This article is part of Pandemic, Panic, and Recession an analytical chronicle of the events and consequences that the Covid-19 pandemic will cause in the global political economy. Comments will be published in a subsequent compendium.
Just as in geopolitics the Cold War paradigm remains a ghost that haunts the brains of the living, when it comes the time to understand the operation of the international monetary system the paradigm of the gold standard on the one hand and inorganic money on the other haunts the brains of the living by preventing understanding the factual dynamics of the capitalist world-economy. The paradigms of the gold standard and the metaphor of inorganic money are easily positioned as common sense because they have the simplicity of the concept-image, however, they are not as useful in accounting for reality. In this comment, we will roughly discuss how the international monetary system works in fact.
From the right of the political spectrum, the governments of the peripheral and semi-peripheral countries are often asked for fiscal discipline so that they do not see the need to monetize the deficit, causing an increase in inflation. For its part, from numerous sectors on the left (influenced by a Keynesian view of the economic cycle) it is considered that the deficit stimulates growth by expanding the tax base, including tax collection. Also, the central countries are accused of spreading a doctrine that they do not practice themselves, placing the twin deficit of the United States as an unobjectionable sign. Criticism of the United States often falls into the commonplace of arguing that when they leave the gold standard, they issue dollars without backing. In most of these critiques, the factual analysis of the global economy is replaced by a normative sentiment structure that longs nostalgically for the gold standard focused on London’s private finances that it laid in the First World War and the Great Depression.
During the second part of the systemic cycle of US accumulation (post-1945), the international monetary system has gone through three stages: the gold standard agreed at Bretton Woods, the dry dollar standard post 1973/1982 and the FED-Treasury-Wall Street scheme that was born from the Great Recession of 2008. Regarding the first and second stages, we will limit ourselves here to saying that they were mechanisms conceived, in the first stage, to manage the industrial, military and financial supremacy with which the United States emerged from the Second World War and, in the second stage, to relaunch the financial phase of US hegemony after the signal crisis between 1973 and 1982.
Facing the subprime mortgage crisis and the consequent Great Recession, at the hands of Bernanke and Geithner, the United States applied the notebook of policies with which Japan had been dealing with economic stagnation since the 1980s: swaps (swap) of currencies between central banks, quantitative easing, “macro-prudential” regulation. Let’s focus, first, on how quantitative easing provides the liquidity that the foreign exchange swap distributes across the nodes of the global economy, and second, how this paradoxically strengthens rather than weakens US dominance over the global economy.
In all three stages of the international monetary system of the US systemic accumulation cycle, liquidity has been a problem. It should not be forgotten that the Cold War was largely the ideological cover of military Keynesianism as a strategy to fight against the recycling of liquidity. However, the specific difference of the American system with respect to its British predecessor provides the key to understanding its paradoxical strength. Under American hegemony for the first time in the long duration of historical capitalism, a State was able to internalize (nationalize) the international monetary system, granting it stability never seen before, in the long run the logic of state power balances the disruptive logic of incessant search short-term surplus value. The City of London-centered private gold standard launched the world into competitive devaluations and autarky precisely because it lacked the capacity to act in the name of capital accumulation as a whole.
The prerogatives acquired at Bretton Woods for the United States dollar as the world’s main reserve currency and store of value expanded the financial power that any hegemonic power had hitherto enjoyed. Flexible exchange rates as a mechanism of hierarchization of the global added value established with the dry dollar standard prepared the ground for the financial phase of the systemic cycle of US accumulation. The quantitative easing, finally, gave the US hegemony a third vital boost by registering the dollar, amid the structural weakness of its national economic base, the stamp “too important to fall.”
As Giovanni Arrighi has argued, the financial phases of the economic cycle are usually characterized in that the actors prefer liquidity and capital in the form of money. The key to the dollar’s power is that it is issued by the only institution on a global scale with the capacity to provide the liquidity that global value chains need on a systemic scale. How? Turning the public debt of the United States into an excessively attractive asset as a lever for the economic growth of other States, especially China and Japan.
The FED acts as the central bank of the global economy as a lender of last resort by being able to provide the liquidity demanded by the fictitious capital that swarms on the world’s stock markets in situations of financial panic. This demand increases the value of the dollar, which as collateral damage negatively affects the US current account, but further weakens the currencies of peripheral and semi-peripheral countries, centralizes large amounts of resources to central countries and weakens the value of long-term yields of the US public debt whose great accumulators are the Republic of China and Japan. Thus, the United States turns its financialization into a mechanism to maintain a precarious hegemony over the capitalist world-economy and deal with a de facto multipolar world.
In short, US federal government debt is too important an asset to the global economy by allowing, on the one hand, US (debt-financed) consumption bost the East Asian export industry and, on the other, t provides the liquidity that a global economy with great dependence on dollars in input-output chains needs in times of panic in high finance. Rather than issuing “inorganic money” or monetizing its deficit, with quantitative easing the United States acts as a hegemonic power in trying to stabilize the global economy rather than allowing monetary anarchy that led to the failure of the London-centered private gold standard. This being the case, the global health crisis caused by Covid-19 has exposed the complex dependencies in which the global economy is located, from North to South, from East to West.