At the IMF, Japan, Korea, Brazil, Thailand, Rebel Against Globalized Hot Money Speculation Stoked by Bernanke’s QE2; Capital Controls for Self-Defense Gain Ground

Webster G. Tarpley
October 13, 2010

The just concluded fall session of the International Monetary Fund and World Bank may in retrospect mark the beginning of the end of the post-1990 world system based on financial globalization and the unbridled supremacy of speculative hot money flows. Meeting in Washington, the representatives of 187 countries utterly failed to reach any agreement reaffirming the discredited “Washington consensus,” which has functioned as the charter of the world looting and exploitation under the banner of globalization for the last two decades. They punted, and passed the buck to the IMF, which is almost certain to get nowhere. The death-knell of globalization may already have sounded.

The immediate perspective is that more and more countries will now manage their currencies and institute capital controls as a means for defending themselves against massive speculative influxes of hot cash, in particular from the notorious Federal Reserve 0% dollar carry trade. Capital controls allowed Malaysia to fare better than any other country caught up in the “Asian contagion” crisis of slightly more than a decade ago, so there is reason to believe that the current popularity of capital controls will be a modest step in the right direction. However, the beginnings of a real and permanent solution to the current world economic and financial depression require a restoration of the fixed currency parities and narrow bands of oscillation which characterized the Bretton Woods system of 1944 to 1971. A restoration of the positive features of Bretton Woods is now the concrete goal towards which international negotiations should now be directed, starting at the G20 meeting soon to be held in South Korea. National Tobin taxes to discourage speculation and aid distressed budgets should also be enacted.

The stage for this current crisis was set last May when the Anglo-American attack on the euro, designed to provoke a panic crash of that currency, broke down — partly due to German self-defense, partly because of Chinese intervention, and partly because a high-frequency attack on the euro boomeranged against the Dow in the infamous “flash crash” of May 6. Since then, the euro has been steadily gaining ground, while the US dollar has lost about 13% of its value since mid-June. The forces of depression, represented by $1.5 quadrillion of kited, toxic, and bankrupt derivatives centered on New York, have been re-asserting themselves against the battered US greenback.

If smashing the euro was one prong of the Anglo-American game plan, then driving the Chinese renminbi up into the stratosphere was the other prong of an ongoing attempt by London and New York to export a world depression by beggaring their leading rivals in Frankfurt and Beijing. The attack on China had been speaheaded by the feckless Tiny Tim Geithner, so it is not surprising that the Chinese have largely ignored US demands, limiting the rise of the renminbi to just a couple of percentage points since the last bilateral confrontation in June.

Will Helicopter Ben Bernanke’s QE2 Become the Titanic?

In the meantime, the US dollar has been falling relentlessly. Helicopter Ben Bernanke has been promoting an extensive public discussion of his plan to inject about $1 trillion of fresh liquidity into the US financial system under the slogan of Quantitative Easing II (or QE2), and this has added even more to the downward pressure on the US currency.

The Chinese renminbi remains closely pegged to the US dollar. This means that when the dollar goes down, China — the world’s largest exporter — goes down with it, giving Chinese exporters a significant price advantage over competitors in Japan, Korea, Malaysia, Indonesia, the Philippines, and elsewhere, causing acute distress in these countries.

On September 15, the Bank of Japan surprised the world by unilaterally dumping large quantities of yen in a bid to prevent the Japanese currency from continuing to rise against the dollar. This was the first such exercise by the Japanese in more than six years. But the dollar is now so weak that the yen has continued to rise, hitting a new 15-year high against the dollar last week.

About 10 days before the IMF meetings, Brazilian Finance Minister Mantega warned of an imminent “currency war.” In reality, the currency war has been waged by the Anglo Americans against the euro and the renminbi for about a year. Brazil has for its part already imposed a special tax on bonds owned by foreigners, and measure aimed at discouraging the influx of foreign cash.

Capital Controls Are Back in Vogue for 2011

It is now thought that Thailand may be preparing more comprehensive capital controls than have yet been seen in the current phase of the crisis. According to one account, ‘Wongwatoo Potirat, director of the Bank of Thailand …said the Thai central bank was considering restrictions on fund flows to try to manage the baht.” The Reserve Bank of India was reported to be ‘looking at ways to deal with the “potential threat” of inward capital flows.’ India, threatened by hot-money inflation imposed by foreign speculators, was thus also considering protectionist self-defense measures.1

One central tenets of the theory of globalized finance is the international speculative hot money flows are sacred, and must be neither limited nor taxed. A worldwide revulsion against this oppressive concept is one factor helping to produce the apocalyptic rhetoric being dished out by the international financier bureaucrats. World Bank boss Robert Zoellick grimly commented: ‘”If one lets this slide into conflict, or forms of protectionism, then we run the risks of repeating the mistakes of the 1930s,”… Zoellick said history shows “beggar thy neighbor” policies don’t work, and suggested international agencies such as the IMF and World Trade Organization could help manage currency tensions before they erupt into something more damaging.’2

