Sunday, 10 May 2020

A Break for Science


There have been no articles on this blog since early February this year. Largely, this has been based on my interest in the coronavirus pandemic. Since mid-2019, I had in any case started reading up on biology, prompted by my own health problems, and the pandemic has greatly expanded that interest. I had little formal education in natural sciences, and have only in recent years come to see how fascinating they are, making ‘economics’ look intellectually trivial and pretty dull by comparison.
As for the economic slump engendered by the coronavirus, I think little can usefully be added on this blog to the almost daily, easily available information. (For my more regular comments, see my Twitter account, Stubborn Facts, or the Facebook page, Imperialism Today) Yes, this will be the biggest capitalist crisis possibly ever, at least in terms of collapsing output. But that much is obvious. For readers of this blog, what should also have been obvious is that the already accumulated debts in the system – onto which vast amounts more are being loaded – will make any subsequent recovery very difficult.[1] Capitalism’s troubles have now become more acute, but if/when they are less acute, perhaps in 3-6 months’ time, the chronic problems revealed in debt will become less able to be postponed and more likely to result in conflict. Already there is a stirring of ‘China must pay!’ sentiment in the US.
One purpose of my more recent self-education is to avoid the often wrong virus-capitalism arguments of many writers. While I do not plan now to fill this blog with disquisitions on viruses, in the next week or so I should have completed an article on putting the pandemic into an imperial context.

Tony Norfield, 10 May 2020


[1] Look in the ‘Search this blog’ box at the top right of the page and insert the word ‘debt’ for a series of articles.

Monday, 3 February 2020

Brexit & the British Working Class *


Much has been written on Brexit, stage 1 of which occurred on 31 January. But a key point has been ignored: the UK’s departure from the European Union is due to a reactionary revolt by the British (mainly English) working class. This went against the established policy of the political elites, bourgeoisie, ruling class – call them what you want – and will lead to many problems. As such, it represents the first time in very many decades that the ‘popular will’ of a vote has contradicted capitalist business interests. However, this is no reason for socialists to be happy.
In the UK parliament, most MPs were in favour of remaining in the EU. Yet they had to watch their backs and worry about the people who had elected them: 52% of the UK electorate had voted for Brexit in the 2016 referendum and, more importantly, 64% of Parliamentary constituencies had done so. The biggest bloc of ‘Leave’ voters was in England. To show this was not a one-off decision, English voters rallied to the Conservatives and their ‘Get Brexit Done!’ slogan in December’s General Election. A survey showed that more than half of working class votes in Britain were for the Conservatives or the Brexit Party. As a result, the Conservatives now have the largest majority in Parliament since 1987.
It was no surprise that the Brexit issue dominated the General Election, since it has featured in all UK political discussion for years. Pro-Brexit sentiment grew in the aftermath of the 2008 financial crisis, when British workers complained about the squeeze on their living standards. They did not blame capitalism, or even UK government policies. For many, the culprit was the EU, and especially the migration of workers from the EU that was seen as putting pressure on jobs, housing and social services.[1] In 2016, when Brexiters chanted ‘Take Back Control’, what they meant was control of EU immigration. This could be done only by leaving the EU.
This factor helped build a successful political alliance between a large section of the British working class and other longstanding critics of the EU. The latter were a disparate group. They included Conservative ideologues, those nostalgic for the days of Empire and who wanted to see ‘Great Britain’ operating more freely in the world, some business people who were annoyed at EU market regulations, and even some on the left who saw the EU as an evil capitalist plot and dreamed of a more British-inspired (!) set of international relations. These diverse forces only gained political momentum once the British (English) working class joined them.[2]

