Currency War and Exchange Rate

The Neoliberal Race for unilateral Currency Devaluations as a Result of Doctrinal Contradictions

An Article in the Compendium of Market-Based Social-Ecological Economics

Key issues in view of the neoliberal crisis:
How can we guarantee employment and fair income?
How can we protect the environment effectively?
How should we shape the economic globalization?
What should the economic sciences contribute?
What must be the vital tasks of economic policy?
How can we legitimize economic policy democratically?

Click here for the list of all articles: Compendium
Click here for the German-language version: Währungskrieg und Wechselkurs

Table of Contents

  1. Overview
  2. The Recent History
  3. To the Core of the Problem
  4. The Doctrinal Mechanisms
  5. The Tactical Games of the Big Players
    > The USA
    > China
    > The EU and Germany
    > Other ountries
  6. The Original Function of the Exchange Rate

1. Overview

WährungskriegA new round has been launched in the cut-throat competition of neoliberal free trade: countries that have their own currency and are confronted with apparently insoluble social and ecological problems on the dollar and euro markets due to decreasing competitiveness, have now discovered exchange dumping – that is, the unilateral devaluation of a currency against other currencies – as a solution for themselves, as China has before. This creates the threat of a global devaluation race that will once again reveal the contradictions of the neoliberal economic doctrine. A good reason, therefore, for a return to the original function of the exchange rate and the opportunities that bilaterally adjusted real exchange rates open up for prosperity and welfare.

2. The Recent History

The annual meeting of the International Monetary Fund (IMF) and the World Bank, to which finance ministers and central bankers of the G7 countries travelled to Washington in October 2010, did not produce any tangible results. And this despite the fact that numerous critics had pointed out the devastating distortions and imbalances of global free trade in the run-up to the meeting. Dominique Strauss-Kahn, then head of the IMF, accused China of keeping the yuan exchange rate artificially low to gain advantages for its exports. The country would therefore bear its share of responsibility for imitators such as Japan and Brazil and could plunge the world into a crisis. The idea of using the exchange rates of currencies as an economic weapon is obviously spreading, Strauss-Kahn added.

Brazil’s Finance Minister Guido Mantega warned at the meeting that the world was already in a »currency war« and was risking a trade war. Like other countries however, Brazil, as a newly industrializing country, was also and still is trying to slow down the appreciation of its currency by increasing the money supply, lowering key interest rates, and by controlling foreign investment flows – also with the intention of keeping the prices of its export goods on the dollar and euro markets at the lowest possible competitive level.

3. To the Core of the Problem

It should first be remembered that the IMF and the World Bank were founded in 1945 on the basis of the post-war order agreed in Bretton Woods (see also the article Bretton Woods System (English)) and that it was the IMF’s task from the outset to stabilize the international monetary system and the world economy. This task was, in adopting a long-term economic vision, explicitly tied to a system of fixed exchange rates, because the founding fathers of the post-war order were convinced that it would be impossible for the IMF to fulfill its mission in a system of manipulable, variable exchange rates. Neither has their conviction lost its significance, nor has the IMF ever been expressly relieved of its original task. However, the historical development has brought about the failure of the post-war order in the early 1970s as a consequence of the US debt and inflation policy caused by the Vietnam War. Market forces then gained the upper hand over national economic policies, and the unregulated play of forces was finally glorified in a doctrinaire fashion as »market liberalization«.

Since then, the IMF has sought its tasks within the new »neoliberal order« and, since the 1980s, has switched to serve the interests of the globally active financial sector – including the speculative tendencies which are particularly dangerous for developing and emerging countries and which reach their largest volume on the currency markets.

The ongoing »currency war«, including its consequences, demonstrates once again that a system of speculatively manipulable exchange rates cannot contribute to the stability of the world economy and to sustainable welfare.

