Twitter
Part 1: https://twitter.com/bidetmarxman/status/1564267348017938434
Part 2: https://twitter.com/bidetmarxman/status/1564268574075940870
Archive
Part 1: https://archive.ph/BqBlW
Part 2: https://archive.ph/fmsQE
Threadreaderapp
Part 1: https://threadreaderapp.com/thread/1564267348017938434.html
Part 2: https://threadreaderapp.com/thread/1564268574075940870.html
Text Part 1
It is impossible to understand the current existential threat the US feels from China without first understanding what happened to Japan 37 years ago.
This is the story of the Plaza Accord 🧵
As Japan emerged shattered from WW2, the US was intent on establishing a forward operating base from which to combat communism in Asia. So in the spring of 1949, under allied occupation, Japan joined a US-led system of monetary management known as the Bretton Woods agreement.
The agreement pegged the currencies of the largest economies to the USD, and the USD to gold, establishing the dollar as the global reserve currency. As a concession, the US allowed Japan to peg the yen to dollar at a favorable rate of 360:1, buoying Japan’s export economy.
While initially tolerable, the rapid post-war growth of Japan’s export industry quickly allowed them to outcompete US manufacturing by producing similar quality goods at 1/3rd the price. This led to significant anti-Japan reaction in the US, particularly amongst auto workers. The Bretton Woods Agreement...
As a result of this growth, experts began predicting in the ’70s that Japan could overtake the US as the world’s largest economy by century’s end. This trend only accelerated when the US was hit by the ’73 oil embargo.
https://www.nytimes.com/1970/12/13/archives/the-emerging-japanese-superstate.html
Meanwhile in the US, the costly Vietnam war, high social spending, and growing negative trade balance were all being financed by money printing. But almost as soon as they were printed, these newly minted dollars left the country via the US’s negative balance of trade. As a result of this monetary inflation, it was becoming increasingly clear the USD was overvalued relative to its fixed gold tether and in 1968, this overvaluation manifested as a collapse of the London gold pool, when growing US debts caused a loss of confidence in the dollar.
In 1971, Nixon intervened to address rising inflation by instituting domestic price controls and a blanket 10% import tariff. He also officially ended the direct convertibility of dollars to gold, untethering the dollar and effectively kicking off the fiat currency era.
With the dollar untethered, it could now drift toward its ‘true’ value. In ’73, the USD was again devalued against its official rate as the price of gold continued to rise. Soon after, Japan and the EEC were forced to let their currencies float, ending the Bretton Woods system.
With the USD now in turmoil, the late 70s saw the worst US inflation in decades. When Reagan took office in ’81, inflation had reached a crisis. To get it under control, the Fed increased interest rates to the highest level ever, with the prime rate peaking in Aug ’81 at 20.5%
While this finally brought inflation under control, it came at the expense of dramatic economic slowdown and mass unemployment. What followed was an era of lower interest rates, slashed social spending, regressive taxation, and massive military spending, aka ‘Reaganomics’. Reagan’s policies of military spending while cutting tax revenues resulted in an exploding deficit. This deficit spending combined with the contraction of US exports needed to be financed somehow. And the solution that was chosen was to sell the debt.
As a result of the high interest rates of the early 80s, combined with a flood of new government debt entering the market, demand for USD soared, and between 1980 - 85 the dollar appreciated against the currencies of the next four largest economies by a whopping 50%.
While good news for the cost of imported goods, this strong dollar was disastrous for US exports, and contributed to the further collapse of domestic manufacturing.
But who was buying all this debt?
Japan.
By 1985, capital inflow attracted by these high interest rates meant that Japan owned more US-treasuries than any other country. But why buy only treasuries?
Because after the collapse of Bretton Woods, the US began stipulating that dollars accrued through trade surplus could not be used to buy major American companies, only allowing them to be recycled back into the American economy to purchase debt securities. With this, the USD had finally landed on a foundation seemingly more stable than gold: dollar recycling. This recycling became the way in which the US has been able to maintain both a budget deficit and a balance-of-payments deficit year-over-year, seemingly without consequence.
And while export countries gain a small but stable return from these US securities, they inadvertently finance the cost of surrounding themselves with 800 American military bases, which are then used to break any country that tries to form alternatives to this dollar system. But this system of maintaining the dollar created a new problem: too much indebtedness to one country would pose a strategic threat. And with Japan now the primary debt holder, the US needed to throw a wrench in the engine driving Japan’s growing leverage.
Enter the Plaza Accord Assembling leaders from the top 5 economies in Sept ’85, the Plaza accord was designed to boost US manufacturing and agricultural exports and lower the value of the US Treasury instruments purchased with the trade surpluses held by other countries. At least on paper. But the true aim of the accord was to cripple Japan’s manufacturing-driven economy.
