. The game is always to find the elusive moment to divest that is neither too late nor too soon, or not too slowly but not too fast. This requires perfect timing, and the search for perfect timing is the kind of judgment that quite frequently goes awry.

I see this as the basic picture of what is happening and will happen with the U.S. dollar. It cannot continue to maintain the degree of world confidence that it once enjoyed. Sooner or later, economic reality will catch up with it. This may happen in a five-minute shock or in a much slower process. But when it does, the key question is, what then happens?

There is no other currency today poised to replace the dollar as a reserve currency. In that case, when the dollar falls, there will be no reserve currency. We shall be in a multipolar currency world. And a multipolar currency world is a very chaotic world, in which no one feels comfortable because the constant swift shifts of exchange rates make minimally rational short-term economic predictions very precarious.

The managing director of the International Monetary Fund, Dominique Strauss-Kahn, is at the moment warning publicly that the world is plunging into currency wars, whose outcome “would have a negative and very damaging longer-run impact.” One real possibility is that the world may revert, it seems to me is already reverting, to de facto barter arrangements – a situation that is not really compatible with the effective functioning of a capitalist world-economy.

Caveat emptor!