The Social Contract

Working class support for Brexit was a protest. But it was a protest against how they thought the British state was not doing enough to protect them – against immigration and the pressure on living standards. So, economic arguments in favour of staying in the EU had little effect, because they thought that getting out of the EU would encourage the state to help them. The British working class has long had a loyal commitment to the British state. As long as that state offered some economic and social protection, it would not cause too much trouble. It was a kind of ‘social contract’. The immigration question became important in this context because it helps to identify the national, British-based working class as the legitimate recipient of state assistance versus the immigrants (or even refugees) from other countries. In this political outlook, the issue of inadequate housing, jobs and services delivered by capitalism becomes a moan about the supply of housing, jobs and services taken by migrants. In earlier decades, the moan was about blacks and Asians. In the past decade it has been more about white (East) Europeans who had rights to move to the UK under EU labour market rules.
By contrast, business opinion in Britain was consistently against Brexit. However, companies had to be careful in their public comments because they did not want to annoy half their customers. It was only in the past year that they warned how Brexit would disrupt supply chains, put important trading relationships at risk and damage investment, but this had little effect on popular opinion. The capitalist enthusiasts for Brexit were few, usually small companies wanting to avoid EU regulations. They, and others, overlooked an inconvenient point that world trade is already divided up among major trading blocs, especially in North America, Europe and Asia. There is no big, free world market to join outside the EU, and the UK will be stepping out of the deals that the EU has already negotiated with other countries.
After Brexit Day on 31 January, at first nothing much will seem to change for the UK. It will be excluded from EU decision-making, and a number of EU-related outlets for British citizens will begin to close down, such as employment and education opportunities. Otherwise, Brits will see most EU-related things going on as normal, probably up to the end of 2020. Even trade with the EU will not change abruptly before then.
Nevertheless, the Brits will still feel able to blame their woes on the EU. The Conservative Government’s objective is to do what it likes after leaving EU membership, but to still have trade access to the EU market as it was before. The remaining 27 countries of the EU cannot agree to this, so there will be many disputes and plenty of room for EU bashing in the forthcoming negotiations. There also remains a ‘divorce bill’ to settle, whereby the UK is liable to pay the EU tens of billions after it cancelled its previous membership commitments.
It is doubtful that the British working class will turn against the Conservative Government as the dream of a bright future outside the EU fades away. It may not take long before their promise of more investment in poor areas of the country is exposed as a fraud, but that does not mean there will be any progressive resistance. Instead, the greater likelihood is that the working class will double down on aggressive nationalism.

Tony Norfield, 3 February 2020

Note: * This is the English version of an article published on 2 February in the Spanish language journal Ideas de Izquierda, together with an article by Michael Roberts, here.


[1] See here for a fuller discussion of the data on EU immigration and the working class response to it.
[2] Just ahead of the 2016 EU referendum, I explained the politics of Brexit, the imperialist 'social contract' and the working class Brexit vote in more detail here.

Wednesday, 18 December 2019

Oath of Allegiance



Anyone observing the opening of the new UK Parliament session yesterday will have been aware of the fatuous flummery of absurd rituals. But this is just window dressing, complete with garters, for a more fundamental point: all new members of Parliament must give an Oath of Allegiance to the Crown or else they cannot take their seats. Nobody thinks that the Queen runs Parliament, but this oath acts as a shorthand way by which patriotism and solidarity with the British state is expressed, no matter which government is in power.
The Oath takes one of two forms. The most commonly used is:
I, [member’s name], swear by Almighty God that I will be faithful and bear true allegiance to Her Majesty Queen Elizabeth, her heirs and successors, according to law. So help me God.
For those whose belief in the Almighty is a little shaky, but who still believe in the majesty of the British state, the version is:
I, [member’s name], do solemnly, sincerely and truly declare and affirm that I will be faithful and bear true allegiance to Her Majesty Queen Elizabeth, her heirs and successors, according to law.
Being an atheist is now OK, but failing to have the correct national faith is not.
So it is that the Irish republican party, Sinn Féin, boycotts the House of Commons, despite having won seats in the British Parliament. As Mary Lou McDonald, the leader of Sinn Féin, put it, party members would not be willing to ‘swear an oath to a foreign power’.
Jeremy Corbyn, soon to be not leader of the Labour Party, and all other sitting MPs have taken the Oath. But that did not stop him being criticised for failing to pay attention to the Queen’s speech on Christmas Day. This was a sure sign of insufficient patriotism, and one to be included with his other alleged misdemeanours in the vox pop media interviews at the time of the General Election.
The political climate that all this suggests is pretty bad. It gets worse still when you consider the mentality that must underlie the singing of the National Anthem at all big events, especially in sports.
Study the main verse of this obsequious dirge and weep:
God save our gracious Queen!
Long live our noble Queen!
God save the Queen!
Send her victorious,
Happy and glorious,
Long to reign over us,
God save the Queen.
However, it does not take much deciphering to see that this is not really an expression of undying love for the monarch, although you will not get far in Britain without showing due deference. It is the hope that h/she will persist, but as the head of a victorious, happy and glorious country of ‘us’. The eternal reign – eternal because the Anthem is applied to succeeding monarchs – is therefore a deep, patriotic wish that British power will persist too, and that its magic will enrich all loyal subjects.
British citizens want to count themselves as beneficiaries of such magic and will sing the Anthem. It is an incantation, an expression of exaggerated pride and bolstered self-confidence to give hope for a better future for ‘us’. It is no wonder that their members of Parliament have to take the Oath of Allegiance.

