Tag Archives: world system

Can currency wars lead to real wars?

Are we in a potential inflationary moment?

Imagine the following:  China secretly buys up gold futures in the hopes of stockpiling a war fund to fight inflation caused by US ‘quantitative easing’.  If the US goes too far in trying to fund its stimulus by debasing the dollar, China triggers a crisis by buying up gold.  The ultimate statement of lack of confidence in the US dollar (which is the key currency for all international trade and capital reserves) leads to a catastrophic run on the dollar and a collapse of globalization as each country tries to ‘beggar’ its neighbour with cascading tit for tat devaluations.  In his book Currency Wars: The Making of the Next Global Crisis, Jim Rickards presents several scenarios by which the world could come to the brink of collapse as a result of governments’ efforts to manipulate their currencies, thereby stimulating their economies at the expense of their trading partners.  Indeed, it is not hard to imagine how the monetary underpinnings of globalization could easily come crashing down given the wobbliness of the top currency, the high level of US debt, and the lackluster response of the US consumer, traditionally the world’s growth engine, in recovering from the 2007 recession.  Indeed, one could argue that even a much less complicated scenario might lead to crisis:  what if China simply decided to use it’s so-called ‘nuclear option’ and stop buying US treasuries, triggering a cascading dive of confidence in the world’s reserve currency?  What if politics really did take over economics?

The alarmism over a coming hyperinflationary crisis appears to be growing, and it’s not without some foundation.  Fiscal stimulus appears to have met its match in the global system of monetary exchange, where politics and economics do not just interact, but essentially meld.  However, at least some of the alarmism should be taken with a grain of salt.  The calls for curbing the US fiscal deficit (quite apart from the debt) are at least in part motivated by an ideological discomfort with government’s influence on the market as well as a moral panic over Americans’ dependency and perceived complacency.  This view tends to see the world as a dangerous, zero-sum place where countries await any and every opportunity to force an advantage over their competitors.  However, economic competition is not exactly the same as political rivalry, and should not be equated.  While it is not impossible for countries to mutually try to obliterate each other (see the Great Depression) it is not likely given the availability of much more palatable options.

Economic and political 'wars' should not be equated
Economic and political ‘wars’ should not be equated

It is important to remember that unlike real wars, currency wars that result in hyperinflation are not really deliberate—they result from governments’ fumbling and lack of effort to cooperate or lead rather than from single-minded plans to dominate the world.   They are tragedies (or tragicomedies) rather than evils.  They are not so much caused by politics as by a lack of politics.  Because of the uncertain results of currency manipulation, it is a very blunt and unpredictable instrument of policy indeed.   As with nuclear deterrence, mutual deterrence is more likely than not to push countries to cooperate and to head off crises before they get out of hand.  Indeed, this is exactly what has been happening for the last (almost) 42 years.   The players may change, but the game will remain: keep the poker face on and ensure the world continues to have a world reserve currency with some usefulness to everybody.   The alternative is just too awful to contemplate.

Upside Down: A Post-Modern World System

In 1974, Immanuel Wallerstein argued that the world was composed of three types of economies: a core, a semi-periphery, and a periphery.  In the core countries, capital-intensive manufactured products with high levels of complexity and value-added were the primary source of national wealth.  In the periphery, labour-intensive primary resource industries were the main source of wealth.  The semi-periphery countries mediated between the twroller coastero, but all countries acted in accordance with the principles of the global capitalist system. What characterized the relationship between the three regions was the terms of trade among them: core countries accumulated wealth by extracting resources and labour from the periphery.  In the outskirts, raw materials were traded for machinery and technology. The semi-periphery managed the relationship between the other two, with a mixed economy based on trade.

Even though Wallerstein’s analysis was applied primarily to Western and Eastern Europe, no one had any illusions at that time about who constituted the core, and who the periphery.  At the commanding height of the world economy, the US was unrivalled as a trading powerhouse, the most efficient and competitive economy in the world, the driver and reference point for development for all countries (including the Soviet Union, the ostensible rival).  Americans were the world’s consumers, traders, thinkers, workers, and investors.  America defined the ‘core’ of the world economy.


Today, Asia is the world’s factory and an exporting powerhouse, sucking in raw materials from abroad at a ferocious rate.  China is becoming the world’s braintrust, transforming trade goods into high-end tradable commodities and changing their workforce using technical and business knowledge to ‘reverse innovate’ new products and services. Today, Hollywood movies are released in China and India a full month before anyone in the US can see them.   Australia, Canada, the Middle East, and South Africa, formerly the nimble trading members of the semi-periphery, are now repositioning themselves as raw materials and commoditiesproducers, supplying the forests, minerals, food, and fuel for the new core countries.

In this post-modern world-system, unrecognizable as it is fromwinners and losersthat of 50 years ago, the core and periphery have switched places.  It is not so much ‘flat’ (as claimed by Thomas Friedman) as ‘bumpy’; with hills and valleys defined by the underlying forces of finance and production.  Sometimes the ‘bumps’ create stranged bedfellows, as Greece and Germany are discovering.   It is highly intermingled, more like a ‘neo-Medieval’ system of interlocking interdependencies coupled with rigid underlying hierarchies.

But as Wallerstein recognized, exactly which country plays which role is irrelevant. All of the things that are often deemed to make civilizations unique, like values, culture, soft power, technology, and even military prowess, are less important than the underlying patterns of wealth and exchange that dictate the range of motion that a country has.   Assuming, as America and Canada have recently, that one is immune to the disciplining forces of capitalism, and that capitalism will only ever  work in your own interests and against those of your competitors and partners; is a myopic failure of vision.  It assumes that only one vantage point exists or even matters, and neglects the realities of the new post-modern topsy turvy world.