4. The Doctrinal Mechanisms

If the external value of the Chinese currency alone were the cause of all evil, the western industrialized countries would have been able to solve the problem long ago with the pressure of their trade volume. The reason why the then head of the IMF, Strauss-Kahn, decided to side with the USA and the EU and unilaterally denigrate China is that China and the other emerging countries have not yet had a voice in the IMF committees that was commensurate with their importance. So logically, the former head of the IMF, himself a French citizen, had been promoted to his post by the Western industrialized countries. At the G20 meeting of finance ministers, which also took place in South Korea after the G7 annual meeting of the IMF and World Bank, it was announced, however, that the IMF’s financing and voting rights would be redistributed by 6.4 percent in favour of the emerging countries – predominantly at the expense of Europe. China will thus become the IMF’s third largest shareholder after the USA and Japan, displacing Germany to fourth place.

The driving force behind the neoliberal »currency war« is the competition between economic areas and their resident companies for market shares in the »liberalized« world markets. With the declining influence of national and supranational economic policies, market dynamics are mainly determined by the entrepreneurial striving for expansion, which pushes beyond national borders into open export markets and sparks off predatory competition on the basis of price advantages in dollars and euros. A competition which is carried out to the detriment of man and nature with all forms of dumping. The protagonists, who experience the mutual crowding out probably personally as a sporty challenge, do not become tired to stress that only global »free trade« can guarantee the well-being and progress of mankind.

If, however, all economic areas are pushing for exports, as is now the case, global competition intensifies. Overcapacities arise and cost pressure increases tempting players to social, ecological and exchange dumping as well as to terrotorial concentration of entrepreneurial capital. Thus, the global economy gets into a downward spiral of real prices and, complementarily, into an upward spiral of externalized costs passed on to society and the environment. These costs arise mainly from precarious employment, underemployment, unemployment, poverty and environmental degradation. The process of capital concentration contributes significantly to the cost spiral by weakening regional structures and domestic economic cycles and thus, as a systemic vicious circle, further strengthens and neoliberally justifies the export orientation. The voluntary exchange dumping, which is spreading worldwide for the first time, is now responsible for the fact that predatory competition is becoming ever more chaotic and the world economy ever more unstable – a development which the Brazilian finance minister rightly described as a »currency war«.

5. The Tactical Games of the Big Players

Alongside China, the USA, the EU and Germany also play a dominant role in the neoliberal »currency war«:


In view of an annual bilateral trade deficit of around 300 billion US dollars, the USA has repeatedly called on China to revalue the yuan. They hope to curb the flood of Chinese imported goods, increase the competitiveness of their exports to China and thus their own added value, and above all, secure their own jobs and create new ones. The tensions between the two countries have increased since the US House of Representatives decided to impose punitive tariffs on Chinese imports and announced further ones.

The USA, however, with its shrill polemics, exposes itself to the suspicion of wanting to distract from its own aggressive measures. For years, the US Federal Reserve has pursued an expansive monetary policy in order to generate growth and employment and to stimulate the domestic economy. However, the domestic effect has long since worn off. On the one hand, because interest rates have been close to zero without any effect since the financial market crisis, on the other, because the country has largely lost its competitiveness on the »liberalized« world markets, especially in the manufacturing industry, and investments in production facilities are declining sharply.

The expansive monetary policy is now causing nothing but dollar flows to countries with higher interest rates, accelerating domestic inflation (money depreciation), favouring the emergence of new asset price bubbles and causing – in terms of export promotion – a creeping depreciation of the dollar as the reserve currency against other currencies. The economic risks are also weighing on the prices of US government bonds and are increasing the country’s debt costs. With high social, infrastructural and military costs, government debt has therefore risen to 94 percent of gross domestic product (GDP), which puts additional pressure on the dollar. Hence the rest of the world sees US monetary policy as an aggressive and dangerous export promotion measure. In addition, the devaluation of the dollar in bilateral relations with China has only an indirect effect to the annoyance of the USA because China has been pegging its currency exchange rate to the US dollar for years (see below).

