There is growing instability in global currency markets. Since February, the dollar has declined more than ten percent against both the euro and the yen. But it has risen sharply against the currencies of Mexico, Brazil and several other countries.
The turmoil is above all a symptom of a deepening crisis of capitalism. Furthermore, the dollar’s decline against the euro and yen does not signal that European or Japanese producers are gaining strength against U.S. producers. For reasons discussed below, the dollar’s fall actually increases problems for the already-troubled capitalists of Europe and Japan.
To understand what is happening, it is important to keep in mind that the unfolding crisis of capitalism is one of “overproduction.” Even in the face of crying hunger, homelessness and other needs in the world and in the U.S., capitalist producers are drowning in “too much” food, “too much” steel-producing capacity, “too many” machine tools, etc. It is becoming increasingly difficult for capitalists to sell their commodities at a profit, and in some cases to sell them at all.
In the face of this “overproduction,” capitalists try to lower the sale price of their commodities in efforts to keep their factories from shutting down. Currency devaluation is one way to lower prices in export markets. Exports are vitally important for all major economies, including the U.S. economy, which is the world’s largest exporter, as well as Germany and Japan, the second and third largest, respectively.
The dollar is effectively the world capitalist currency. While trade is conducted in other currencies, the price of practically all commodities is first set in dollars, then converted at the day’s exchange rates.
Only the U.S. government has the power to print dollars, which are backed not by gold but by U.S. economic and military dominance. This dominance gives the U.S. considerable influence in regulating exchange rates, up or down. The Federal Reserve engages in extraordinarily complex calculations in estimating “optimal” dollar exchange rates against other currencies. Their main goal is to maximize U.S. profits. In addition, the Fed takes into consideration maintaining U.S. industrial capacity, not least for “national emergencies,” i.e., for war. This is desirable for profits as well.
“The dollar’s decline helps spur exports of U.S. goods by making them cheaper to buy overseas,” The Wall Street Journal recently pointed out. At the same time, the Journal explained, it will “raise the cost of buying foreign goods.” The rise of the euro and yen, on the other hand, will make it harder for highly export-dependent economies, including Germany and Japan, to sell their products. One result is to place enormous pressure on European, Japanese and other capitalists to try to preserve their profits, or minimize their losses, by cheapening “their” labor.
What is extraordinary is that for several months now, the Japanese government has been engaged in a desperate effort to devalue the yen, in good part to boost exports. The recovery of Japanese profits, economists have pointed out, “is enormously dependent on export earnings.” According to a recent Business Week, the Bank of Japan has been busy printing money, increasing the money supply at a 36 percent annual rate in April and 29 percent in May. In the past month, the Bank reportedly spent tens of billions of dollars – dollars it can ill afford – in efforts to keep the yen down against the dollar. No success.
Capitalism’s current terrible “race to the bottom” may now partly express itself through successive competitive currency devaluations. Reports are that the Federal Reserve is hoping for a controlled 20 percent devaluation of the dollar against the euro and yen. But this “race” could spiral out of control, in part because of the scale of “overcapacity” worldwide and huge speculation in currencies. If that occurs, this could “pollute” the lubricating fluid that currencies form in trade, causing world trade to contract sharply.
The price of gold provides an unusual insight into the situation. The cost of finding and producing gold has reportedly fallen to below $40 an ounce in some regions. Yet the price of gold on world markets has climbed 15 percent since the beginning of the year, to $325 an ounce. This is practically an investors’ vote of no-confidence in currencies.
The crisis of “overproduction,” and the associated speculation, is beyond the power of the capitalist class to control. Only the working class, leading all oppressed classes, can end this crisis permanently. To do so, it must take power and reorganize the economy to meet human needs, not for profit. In turn, the struggle today to meet those needs, including for quality and affordable housing and for good jobs for all, points the way forward.
The author can be reached at firstname.lastname@example.org