Dollar Hegemony Post-Brexit

“Experience, however, shows that neither a state nor a bank ever have had the unrestricted power of issuing paper money without abusing that power” — David Ricardo

Markets were spooked by the Brexit — the value of the British pound sterling plummeted relative to the dollar, yen, and gold. Gold soaked up pound losses leaping in one week from 1260$ per troy oz to 1340$. Gold is now up 25% on the year. Why these effects?

Brexit may be the beginning of the end of the international monetary system created 40 years ago. It is uncertain how far Europe will descend into xenophobic ethno-nationalism. Brexit surely puts the unity of the United Kingdom at risk as well as the unity of the eurozone. Italian banks are already on the brink. The British economy will likely enter a recession that will have more or less damaging effects globally — a seemingly self inflicted wound born of despair.

The sterling, the dollar, the yen, and gold are all forms value takes when expressed as the universal equivalent — money. Money expresses the relative value of a commodity to other commodities by quantifying it. The value of the commodity is the amount of socially necessary labor time necessary for the production of the commodity at the time of sale. Socially necessary labor time is determined by the skill of the worker and the power of the tools she commands in the labor process. In other words, value is determined by the level of development of the productive forces — the determinant of labor productivity.

So, money is a commodity. Over time, during the course of trade, societies decide on which commodity will become the universal equivalent, ie., money. In prisons cigarettes, stamps, and bags of potato chips have played this role — when one commodity can be exchanged for any other it is money: the universal equivalent. Historically, salt,cows, and cords of wood have traded as money. Gold and silver have been used as the money commodity most extensively (money has functions like storing value over time so it can’t be prone to rot or rust and it needs to be divisible and quantifiable to function as a unit of measure: precious metals play these roles well; a bag of chips is not divisible and is perishable; chips could only work as money in situations like prison where the money commodity is esteemed as much for its use-value, in this case, a snack, as for its exchange value — so many bags of chips will buy a book).

The money-commodity’s value is determined the same as any other commodity, by the labor time required for its production.

Today’s money, say the dollar, the pound or the yen, is printed by governments. This money sometimes, derided as “fiat money,” has no intrinsic value. It is a form of debt (an IOU that can be traded but never redeemed because there is nothing behind it but faith in god and country). Its value is determined, most importantly, by its value-relation to other currencies, its purchasing power (relation to other commodities), and the quantity of money in circulation.

The central bank (in the U.S. the Federal Reserve) attempts to control the quantity of money in circulation through its policies, most notably the interest rate which is said to set the price of money. Central bank’s manipulation of interest rates is a mechanism of price control currently favored by global capital. Control over the price of money. Manipulation of money’s value is the only price control practiced by all contemporary states. To manipulate the price of money a fiat currency is necessary.

By lowering interest rates central banks aim to increase the supply of money and thereby cheapen the value of the currency and lessen its buying power relative to all other commodities: i.e., inflation. Controlled inflation is the goal of central bank policy. Inflation allows indebted governments to monetize the debt (pay it back in currency worth less than the value of the currency at the time the debt was taken on) and to increase revenue through taxation. If instead of inflation an economy had deflation (generalized lowering of prices) governments cannot tax the gain in living standards achieved when wages stay the same and prices fall. And more importantly the real value of government debts would increase as the debt is repaid in currency whose relative value has increased.

Central banks are officially targeting a 2%-3% rate of inflation. When the target is met interest rates are raised in order to keep inflation from turning into hyper-inflation where prices rise out of control and the value of the fiat currency plummets in a vicious cycle as confidence in the currency’s buying power evaporates — Venezuela, Zimbabwe, and Syria are countries currently facing hyper-inflationary crisis as confidence in those states and economies weakens.

In the 1970’s the United States was so indebted by Lyndon Johnson’s “guns and butter” policies (war on Vietnam abroad, and social programs at home: Imperialist-socialism) that by 1972 Nixon was forced to abandoned the gold standard effectively devaluing the dollar bringing the U.S. to the brink of runaway inflation evaporating confidence in the currency and country. At the time $35 traded for one oz. of gold. Today it takes $1340 to buy an oz of gold. The currency has been massively debased. The infamous war criminal Henry Kissinger, in his role as Secretary of State, checked the hemorrhaging brought on by the closing of the gold exchange and negotiated with Saudi Arabia to establish the “petro dollar” whereby oil on the international markets would be priced in dollars. In exchange the U.S. would guarantee the security of the house of Saud. This arrangement helped ease the crisis of confidence and remains in place to this day underpinning the dollar and the dollar’s hegemony. The agreement is also under pressure as most 21st terrorism from Al-Qaeda to ISIL originates with Saudi Arabia.

