Capital's Achilles heel?
I was almost right! Sort of.
I’d had an instinct that the dollar swaps the Fed was doing with 20 international banks had something to do with inflation. I wrote it about here.
I was definitely wrong that the swaps (which are currency derivatives using interest rates in foreign exchange markets as the underlying entity) would increase inflation.
But the other morning I listened to the Hidden Forces podcast, where the host had the CEO of the Institute for Supply Management Tom Derry talked about supply and COVID.
At around 48:00, Derry mentions that international finance is done mostly in dollars, and supply chains are staggeringly global. This means that most firms in the world do their credit deals using our currency.
If there’s a shutdown and these firms take losses, there’s demand for dollars–which makes the price of dollars go up (according to Derry). Value of dollar goes up, deflation. Value of dollar goes down, inflation. I want to do a post all about this soon.
In any case, if demand for dollars increases then so does its price. That’s why we get deflation (not inflation), or appreciation of the dollar. Thanks to Michael Kinnucan for helping me get this point straight.
And that’s why the Fed did these dollar swaps—pooping back and forth forever— so early on: to prevent dollar deflation, which is really bad for the US and global capital as a whole.
Capital getting unstable
One big threat of the Fed’s spending programs is inflation. If prices of everything go up then the capitalist mode of production’s stability goes haywire and, well, fascism is one kind of historical outcome from it. There isn’t really a risk of inflation.
But deflation is an issue:
Economists worry that a significantly heavy hit to the economy could depress demand so much that prices decline persistently across the board, encouraging consumers to hold off from making purchases – in the hope that they will fall further. The Fed’s aggressive action is designed to stop the U.S. slipping into this so-called deflationary trap.
But this has international consequences too. As Michael tells me on facebook:
A sudden spike in the value of the dollar is very bad for the global economy because it’s very bad for the many firms and countries that have dollar-denominated debt. If you’re a Japanese company with dollar-denominated debt but holding most of your cash in yen, and suddenly dollars go up / yen falls, then suddenly your debts got a lot bigger and you’re fucked, you could go bankrupt because you now need a lot more yen than you used to to buy the same number of dollars to pay your dollar-denominated debts.
So at least now we can point to one possible origin point for instability (either inflation or deflation): international finance. And things aren’t looking good internationally. The IMF says the global GDP will fall 3% (and that’s optimistic).
Michael Roberts actually pointed to this problem in the Global South in one post earlier in the crisis, and he’s got a new post that talks about the state of the global economy. He provides some details that point towards what Michael was saying:
More than 90 ‘emerging’ countries have inquired about bailouts from the IMF—nearly half the world’s nations—while at least 60 have sought to avail themselves of World Bank programs. The two institutions together have resources of up to $1.2 trillion that they have said they would make available to battle the economic fallout from the pandemic, but that figure is tiny compared with the losses in income, GDP and capital outflows.
Since January, about $96 billion has flowed out of emerging markets, according to data from the Institute of International Finance, a banking group. That’s more than triple the $26 billion outflow during the global financial crisis of a decade ago. “An avalanche of government-debt crises is sure to follow”, he said, and “the system just can’t handle this many defaults and restructurings at the same time” said Rogoff.
Stay international
In any case, socialists should keep an eye on inflation and deflation like everyone else. But we should particularly pay close attention to ‘emerging markets’ to be in solidarity with the international working class.
Capital is global and the crisis is global. Socialism was always about international solidarity across national borders, which ultimately benefit the ruling classes in our moment. Getting rid of classes, a key Marxist goal, will require crossing borders.
It’s totally understandable, but we’ve been focused a lot (maybe too much) on our own country. The ‘all’ in Medicare for All, for instance, isn’t really ‘all’. It’s people in the US. I have to do a better job of this too. It’s hard to stay international, but really important if we want to use the term ‘socialism’ with any legitimacy.
And looking at dollar inflation/deflation might be place to watch for capital’s Achilles-heel.