Brian Holmes on Thu, 18 Jul 2002 06:50:03 +0200 (CEST)

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<nettime> Re: Deflation, anyone?

WRE Reynolds wrote :

>"Over $1 trillion in currency is traded each day. When the market is
>hopping, as it is right now, the value of those trades can exceed $2
>Actual requirements (for bank settlements and other tangible needs)
>rarely exceed $50 billion."

This is quite true: currencies are one of the major fields of 
contemporary financial speculation, as George Soros proved to 
everyone a few years ago, with his successful speculative attack on 
the British pound.

However, what appears to be happening right now is capital flight 
from the USA, which stands a good chance of being durable. The cause 
does not lie in currency speculation (and I didn't mean to suggest 
that it did), but in the deflation of the overvalued stock market. 
But I do think that in this instance, the changes in the key exchange 
rates between the three currencies of the Triad (yen, euro, dollar) 
do in fact reflect that capital flight. Time will tell about that.

>"The value of currencies is as speculative as those of stocks and do not
>reflect underlying economic realities. Witness the overvalued Asian
>currencies prior to their crash in the fall of '98, and their incredible
>devaluation (some by as much as 70 per cent) within a matter of days - a
>period when little changed in their economies, but when sentiment
>amongst traders changed dramatically."

Yes, and a similar kind of change in sentiment is happening now, 
primarily around the US stock market, or with the US stock market as 
the trigger. Of course, nothing particular in the productive base of 
the US economy has changed in the past few weeks - but then, that's 
not usually the problem in capitalist economies beset by financial 
speculation. My point was that the withdrawal of capital from the US 
stock markets, if it is durable even over the middle term, is 
different, in that it neans the crisis has finally come back to the 
center of capital accumulation. And it could lead to a deflationary 
trend for global capital, because of the unique position which the 
United States occupies: that is, as a heavily endebted nation which 
is simultaneously both a major market for world production and the 
undisputed center of the speculative economy that has attained such 
large proportions over the last decade. My question is whether any 
other financial center or mechanism can absorb the world's excess 
speculative capital, thereby staving off the outbreak of a classic 
overaccumulation crisis (where a proper fit can no longer be found 
between productive capacity and markets to buy it).

I think the Canadian example actually fits into this picture, or at 
least, doesn't disprove it:

>"Also witness the fact that the Canadian dollar has dropped almost four
>per cent in the past week relative to the US dollar, while Canada
>possesses the strongest economy (in terms of GDP growth) is the OECD,
>and has strong positive inflows of capital from the US and large and
>growing trade surplus with the US - both of which have been true for
>years and, in theory are sucking capital out of the US."

How has the US paid for its trade deficit over the last decade? Why 
has the world given the US such *credit*, literally, while the 
currencies of supplier countries have been losing value against the 
dollar, in many cases through competitive devaluations, and thereby 
encouraging further American purchases of their cheap products? The 
answer, I think, has been that the US has paid for all that, in an 
indirect way, by creating an extremely attractive stock market bubble 
(whose profit-making potential contributed to the long-standing 
overvaluation of the US dollar). Just as the entirely liquid Treasury 
bonds were a way to attract the world's speculative capital in the 
eighties, to pay for Star Wars, among other things, so the stock 
market in the nineties, pushed ahead by the communicative buzz around 
Internet technologies, played that role of capital attractor, pumping 
money into the US economy. And it must be understood that global 
capital and policy from the other Triad governments has encouraged 
this dynamic: capital wants to speculate in a booming stock market, 
and all the countries want a strong US consumer market to sell to, 
they all prefer to have their currencies a little weaker so they can 
sell more to the fat cats. If that house of cards can't be kept up in 
the air, if the US actually had to stop living in the red (I mean, 
with negative balances!), then you're talking about a massive change 
in the way capital is articulated generally in the world. One of the 
outcomes could be a deflationary trend, which could be accompanied by 
all kinds of other tensions in our societies. That's where the 
important political questions begin.

That said, I'm hardly a pro economist and I'm quite interested in 
finding out more about all this, so anybody who can improve or 
disprove my argument, go for it. Also, over the last ten years there 
have been several major crises, and each time the world financial 
system, led by the US, has found ways around them, while all the 
while pushing the stakes up ever higher. Won't it keep on doing this? 
It's anyone's guess - and you can be sure they'll certainly try to 
put another "fix" on this crazy system, which so often looks like 
it's spinning out of control.

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