Tony Norfield, 18 December 2019

Friday, 13 December 2019

All Quiet on the Western Front


The British elected, by a big majority, a Conservative government run by certified liars and incompetents in order to ‘Get Brexit Done’.[1] What a contrast to the countries that have recently seen widespread protests about a lack of democracy, corruption in government and attacks on the living standards of the mass of people. Mass action has worried the ruling elites from France to Georgia, from Hong Kong and South Korea to Iran, Iraq and Lebanon, from Chile and Brazil to Algeria and Sudan. In the UK, the electorate has endorsed the ruling elite.
The lack of a pulse in the British ‘labour movement’ – unless moaning can be seen as a sign of political life – confirms my longstanding scepticism about the potential for anything progressive happening in Britain. The British working class will likely learn nothing positive from the outcome, and may well become even more conservative and reactionary when it suffers the consequences.

In the map below, from the BBC, the dominant Conservative vote in England is shown in blue, while the Labour Party constituencies are in red, the Liberal Democrats in orange and the Scottish National Party in yellow.


Tony Norfield, 13 December 2019


[1] The Conservative Party message was ‘Get Brexit Done’ and this gained them a large majority of seats in Parliament. The irony was that, according to a BBC report, only 48% of UK votes were for Brexit-supporting parties! But this potential anomaly was widely known, leading to many advocating tactical voting in the ‘first past the post’ UK electoral system. In Scotland, the Scottish National Party won 48 of 59 seats and was strongly against Brexit. It is worth noting the relative population and seat numbers for the UK: England 56 million people and 533 seats; Scotland 5.4m and 59 seats, Wales 3.1m and 40 seats, Northern Ireland 1.9m and 18 seats. The General Election results are principally determined by the English vote, which this time supplied 345 of the Conservatives’ 365 seats in the 650-seat Parliament.

Tuesday, 22 October 2019

British Workers


As we wait impatiently while the Brits go through the interminable travail of Brexit, let us have a look at who they are. Not directly in a social, cultural or political sense, but by reviewing the data on UK employment. Work gives a foundation for people’s daily lives and will, in turn, have an impact on society, culture and politics. The employment numbers challenge the conceptions of many, especially those with a narrow ‘industrial’ view of the British working class. They also highlight that a surprising number of people, for various reasons, are not working at all, and that UK residents originally from other European Union countries are more likely to be employed than indigenous Brits.

Swamped?

According to the UK Office for National Statistics, the total UK population was 65.6 million people in 2018, with a couple of percent more women than men. Roughly 86% of these were born in the UK. Poland and India were the countries of origin for the largest number of others, each with 832,000. Pakistan (535k), Romania (392k) and the Irish Republic (369k) were next in line as other countries of origin. Even for Poland and India, their share of the total population was just under 1.3% each. Calculations of people by their claimed nationality give only slightly different data, and the overall picture is not simply that most people in the UK were born in the UK, as one would expect, but also that there has been no great influx of people from any one other country.
Even if the EU were taken as a whole, UK residents born in the 27 other EU countries amounted to only 3.6 million people, just 5.5% of the UK population. That figure was a slightly higher 5.8% in England, the major Brexit-voting country. Although this share is about three times higher than in 2004, a rapid increase, the still low percentage leads one to suspect that the anti-EU sentiment revealed in the dominant English Brexit vote (53.4% for Leave) has been based on something more than simply the scale of the EU immigration numbers.
A number of commentators have argued that it was the rapid influx of EU migrants after the accession to the EU of Poland and other countries in 2004 that led to worries on the part of British people about their domestic culture and ‘way of life’ being undermined by this development.[1] A look at the UK’s employment data will suggest a different perspective.

What about the workers?

