What Finance Minister Guido Mantega defines as a currency war is the surface of the long crisis of the Bretton Woods system. The imbalance between Chinese surpluses and American deficits allows this landscape but neither exhausts or explains it. The crisis has an economic dimension, but at its base it has a geopolitical root. In the end, the institutional gears of the global economic order seem stalled for the first time since the postwar period. The G-20, the stage debut for President-elect Dilma Rousseff on the international scene, is not the miracle cure to resolve the crisis. It can be seen as a unique expression of the impasse since the failure of Lehman Brothers.
In its original version, the Bretton Woods structure practically precluded the need for political interference in the monetary system. The dollar reflected the gold standard, which served as ballast for the system, and a set of currencies circled the dollar under a mechanism of semi-fixed exchange rates. The foundation of the structure sat on the bedrock of the shortage of dollars at a time when the U.S. was the world’s creditor. The arrangement has promoted three glorious decades of rapid growth of market economies. Voluntarily, to save capitalism, the U.S. helped to create independent centers of economic power, sacrificing in this way the position of absolute hegemony it had gained during the war.
When the dollar shortage disappeared with the financing of the Vietnam War, Richard Nixon raised the anchor of the gold standard. Bretton Woods 2 did not come from a conference but rather a unilateral gesture of the manager of the system: the retaking of the sovereign prerogative to print money. In the new environment of currency fluctuation, political interference of the main actors has become imperative. The G-5 and G-7, its successors, were born in response to the need to establish consensus on global economic governance. They operated as a select club, which shared a similar worldview and made decisions informally in closed meetings, protected from the harassment of the press.
Since 1971, the United States has acted with an eye to their national priorities, sharing with the rest of the international system the cost of their domestic policies. The currency devaluation of Nixon spread to the rest of the world the inflationary pressures generated within the U.S. economy. Ten years later, the “economic revolution” of Ronald Reagan led to a rise in global interest rates, the rerouting of global liquid capital in the direction of Wall Street and a strong appreciation of the dollar. A few years later, a sudden course correction was taken, with the depreciation of the dollar against the mark and yen, something that required the agreement of Germany and Japan. Washington got what it wanted in the Plaza Accord in 1985, an indisputable proof of the political effectiveness of the club of world powers.
Two years ago, the United States began to seek a renewal of the Plaza Accord in the form of a pact limiting surpluses to a maximum of four percent of national GDP. This implies a strong appreciation of the Chinese currency, the renminbi. The proposal makes sense but has not taken off because of a combination of two reasons: First, China will not allow itself to play the role played by Japan a quarter century ago; and second, the G-20 is not an expanded G-7.
The Chinese are afraid to repeat the history of Japan after the Plaza, when the inflow of capital coagulated into speculative bubbles in markets for real estate and stocks that popped in the financial crisis of 1990, resulting in nearly a decade of stagnation. The internal consensus with relation to the depreciated renminbi comes from the core leaders of the Communist Party, who resist conferring economic rights to the people through the transnational companies established in the country to serve as export platforms.
The G-20, consolidated after the collapse of Lehman Brothers, reflects the relative decline of the U.S. and the multiplication of centers of economic power generated by globalization. It is not a club but rather a forum. Its members, especially China, do not share the worldview that shaped the Bretton Woods system. Their meetings are wide open to public scrutiny and are a stage for shows of sovereignty. Today in Seoul, Chinese, Germans, Brazilians and South Africans will lift their voices to criticize the United States. They will all be looking to make headlines in television news and print publications.
The decision of the Federal Reserve to flood the market with a torrent of $600 billion (U.S.) marks a turning point. The United States got tired of waiting and decided to unilaterally change the world scene. China retorted in an unusual tone, announcing that it will erect a “wall of fire” against the inflow of speculative capital. The currency war is taking on the appearance of a political confrontation and threatens to convert the G-20 into a fighting ring. Amid the gunfire, the Brazilian government is transforming the justified anger against the U.S. initiative into a pretext to open the debate about the connection between government spending, interest rates and the appreciation of the Brazilian real.
A failure of the G-20 would not help any of the actors of a global economic order that requires a “visible hand” to maintain some stability in economic policy. But the show of sovereignty, by its own momentum, can deteriorate into a currency war, dragging the world into a depression. Today only the IMF, which has closed meetings that are conducive to the separation of sovereignty and shows of sovereignty, has the political power to pursue mediation between the powers of the G-20. After the resounding failure of the ‘90s, the IMF can find new utility in its role as mediator. If this happens, Dilma Rousseff’s Brazil will recognize the old Bretton Woods institution as an irreplaceable partner. Oh, the ironies of history.