At the aforementioned G20 meeting of finance ministers, the then US officeholder Timothy Geithner made a new tactical push: He proposed to oblige export heavyweights such as China and Germany to limit their current account surpluses (trade surpluses in goods and services) to four percent of GDP; in compensation, these countries should boost their domestic economies through tax cuts. In the neoliberal context, the push is absurd, because the major exporting countries would have to artificially curb their competitiveness on the otherwise »liberalized« markets. Conversely, according to Geithner, the proposed obligations of the major exporters would enable the deficit countries such as the USA to save more, strengthen their exports and limit their current account deficits to four percent of GDP. Significantly, Geithner’s push was, tellingly enough, only welcomed by the deficit countries Canada and France.

The then German Economics Minister, Rainer Brüderle, on the other hand, warned against a »relapse into a planned economy« and pleaded for a strengthening of market economy processes – which in the neoliberal context is to be understood as a warning against any market regulation. In the same context, he pointed out that the German current account surpluses were not the result of government intervention but of the high competitiveness of the German economy. Resistance to the American plans also came from China, Japan and some emerging countries.


China pegged its currency exchange rate to the US dollar in the mid-1990s and controls the peg through money supply and key interest rates as well as government intervention in foreign exchange and capital markets. According to Western calculations, the Yuan is now undervalued by up to 40 percent against the US dollar and the euro. This means that if no customs duties are levied, Chinese imports in Western countries are up to 40 percent cheaper than comparable domestic products. The Chinese government’s long-term export strategy clearly aims not only to catch up with the West, but also to dominate world markets and become the strongest economic power.

The Chinese strategy is responsible for the flooding of Germany and other Western countries with Chinese imports and the subsequent concentration of economic capital and power, including widespread de-industrialization that is already well advanced in the importing countries. The question of who is the perpetrator here and who is the victim does not arise in the neoliberal context, because both sides are unanimously doctrinaire and trapped in the contradictions of the system. From a future-oriented, post-neoliberal point of view, the answer to this question is clear: each country must direct its economic policy solely towards the welfare of its citizens and its environment, namely on its own responsibility and unimpressed by the intentions of its trading partners. And by the way: China has certainly underestimated the domestic economic consequences of its neoliberal export strategy, such as the desertification outside the major economic centers, the domestic currency devaluation, the growing gap between rich and poor, the stagnating domestic demand and the growing protest potential among the population – and is now attempting to break the neoliberal vicious circle with inappropriate measures just as hopelessly as the Western countries.

The high Chinese surpluses in the current account balance with the dollar area naturally entail high capital exports, so that the central bank of the People’s Republic already holds 20 percent of all US government bonds and around 2.5 trillion US dollars as currency reserves. In addition, there are ongoing investments in US real estate and companies. All these developments are perceived in the USA as a creeping infiltration of their domestic economy.

Conclusion: The USA and China have become interdependent in an indissoluble devilish way typical of the neoliberal system. China is forced to buy US government bonds and other US assets with its dollar export earnings to support the US economy and consequently the US demand for Chinese imports, and at the same time to support the dollar exchange rate against other currencies to preserve the value of its US government bonds and other US assets worldwide. The fact that through the support of the dollar and the yuan’s peg to the dollar Chinese exports may become more expensive outside the dollar zone (which is currently not the case, see below) is one of the imponderables of the neoliberal system that China has nothing to counter.

In the meantime, pressure from the USA has had an effect in that the Chinese have appreciated the yuan by around 4 percent against the US dollar in 2010. In view of the dollar’s decline of 10 percent against the euro and the Japanese yen in the first three quarters of 2010, the appreciation was not difficult for China, because while exports to the USA became only slightly more expensive, the country significantly increased its competitiveness in Europe and Japan during this period.