In mid-2019, there were about 41.3 million people in the UK aged 16-64, the prime age group for employment. Of these, 31.5 million, or 76%, were employed, 1.3 million were unemployed and 8.6 million were ‘economically inactive’. Employed and unemployed are reasonably straightforward terms – although with changing definitions – but the latter one is worth examining further.
The ‘economically inactive’ category includes those who are students, those who are looking after the family or home, the temporarily sick, the long-term sick, ‘discouraged workers’ and the retired. It also includes some other reasons for inactivity, but basically means those who have not been seeking work in the past four weeks and who are not available for work in the next two weeks. It does not include those registered as unemployed.
At 8.6 million people, the number of the ‘inactives’ is surprisingly high: 21% of the population aged 16 to 64. Nevertheless, the inactivity rate has fallen over the past five decades, largely because of more women working. Over 40% of women were ‘inactive’ in the 1970s, but this has fallen to around 25-26% today. By comparison, the inactivity rate of males aged 16-64 has risen a lot – from around 6% in the 1970s to 16% in 2001, and it was 16.4% in the latest period. This is one way that the capitalist labour market, in its usual perverse manner, has tackled gender inequality. It is also linked to how female earnings can still remain below male earnings doing the same job, despite laws against such discrimination.[2]
The surprise at the high number is reduced when one takes account of 2.2 million students and another 2 million people looking after the family or home included in the total. But that still leaves another two big categories: 1.1 million who have retired before the age of 65, and 2.1 million who are long-term sick. Only 1.9 million of the 8.6 million inactives are recorded as wanting to have a job.
In addition to the inactive numbers, in mid-2019 there were also 333,000 people who had been unemployed for over a year but were still looking for a job. They are counted in the unemployment figures, which totalled 1.3 million, 3.9% of the workforce.

Economic activity divergence

There is a big divergence between the proportion of UK-born people who are economically ‘active’ and those who were born in other EU countries. In mid-2019, 76.3% of the UK-born population aged 16-64 was economically active, a rate which has slowly increased from a recession-hit 71% in 2010. By comparison, for those born in the original group of EU member states, named the EU-14,[3] the activity rate was higher, at 80.2% in 2019.
Much higher again was the economic activity rate of those born in the EU-A8 countries, among the group that joined the EU in 2004,[4] and which contains the famous ‘Polish plumber’: it was 85.2%. For Romania and Bulgaria, who joined the EU in 2007, the economic activity rate was highest of all, at 86.2%.
Recent migrants will tend to be the more economically mobile and more likely to be in the active workforce. They will also include fewer students, fewer people who have retired before the age of 65 and fewer long-term sick. These factors will tend to push the economically active rate of that population group higher. However, at the same time, there are other things, some less amenable to coverage in official statistics, yet clear in numerous anecdotal reports, which also account for the higher employment rate of the newer EU members.
For the EU countries that joined from 2004, a BBC report last year showed that these workers had hourly pay rates around 25% less than for UK nationals. This was despite them having average skill levels higher than for UK nationals. The skill-pay relationship only seemed to apply for workers from the EU-14 countries: their skill levels were much higher than for UK nationals, although they had pay rates only around 10% higher.
Many of those from the newer EU members included in the British working class have done low-paid jobs that British-born workers were reluctant to do, such as food processing and picking fruit and vegetables in fields. However, they are also in more skilled occupations, and not simply the skilled manual ones that led to the ‘Polish plumber’ term.

Workforce breakdown

Turning back to the British workforce, the following table gives a breakdown of the number of jobs in the UK by sector in June 2019. These sectors are based on standard classifications and are a bit broad. They can also be impacted by changes in the labour market over time. For example, if I recall correctly, it used to be the case that canteen workers in a workplace used to be counted in the total of people in that particular workplace sector. But with the outsourcing of most canteen services to outside companies, they would mostly be included instead under ‘accommodation and food services’. Nevertheless, the breakdown of the types of jobs done in the UK does a lot to question the common ideas people have about the relative importance of different jobs.
For example, while Britain may not be a ‘nation of shopkeepers’, it turns out that the biggest sector of UK employment has five million people in the wholesale and retail trades. The large numbers in health, professional, education and administration will not be a surprise to many, but each of these areas employs more people than the whole of manufacturing industry, which itself is not that far ahead of accommodation and food services. The much-maligned financial and insurance services sector employs over a million people, not all of whom are in the City of London. Another million have jobs in the arts, entertainment and recreation sector, and there are ten times more people employed in estate agencies than in mining and quarrying. A further detail is that more than 150,000 have ‘jobs’ in the armed forces.