The plan had 2 parts. The 1st part was to decrease the value of the USD, while the 2nd was to deregulate Japan’s economy, loosen monetary policy / liberalize markets, and cut government spending.
To accomplish the first, Germany agreed to dump a massive portion of its USD foreign reserves, flooding markets with USD and driving the relative value downward. The actual USD surplus that entered the market was less impactful than the implied threat of further intervention.
Almost overnight, the higher relative value of the yen made Japanese exports much less competitive. At the same time, Japanese capital was being incentivized by the US-backed deregulation of the Japanese economy into real estate, the stock market, and even more US treasuries.
The deregulation that followed also led to foreign capital flowing into Japan like a firehose. Tokyo’s stock market index rose 49% in the year after the accords. By 1989, it had risen 300% and Japanese stocks comprised almost half the entire world’s equity market cap. As the newly available cheap credit created by the Bank of Japan congealed within Japan’s real estate sector, a massive asset price bubble began to grow.
In 1987, Washington piled on further to break the back of Japan’s manufacturing base by imposing 100% tariffs on $300 million worth of imports from Japan, effectively blocking them from the US market.
Eventually, Japan’s financialized frenzy had to end. On the eve of 1990, the real-estate and stock market bubbles finally popped, resulting in widespread collapse and sustained stagnation of Japan’s economic growth, beginning a period now known as “the lost decades”.
And while Japanese exports became more expensive overnight, productive capital couldn’t shift as quickly. It took another 5 years after the financial bubble popped before the actual productive output of Japan finally began to sputter.
Where did production shift to? In response to the tariffs, some production, such as Japanese auto manufacturers, relocated to the US, while the rest, particularly electronic goods, moved to China. I
Given that this exact outcome was largely predictable at the outset of the accords, why did Japan agree to so thoroughly subordinate their own economy to US interests?
Because the post-WW2 US occupation of Japan never ended.
(End of part 1. Part 2 won't fit in this post)
I simply cannot understand cause and effect when people talk about international monetary policy. Higher currency value is bad, buying debt, everything about interest rates, what counts as a bubble, it's all entirely too much 😔
this is because a currency that's too strong will kill your local economy. it becomes cheaper to import anything rather than produce stuff at home.
the inverse is also true: if you have a currency that is disproportionately weak it will make exporting much, much more lucrative than selling your commodity to your domestic market, so you might have a country that produces a lot of a commodity but whose population doesn't have access to that commodity.
idk if that helped
deleted by creator
If you have a too-strong currency, could you solve that problem by devaluing it by printing more money? Similarly could you solve a too-weak currency problem by printing less?
yes! but I think what the post is saying is that the value of currency has huge implications on international relations. So shifts in value of currency can upend the status quo. The US devalued its own currency to capitalize on foreign manufacturing but then the outlying countries became too powerful. Because of this they enacted policies to weaken those countries and reign them in. The lack of control that the US over china puts them in a no win situation where they can't both cripple Chinese power and reduce inflation.
I don't understand it fully but I think thats the gist of it.
Edit: its this last bit that is the most important
"US wanting a strong dollar to combat inflation, while simultaneously needing a weak dollar to maintain foreign investment and dollar recycling."
Dollar recycling is when foreign countries take on large amounts of USD debt while not being able to use that to buy american companies. This gives a best of both worlds situation where the US gets to import cheap goods without giving up domestic power and control. It is a relationship only functional when one country is dominant over another. So with China being as powerful as it is the gameplan from the past won't necessarily work. The USA needs to find a way to curtail chinas growth without furthering their inflation. If they are able to do that it will have to be with a method that we haven't seen historically, or one that requires the USA to gain direct control over china the way it had over Japan which seems unlikely.
In theory, yes. But there's more complex flow on effects. For example, printing more money does devalue currency but it also causes inflation and raises the relative cost of imports. That fucks over a different group of people who rely on imported goods.
This is especially bad because most countries import energy, raw materials, and food - the basic inputs of an economy. Therefore if you make the inputs more expensive, the outputs become more expensive too, so now your exports still aren't much cheaper and you have inflation fucking with people's lives.
you could, but that'd also have implications to your own economy as other comrades have pointed out. you print too much and you might get inflation, print too little and you might get deflation. i think generally central banks do a combination fucking with the rate of 'money printing' + interest rates + their foreign reserves. that said i'm not very well versed on monetary policy unfortunately, so i can't go much deeper than this.