The EU and Germany

Like the USA, the EU is being criticized for its flood of liquidity, with which it is fighting the financial market crisis and now also the neoliberal-system-induced euro crisis, for which the over-indebtedness of Portugal, Italy, Ireland, Greece and Spain is mistakenly blamed. The European Central Bank (ECB) would like to reduce the money supply immediately because of the intra-European risks, but would thus initiate an appreciation of the euro against all other currencies and weaken European competitiveness outside the euro zone. It is therefore likely that the ECB will opt for a slow, gradual reduction in euro liquidity.

Germany, which no longer has its own currency, is bound by the decisions of the Governing Council of the ECB; therefore it cannot devalue the euro arbitrarily and in its own interest. But, from a neoliberal point of view including the absence of an autonomous monetary policy, the country’s situation is currently more than comfortable, because German export companies are extremely competitive both in the euro and the dollar zone – which is why Germany accumulates large surpluses in its current account and its balance of payments. The associated imbalances in trade within the euro zone are particularly criticized by France and within the dollar zone by the USA because both countries have accumulated large deficits. Germany’s export successes thus indirectly create incentives for the global devaluation race, that is, the exchange dumping. As already indicated, the criticism of Germany is nonsensical given the neoliberal context, because artificial restriction of competitiveness runs counter to the doctrine of economic deregulation and »market liberalization« propagated by all trading countries.

The situation of German companies is further strengthened by their high volume of foreign investments outside the euro zone. If, for example, a German company relocates half of its value-based production for the world market to China to save costs, the influences of the exchange rate fluctuations between the US dollar (or yuan) and the euro will offset one another mathematically to zero. This strategy is not limited to end products; it can also be used in a very differentiated way for intermediate products. All competitive global players try to hedge their positions in this way. However, this does not change the social and ecological devastations caused by the neoliberal system.

Other Countries

Japan and a number of emerging economies, among them Brazil, are also making a stand against the monetary policies of the US, China and the EU by attempting to limit the inflow of foreign capital and the appreciation of their own currency by means of monetary policy and capital controls.

Against a flood of imports caused by a relatively high exchange rate of a country’s currency only tariffs and import quotas remain as last means. The fact that countries are forced to apply these protective measures – as legitimate protection – and are then falsely and nonsensically accused of practicing protectionism is further proof of the neoliberal doctrine’s indissoluble inherent contradictions (see also the article Protection and Protectionism).

6. The Original Function of the Exchange Rate

The model of a socialecological market economy presented in this compendium has two decisive features with regard to the determination of exchange rates: The economic areas described in the model are characterized by a highly diversified and decentralized (subsidiarized) production structure, and they are bilaterally connected through intensive trade of both regional specialties as well as identical or similar products and services (speciality trade and intra-industry trade). This means that the diversity and geographical distribution of their productions makes them largely resistant to sudden changes (shocks) in individual industries as well as to unforeseeable changes in trade flows. Thus, economic areas automatically also fulfil the conditions to be imposed on optimal currency areas. And they are in a position to autonomously enter into trade agreements with their trading partners based on fixed real exchange rates – exchange rates which they periodically determine from the two average prices of a bilaterally compiled baskets of goods. Conversely, flexible exchange rates, including the foreign exchange markets at which they are dynamically determined simply by supply and demand, are out of the question because under socialecological conditions they cannot contribute to absorbing shocks and because they impede the profitable exploitation of relative (comparative) price advantages in trade. Even a reserve (key) currency is superfluous under these conditions, because the economic areas are not dependent on the stabilizing effect of a large, dominant economic area and its currency reserves.

Under the above conditions, exchange rates can once again become the crucial connective link through which prices are automatically adjusted at the interface between trading partners (when products are crossing the border with the exchange rate being applied), thus enabling beneficial trade relations beyond the cultural and productivity-related boundaries of independent economic and currency areas. However, the time window within which exchange rates do justice to this function is limited due to ongoing and diverging productivity developments: economic and currency areas must therefore periodically determine (calculate) bilateral exchange rates with their trading partners which correspond exactly to the respective average price difference of all trade products, and, at the same time, automatically so to the average difference in productivity, and which neutralize the average differences.