Table: UK Employment Breakdown, June 2019

Employment in sector
Number (000)
Percent
Wholesale, retail trade, incl repair of vehicles
4,997
14.0%
Human health & social work activities
4,538
12.7%
Professional, scientific, technical activities
3,156
8.8%
Education
2,970
8.3%
Administration, support services
2,968
8.3%
Manufacturing
2,729
7.7%
Accommodation & food services
2,470
6.9%
Construction
2,369
6.6%
Transport & storage
1,789
5.0%
Information & communication
1,620
4.5%
Public administration, defence, etc
1,510
4.2%
   of which, HM armed forces
152
0.4%
Financial & insurance services
1,113
3.1%
Arts, entertainment, recreation
1,053
3.0%
Real estate activities
572
1.6%
Agriculture, forestry & fishing
366
1.0%
Water supply, sewerage, etc
239
0.7%
Electricity, gas, etc
141
0.4%
Mining & quarrying
57
0.2%
Other sectors
1,010
2.8%
Total jobs in all sectors
35,667
100%
Note: Services sector total
29,766
83.5%

Note: The data count the number of jobs in each sector and not the number of different people. The total of jobs exceeds the total number of people in the workforce.
Source: ONS, Labour Market Overview, UK: October 2019
Overall, services sector jobs make up nearly 84% of the total number of jobs in the UK. This makes the common refrain from the British left about ‘industry’ – let alone ‘manufacturing’, which got a special mention in Jeremy Corbyn’s Brexit policy statement in Parliament on Saturday 19 October – seem more than a little out of touch with the reality of contemporary employment.

Conclusion

Many British workers voted for Brexit in June 2016, and many were enticed by the ‘take back control’ argument of the Leave campaign – a phrase that was a poorly disguised attack on migration from the EU. The data show that although the number of EU migrants into the British workforce rose fairly rapidly after 2004, it remained a relatively small proportion of the total. The data also indicate that an underlying problem for British-born workers was the much higher employability of the more recent EU migrants, whether that was due to their higher levels of skill or to their lower wage rates, or both.
Workers often react to labour market competition in a reactionary way. The irony is that they usually support the capitalist system and the capitalist labour market, but then complain if how these operate does not turn out well for them. The result is that they call upon the state to stop or control immigration. Far from any notion of ‘workers of the world unite’, the sentiment instead has been ‘British jobs for British workers’, something supported by the Labour Party and, implicitly, by sections of the useless left.
A basic minimum demand for anyone with a sense of justice is that all workers should get the same rights and protections, ‘immigrant’ or not. That might be the most justice one can get from a labour market based upon a capitalist system that oppresses workers and destroys society.

Tony Norfield, 22 October 2019


[1] A comprehensive assertion of this view is from academic authors Roger Eatwell and Matthew Goodwin in their National Populism: The Revolt Against Liberal Democracy, Pelican 2018, which I critique here.
[2] This point excludes the other feature of the labour market, that many occupations are dominated by one gender, and those with a preponderance of women often have lower wage rates.
[3] The EU-14 is made up from those countries who joined the EU before 2004, but excluding the UK in these UK statistics of other countries. The 14 are: Belgium, Denmark, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain, Austria, Finland and Sweden. The latter three joined the EU in 1995.
[4] In 2004, 10 countries joined an expanded EU, but the EU-A8 definition excludes Malta and Cyprus who also joined then, presumably because they were formerly British colonies. The EU-A8 countries are: Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia.