“Beggar my neighbor” goes back to the policy of competitive devaluations used to enhance exports by various nations during the world economic depression of the 1930s. The country which pioneered these competitive devaluations was Great Britain under Ramsey MacDonald, after the fateful decision of the Bank of England to default on gold payments and destroy the only functioning monetary system the world had, on September 21, 1931. “Beggar my neighbor” meant the attempt to shift the consequences of depression on to other countries, and in 1931 the main victim of the British was the United States, where panic runs on the banking system began in 1932 and reached an apex in March of 1933, when every bank in the country shut down on the eve of Franklin D. Roosevelt’s inauguration. In the words of an American economist, “Hardly had Ramsay MacDonald stopped sobbing over the international radio that Britannia should not be forced to sacrifice her honor [by defaulting], than he began to smile broadly because the fall of the pound gave her marked advantage in exports.”3 Competitive devaluation became a big issue in the fall of 1931, then as now about 2 years into the unfolding of the world depression.

The Twilight of Globalization: Good Riddance!

If countries now begin to view their currencies as potential weapons, Strauss-Kahn warned, “catastrophe” may be the result. What the IMF boss regards as a catastrophe may actually significant positive potential. In reality, the world may be going beyond mere competitive devaluations and competitive dirty floats into the era of competitive capital controls. The tendency is already very widespread, noted Bloomberg with alarm: ‘Some forms of protectionism may already be on the rise. Ukraine’s Deputy Premier Serhiy Tigipko said in an interview in Washington that his country may follow South Korea, Poland, Brazil and other emerging markets in introducing capital controls to prevent short-term investments from fueling currency volatility. India may also intervene to “prevent the disruption of the macroeconomic situation,” Reserve Bank of India Governor Duvvuri Subbarao told reporters.’4

On the eve of the IMF meeting, the Anglo-American finance bosses and their international minions orchestrated a veritable chorus of China bashing, led of course by Tiny Tim Geithner. Canadian Finance Minister Jim Flaherty asserted that the main purpose of this year’s IMF session was to “re-assert free trade” at all costs — not at all the view of most of the world. Strauss-Kahn told Le Monde that “…China will need to accelerate the appreciation process.” Luxemburg Finance minister Jean-Claude Juncker, the chairman of the eurozone finance ministers’ group, reported after a failed attempt to coerce the Chinese into up-valuing their currency: “There’s a divergence of analysis between the Chinese authorities and the European authorities… we think the Chinese currency is broadly undervalued.”

A revealing attack on China was issued by top speculator George Soros, who wants the Chinese to take responsibility for reforming the world monetary system at their own expense, all in order to benefit London and Wall Street. Soros takes aim especially at the dirigistic mechanisms the Chinese have been using to maintain their 10% annual growth rate, while the Anglo-Americans stagnate: “The prevailing exchange rate system is lopsided. China has essentially pegged its currency to the dollar while most other currencies fluctuate more or less freely. China has a two-tier system in which the capital account is strictly controlled; most other currencies don’t distinguish between current and capital accounts. This makes the Chinese currency chronically undervalued and assures China of a persistent large trade surplus.”

Soros blames the looming currency war solely on the Chinese: “China’s dominant position is now endangered by both external and internal factors. The impending global slowdown has intensified protectionist pressures. Countries such as Japan, Korea and Brazil are intervening unilaterally in currency markets. If they started imitating China by imposing restrictions on capital transfers, China would lose some of its current advantages.”

Soros, like Strauss-Kahn and Zoellick, shares the prevailing Götterdämmerung mood: “The chances of a positive outcome are not good, yet we must strive for it because in the absence of international cooperation the world is heading for a period of great turbulence and disruptions.”

Soros also expresses the rage of the Anglo-American financiers against China’s actions in support of the euro back in May and June: “Earlier this year when the euro got into trouble, China adopted a wait-and-see policy. Its absence as a buyer contributed to the euro’s decline. When the euro hit 120 against the dollar China stepped in to preserve the euro as an international currency. Chinese buying reversed the euro’s decline.” 5

China to US, UK & Co.: Back Off

The Chinese prime minister Wen Jiaobao, fresh from his clash with Juncker, issued a clear warning on the eve of the IMF gathering, rejecting the entire Anglo-American position. ‘”Do not work to pressurise us on the renminbi rate,” Mr. Wen said, departing from prepared remarks. He said Chinese export companies had very small profit margins, which could be wiped out by actions such as the currency import tariffs the US Congress is threatening to impose. “Many of our exporting companies would have to close down, migrant workers would have to return to their villages,” Mr. Wen said. “If China saw social and economic turbulence, then it would be a disaster for the world.” Mr. Wen’s comments come a day after a trio of leading European Union officials, including Jean-Claude Juncker, chairman of the eurozone group of finance ministers, were politely rebuffed when they asked China to allow the renminbi to appreciate faster.’6 Wen knows or should know that the internal destabilization of China is one of the main goals of the Anglo-American policy, which has never given up on the idea of a color revolution or CIA people power coup inside the Middle Kingdom.