In 1976 the “Jamaica Agreement” formally did away with the gold standard and established the system of floating exchange rates between international fiat currencies This is the origin of our current system. It has been significantly destabilized by the great recession of 2007–9 and now Brexit.

In 1979, Carter appointed Paul Volcker chair of the Federal Reserve and under Volcker the Fed raised interest rates dramatically: nearing 20%. This move caused a recession but it wrung inflation out of the economy by pulling excessive currency out of circulation. It was the opening salvo of the neoliberal epoch. Although, neo-liberalism is often characterized as the end of Keynesian policies and the return of laissez faire capitalism by pundits on the left, financial capital never relinquished control over the price of money. This is known as monetarism. It allows the banks to set the price of money… it is no different than allowing the trade unions to set the minimum wage.

The current monetarist system of fiat currencies and floating exchange rates is now 40 years old. Brexit may be the beginning of the end of that arrangement. Monetarism allows governments, especially the United States because of the dollar’s role as the reserve currency, to borrow without limit because although bonds must be sold to underwrite the printing of new money the banks that make up the Federal Reserve System do a lot of the buying. Indeed, U.S. government debt is considered a “safe haven” for idle capital. This momentarily unlimited ability to borrow and print money is the fuel supply of the U.S. war machine and buttresses the viability of the current international order.

International government debt, so-called “sovereign debt,” now stands at over 60 trillion dollars collectively and 11 trillion of that debt yields a negative return. An obviously absurd number that cannot possibly be re-paid.

The interest payments on this debt can only be managed if interest rates stay low. Sovereign debt, like all debt, is a claim made on future surplus value production. The past’s stranglehold on the future. If the debts are not wiped away in crisis they smother the next cycle of prosperity. The solution to the 2008 crisis was to protect the creditors by keeping the debts on the books and so we have had only a tepid recovery since. The solution to the last crisis will act as destabilizing accelerant in the coming crisis.

Sovereign debt is the last bubble of monetarism and the current international monetary system. The price of gold is rising because the value of the fiat currencies it is priced in is falling. The value of gold is stable; although it seems like value of gold is rising this is actually the consequent of a drop in the value of fiat currencies. Central banks respond to economic crisis by “providing liquidity” — printing money. This tactic has prevented a severe crisis thus far and has provided some stability following the great recession. But more money printing won’t cut the mustard in a sovereign debt crisis. Indeed, money printing caused the crisis to take the form of sovereign debt bubble.

The Bank of England has promised to respond to the coming crisis with more money printing and lower interest rates. The poison is in the medicine.

Underlying the crisis is the falling rate of profit which is an expression of rising labor productivity. This is apparent not only in our day to day experience of rapid technological innovation but in the low rate of interest. As Ricardo noted: “It is so with respect to the interest for money; it is not regulated by the rate that the bank will lend, whether it 3,4, or 5 per cent., but by the rate of profits which can be made by the employment of capital…” Mainstream economics, or neo-classical economics, registers the falling rate of profit as a fall in productivity. This somewhat absurd conclusion in the face of obvious rapid technological innovation is the intellectual outcome of a faulty theory of value and price.

It has been noted that Trump’s campaign parallels Brexit with similar opposition to the free movement of labor as its centerpiece. A Trump victory in November would be Brexit qualitatively multiplied and would likely put the current monetary system and dollar hegemony in existential jeopardy. It is the same lunacy animating Brexit writ large. The candidacy of Donald Trump whose battle cry is “build the wall” perfectly captures the absurdity: the country that wrote the rules of the global system and gave itself every advantage now wants to take its ball and go home crying that the rules are unfair: that is the sorry and twisted state of the racist, xenophobic mind.

Brexit puts the European Union in jeopardy while a Trump victory would do the same for the global monetary system. Just as Brexit has shrunk Britain’s influence on global affairs and brought the country to the brink of recession if not ruin a Trump victory would likely mark the beginning of the international order’s crack up. It is also exemplary of the precarious state of the global monetary system. That a Trump victory seems unlikely is cold comfort for a system that is just one good shock away from collapse.