Monday, 7 October 2019

FX & Imperialism


What affects the exchange rate of a country’s currency? The answer depends on where that country stands in the world economy. Not simply because an exchange rate is the value of one currency versus another, so that you must weigh up two or more countries. It is mainly because the capitalist world economy acts both as a force that bears down upon everyone and because the most powerful countries within the system also have the most influence over how this works. Exchange rate theories ignore this latter point and this prevents an understanding of imperialism today.[1]

FX and the law of value

Some countries may link their national currency to that of an important trading bloc, as does Denmark and some peripheral EU countries to the euro. Others may closely tie their national currency to the currency in which their major exports and imports are priced, as in the case of Saudi Arabia and Hong Kong with the US dollar. Still others may decide to join a regional currency union, or some such arrangement, in order to limit the degree to which fluctuations in currency values might destabilise their international trade and also their domestic economies. Such policies will change the ways in which pressures from the world exert themselves, but they will not get rid of those pressures.
For example, a country whose exchange rate has been fixed against another still finds itself vulnerable economically if it becomes uncompetitive in the world market. It would face less demand for its goods and services, rising unemployment and also less ability to sell its bonds or equities to capitalist investors unless the yields were made more attractive. Among other things, this is what happened to Greece, despite Greece remaining a euro member country, and this has also become evident in some other euro countries.
This is not to say that a country can easily escape from these pressures by devaluing its currency. Every policy decision has its related cost, although some costs will be worse than others. The point is that every country is still potentially at the mercy of the market, with moves in currency values being only one means by which the market’s judgement is transmitted.
Here is the breakdown of trading in the global FX market by currency, showing the top 10 currencies. That trading amounted to $6.6 trillion daily in April 2019, according to the latest survey from the Bank for International Settlements released in September. Note that since a currency transaction involves two currencies, the sum of all the percentages would be 200%, not 100%:

Currency
2019 % share
US dollar
88
Euro
32
Japanese yen
17
UK sterling
13
Australian dollar
7
Canadian dollar
5
Swiss franc
5
Chinese renminbi
4
Hong Kong dollar
4
New Zealand dollar
2

As one might expect, the rich ‘Anglo-American’ countries dominate global currency trading. The euro is less than half as important as the US dollar, despite being the currency of 19 countries. Even the New Zealand dollar is traded more than the Indian rupee and nearly twice as much as the Brazilian real. Below, I examine how the structure of the imperialist world economy finds its reflection in the foreign exchange market, looking first at theories of how exchange rates are determined.

Exchange rate theories

Economists have many theories for exchange rates, but the feature they all have in common is that they ignore the structure of the world economy! They might take into account a country’s average price level or rate of inflation compared to others, its productivity growth, its balance of international payments, or the yield on financial assets as ways in which to determine the ‘fair value’ of its currency against others. While it is reasonable to include such things in the analysis, what is missing in these approaches is that they tend to use the same set of variables for each country. Different countries are distinguished by the importance a particular variable might have, with little attention paid to how a country’s status in the world economy can be decisive.
‘Purchasing power parity’ (PPP) is probably the simplest theory of explaining what the underlying value of a currency should be. It is not the favourite theory, but is a constituent part of many others. The basic idea is that the price of a typical good should be the same in two countries, after allowing for differences in taxation, transport costs, etc. If that good costs $1.20 in the US and €1.00 in a euro country, then the PPP value of the euro is $1.20. Then, if the euro is worth $1.30 or $1.10, the euro is either over-valued or under-valued, respectively.
Of course, there is no such thing as a typical good, and a wide variety of goods and services also have to be taken into account. Typically, the PPP approach uses a base year as a suitable starting point for the two (or more) economies, and then looks at the rates of inflation in average price levels since then. For example, if prices have risen in the US by 10% over the past few years but have not changed in the euro countries, then the implied level of the US dollar in the market should be 10% lower versus the euro to compensate for this. If the dollar’s value in the foreign exchange market does not fall, then its ‘real exchange rate’ will have risen, implying a loss of US competitiveness.
One problem with PPP analysis is what index of prices to use: consumer prices, producer prices, or a deflator reflecting the whole of GDP? Excluding certain items or not? Different indices will give different results.
More importantly, the PPP approach does not easily allow for changes in product quality, or new, successful products brought into the international market. Nor does it take account of the impact on exchange rates of changes in world commodity prices. In the latter case, for example, if oil prices rise from $50 per barrel to $100, then significant oil exporting countries will see a sharp rise in their export revenues. These things can justify a rise in the ‘real exchange rate’ of a currency and make it sustainable, whereas PPP analysis rests on the view that the real exchange rate of a currency should stay unchanged.
PPP analysis is used mainly as a guide to currency values based on inflation trends. It will tend to have more validity when the inflation rate in one country is dramatically above those in others, signalling that the value of the currency should fall in the market. This has recently been the case in Venezuela and Argentina.
Other theories of exchange rates broaden out the economic analysis to take account of factors not directly related to the trade in goods. This is just as well, since the influences on an exchange rate go well beyond that. However, these are commonly ‘equilibrium’ exchange rate theories, and usually they try to find an exchange rate for a currency that is compatible with a range of macro-economic targets. This attempt raises more questions than it answers.
Such targets may be a current account balance (including goods and services trade, and income receipts and payments) that is seen as sustainable over the long-term, underlying flows on the financial accounts (direct investment, portfolio investments, etc), and reasonable levels of domestic employment. Good luck with trying to figure out what those numbers should be!
This ‘equilibrium’ approach also tends to sanitise what happens in reality. Partly because it is based on a view that there is some stable, equilibrium level for all the variables that could potentially be achieved, when the global capitalist market is forever disrupting the best-laid plans. Also because some equilibriums are more equal than others, and there is no explanation given for this.