Support from China came from the other BRIC nations, notably from Russia: ‘‘Brazil, Russia, India and China will put up “strong resistance” to attempts to make a “harsh appraisal” of currency controls at the annual meeting of the International Monetary Fund and World Bank in Washington, Deputy Finance Minister Dmitry Pankin told reporters…. A free-floating exchange rate isn’t itself a cure for all ills,” Pankin said.’7

Forces inside the Russian government were also attempting to roll back the doctrinaire free-market line of the Russian Central Bank: ‘The central bank’s shift to a free-floating ruble is a “dangerous policy for the economy,” because a more flexible exchange rate may undercut Russia’s competitiveness, Deputy Economy Minister Andrei Klepach said Oct. 6. “Russia isn’t fully ready” for the free-float regime now, he said.’8

Plaza, Louvre, Crash of 1987

Zoellick was open to some kind of multilateral effort to head off “protectionism” and perpetuate the rigged “free market.” Press accounts referred to the Plaza and Louvre currency agreements of 1985 and 1987. The Plaza deal, engineered by James Baker III, was an attempt to bring the US dollar down from the very high level it attained as a result of Fed boss Paul Adolf Volcker’s lunatic 22% prime rate. Bringing down the dollar was the easy part. When the decline of the greenback began to gather alarming momentum, the Louvre accords attempted to apply the brakes and stabilize the dollar. The Louvre policy, especially as applied by the Greenspan Fed after the middle of 1987, led directly to the Wall Street stock market panic of October 1987. It is easy to see why those who remember these events would be reluctant to embark on a repeat performance.

Return to Fixed Parities

As usual, US monetary policy is about as insane as can be. Right now, the de facto fixed parity between the dollar and the renminbi is the one major island of stability in the chaotic world of universal floating rates. The current crisis is proving once again that the floating rate system is inherently unworkable and not viable as a way to organize the monetary affairs of the globe. A rational policy would be to develop a system of fixed parities and narrow bands of oscillation for the euro, the yen, the ruble, and other currencies in relation to the dollar-renminbi tandem. Capital controls, along with the Tobin tax at the national level, should be seen as a useful tool for suppressing speculation during the transition to a fixed parity system of the 1944-1971 type. These measures would have to be agreed to at a world monetary conference, a real second Bretton Woods. In the process, the US would require a modest protective tariff to make up for decades of free trade sellouts as the buyer of last resort..

Hamiltonian Dirigism Rules

The Chinese experience shows that fixed parities are a good thing. Chinese exporters have benefited from a managed currency, in particular through the certainty and predictability of forward exchange rates over a six and 12 month time horizon. China’s capital controls have protected the country from the plague of speculative hot money. China enjoys the benefits of a significant state sector, which accounts for a large part of Chinese banking in particular. The 2008 Chinese stimulus of about $580 billion, in proportion to the Chinese economy, was 10 or 15 times larger than the inadequate Obamas stimulus of February 2009. The money was used to build fast rail and nuclear reactors, not prop up derivatives. Countries that wish to imitate China’s economic success will increasingly have recourse to what may appear today as Chinese methods. In reality, these methods are very much in the tradition of Alexander Hamilton-Henry Clay economic dirigism of the American System of Political Economy. The key words are protectionism, dirigism, and mercantilism.

It should be noted that the U.S. Constitution rules out any notion of a “free market” by explicitly giving the US federal government the power to “coin money and regulate the value thereof.”9 This directly contradicts the absurd Austrian fetish that the value of a currency must be left to the dark forces of the mysterious “free market,” who are in reality easily identifiable cartels, monopolies, and oligopolies of predatory intent.

Countries that continue to reject American System dirigism, the most successful economic school in world history, thus do so at their own peril in the current world economic depression.

1 Financial Times, October 6, 2010.
2 “IMF and World Bank call for cooler heads on currencies,” Reuters, October 8, 2010.
3 Broadus Mitchell, Depression Decade, p. 14, in Against Oligarchy, tarpley.net.
4 Simon Kennedy and Sandrine Rastello, “Finance Chiefs Fail to Resolve Currency Spat as G-20 Splits,” Oct. 10, 2010, http://www.bloomberg.com/news/2010-10-10/global-finance-chiefs-fail-to-resolve-exchange-rate-spat-as-g-20-splinters.html
5 George Soros, “China must fix the global currency crisis,” Financial Times, October 7 2010.
6 Financial Times, October 6, 2010.
7 Bloomberg, October 8, 2010.
8 Bloomberg, October 8, 2010.
9 Article I, section 8, emphasis added.
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