Why thoooo
ur still paying ur own currency to other places right? So why is it worth more abroad but not in ur own country?
kinda. i know that in my country if you're gonna do business with a foreign company what happens is that you send the money to that company in our local currency (brazilian reais) but it doesn't actually go to that company in reais, the central bank is responsible for making the conversion from reais to dollars and i think the central bank from the company that is receiving the money does the same thing, making the exchange from dollars to their local currency. so, in practice, the local market is pegged to the dollar and every commodity's price is dictated by the global market.
what this means is that generally speaking you need to weigh local labor costs and the exchange rate when deciding if you're gonna buy a commodity from the domestic market or if you're just going to import it. using my own country as an example again, Brazil has been rapidly deindustrializing - not that we were ever an industrialized country - because of our lackluster technological development, our somewhat strong currency and labor costs (these last two haven't been true for the last few years but still) makes it so it's almost always cheaper to import something from China rather than producing or buying it here.
now that our currency has weakened meat and oil prices soared even though we are the largest meat producer in the world (i think) and are self sufficient or almost self sufficient in oil production, because it's more lucrative to sell it abroad than to sell it to the local population.
so, to give some examples:
a) strong currency
say you want a sheet of steel or whatever. let's pretend that the raw materials are priced the same everywhere for the sake of simplicity.
a brazilian worker and a chinese worker make each $5/hour. for whatever reason the local unit of currency in Brazil becomes more valuable and becomes equivalent to the dollar. the chinese currency didn't fluctuate. suddenly, even though the only thing that might've changed is the exchange rate, the brazilian worker makes $10/hour and the chinese worker still makes $5/hour, despite their pay having not changed in their local currency. as labor costs are embedded into the price of a commodity, the chinese-made commodity will have become cheaper in comparison to the brazilian-made commodity.
this can be overcome with State planning and intervention, but as most national governments are sleepwalking neoliberal zombies most will let the market dictate their fates.
b) a weak currency
let's now pretend that the real is pegged to the dollar. let's say oil is a dollar a barrel. if the brazilian currency shrinks to 1/4 of its value, suddenly the cost to produce a gallon of oil becomes a quarter lower. because of that the oil producer can sell it to the global market at a higher profit margin than selling it domestically. this causes domestic prices to go up even though productions costs might not have increased and there's no need to import oil.
obviously i grossly simplified a lot of what goes into the price of a commodity but this is the easiest way to try to explain how the exchange rate affects a country's economy and its trade balance. both of the examples i gave are based on the actual brazilian economy. i hope the examples are intelligible, i don't write that well so sometimes my posts can be confusing to read. either way, if you still have questions or didn't understand something i'd love to try to help you.
I kinda understand? Maybe? I didn't realize they went Currency A > USD > Currency B, like still using the dollar even when the US isnt involved. That probably has deep implications I'm not wrapping my head around.
Is a currency becoming weaker the same as inflation? Like u can buy less with it.
its all fucking made up money is an accounting trick set to the whims of the ruling class
I can't tell how much of it is just capitalist BS that even left-wing people take almost at face value versus how much actually matters.
https://www.nakedcapitalism.com/2019/07/michael-hudson-discusses-the-imf-and-world-bank-partners-in-backwardness.html
Here's a long-form read that explains it, by a banking insider.
BONNIE FAULKNER: Why does the World Bank prefer to perpetrate world poverty instead of adequate overseas capacity to feed the peoples of developing countries?
MICHAEL HUDSON: World poverty is viewed as solution, not a problem. The World Bank thinks of poverty as low-priced labor, creating a competitive advantage for countries that produce labor-intensive goods. So poverty and austerity for the World Bank and IMF is an economic solution that’s built into their models. I discuss these in my Trade, Development and Foreign Debtbook. Poverty is to them the solution, because it means low-priced labor, and that means higher profits for the companies bought out by U.S., British, and European investors. So poverty is part of the class war: profits versus poverty.
BONNIE FAULKNER: In general, what is U.S. food imperialism? How would you characterize it?
MICHAEL HUDSON: Its aim is to make America the producer of essential foods and other countries producing inessential plantation crops, while remaining dependent on the United States for grain, soy beans and basic food crops.
BONNIE FAULKNER: Does World Bank lending encourage land reform in former colonies?
MICHAEL HUDSON: No. If there is land reform, the CIA sends its assassination teams in and you have mass murder, as you had in Guatemala, Ecuador, Central America and Columbia. The World Bank is absolutely committed against land reform. When the Forgash Plan for a World Bank for Economic Acceleration was proposed in the 1950s to emphasize land reform and local-currency loans, a Chase Manhattan economist to whom the plan was submitted warned that every country that had land reform turned out to be anti-American. That killed any alternative to the World Bank.
Yeah it might as well be magic to me