An exchange rate calculated in this way produces average purchasing power parity when people cross the border and is referred to as the real exchange rate. It is also the basis for identifying the relative (comparative) price advantages or disadvantages of all trade products in a bilateral trading relationship (i.e. all products deviating from the average), and it also serves to determine the trade flows:

In concrete terms that means: A country’s products having a relative price advantage, i.e. whose prices are lower in relation to the country’s average price than a trading partner’s identical or similar products in relation to his average price, automatically become export candidates for the country and import candidates for the trading partner. The opposite applies to a country’s products having relative price disadvantages.

The autonomy of the countries requires that the initiative for each individual trade transaction is always taken by the country who decides to import a product; unilateral export initiatives are therefore excluded. It follows that a country can import a product in autonomously defined quantities and then use the entire price advantage (the trading profit) over his own product, or partially offset the price advantage by customs duties (tariffs), as a stimulus for his domestic competition. Meaning, the trade profit can be composed of a price advantage on the domestic market and revenues from customs duties.

Since relative price advantages can always be identified in bilateral trade relations in large numbers on both sides, all trading countries can in principle achieve trade profits with their trading partners. And since each country can trade with any number of partners, a system of multi-bilateral trade relations is established, allowing countries to optimize trade gains by selecting the largest relative price advantage for each product to be imported. The autonomous determination of import quotas and duties is the key to put domestic suppliers under fine tuned, beneficial competitive pressure without risking entire industries to be irrevocably crowded out. At the same time, the diversity of the range of goods offered is increased in every country participating in such a regulated trade.

In addition, price-neutralizing exchange rates have a shielding effect by protecting the symmetry of the developments of productivity, wages and prices from distorting external influences. This is absolutely crucial for the functioning of economic cycles. Because only if the ratio of wages to prices, which constitutes purchasing power, keeps pace with the domestic development of productivity, it can be ensured that the products intended for domestic markets can be demanded and paid for by domestic customers at any time while at the same time maintaining appropriate savings and investment rates, and finally, that the product and money cycles are not weakened or interrupted at any point.

Quite different in neoliberal free trade where exchange rates neither function as a connective trade link, nor do they protect the balance of productivity, wages and prices from external influences. Since the exchange rates are at the mercy of the free forces of »liberalized« global financial markets and are further distorted by lead currencies such as the US dollar or the euro, relative price advantages can neither be identified nor exploited; instead, relative price advantages are replaced by absolute price advantages in lead currency. Participating economic and currency areas and their resident companies are thus forced to secure their competitiveness on the global markets by means of competitive dollar or euro prices, regardless of whether their actual level of productivity justifies these prices, and they counter the resulting cost pressure with all forms of dumping and concentration of production capital, leading to increasing worldwide predatory competition, to the dissolution of regional economic structures and ultimately to mass unemployment and poverty.

In addition I recommend the articles Comparative Advantage – Upgraded, Future-Proof Foreign Trade, Economic Dumping, Economic Pricing and Economic Subsidiarity.

The practical development of subsidiary economic structures under the conditions of the neoliberal globalization as an entry into a post-neoliberal economic order is addressed in the article Building Subsidiary Economic Structures.

Note on the COVID-19 Pandemic

The pandemic has noticeably revealed the significant weaknesses of the neoliberal economic system for everyone, above all the shortage of medical, but also other products, caused by disruptions in the absurdly networked value and supply chains across the globe.

The analyses of the neoliberal system as well as the principles and practical procedures based on them for building a sustainable system, which are presented in this compendium, thereby obtain an unexpected topicality. Now is the time to seize the opportunity and build up economic policy pressure to enforce the development of an economic order that is sustainably oriented towards social and ecological welfare.

The following article refers to the targeted arguments contained in the Compendium: COVID-19 and Globalization


Click here for the German-language version: Währungskrieg und Wechselkurs.

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