Balance of payments and the US dollar market

Take the US dollar, for example. There are some important features of the US international balance of payments that the equilibrium theories may attempt to count but will not delve into.
A country’s balance of payments covers all the transactions between it and foreign residents. This includes not simply exports and imports of goods and services, but also flows of profits, interest and dividends to and from the country, investment in foreign portfolio assets (equities and bonds), foreign buying of domestic portfolio assets, and direct investment and banking flows, among other things.
At first sight, such transactions appear to reflect the supply of and demand for US dollars in the foreign exchange market. For example, if US exports of goods in one month amounted to $150bn and US imports of goods were $200bn, there would be a deficit of $50bn on this part of the accounts, giving a net supply of dollars into the market that would exert downward pressure on its exchange rate (leaving aside the other items for the moment).[2] But this is not what happens. Instead, the way in which transactions take place is conditioned by the structure of the world market.
The dominant role of the US means not only that almost 100% of US exports are priced in US dollars, so that its exporters receive their domestic currency when they sell to other countries. Over 90% of US imports are also priced in terms of US dollars, so companies exporting to the US receive dollars, rather than euros, Japanese yen, Chinese renminbi, etc. In principle, the latter could then sell these dollars and buy euros, etc, so putting the dollar’s exchange rate under pressure. But in practice they will keep a dollar-based bank account for most of the funds.
This is because the US dollar is used for the contract pricing of much international trade, from oil and other commodities to aerospace, engineering and technology supplies, and their dollar accounts will be used for their own imports of dollar-priced goods. The result is that the US trade deficit does not lead to a comparable net sale of US dollars.
So the prominent position of the US dollar in the global market makes the dollar’s exchange rate far less vulnerable to a big US deficit than is the case for other currencies. This was a simple example from the trade account part of the balance of payments. It gets more complicated when looking at the flows of investment income and finance, but the same factors apply: the power relationships in the world economy.

Investment income, finance and FX pressures

‘Fundamental equilibrium’ FX theories project that a country with rising net foreign liabilities (as implied by persistent current account deficits) will find its exchange rate declining in value. Mainstream economic theory also has the view that rates of return should equalise across all kinds of investment, so it expects that a country with growing net liabilities on its foreign investment position will find that its net investment income will fall into deficit. This is because it will pay more on the rising value of assets that foreigners hold in the country than it receives on the relatively declining value of assets that it holds in other countries. Let’s see how these projections (do not) work for the US dollar.
The US has had a current account deficit in every year since the early 1990s, and this has been reflected in a rising value of net liabilities to the rest of the world.[3] By the end of 2018, the US foreign liabilities were a staggering $9.6 trillion more than the foreign assets held by US residents – this was up from a deficit of a ‘mere’ $1 trillion in 1999. Yet, despite this, the US still had a huge net investment income in 2018 of $267bn in 2018! It received $1078m of income on its assets of $23.7 trillion, but paid out just $811m on its far greater liabilities of $33.3 trillion.[4] Also, the US Fed’s broad index of the US dollar’s nominal value versus other currencies rose by 15% from January 2006 to July 2019, and was also 6% higher in inflation-adjusted terms. [5] What is going on?
Two related points account for this apparent anomaly: there are different types of asset and liability, and the investment returns on each also tend to be different, contrary to much economic theory. On so-called ‘foreign direct investment’ (FDI), where an investor has 10% of more of a foreign company’s equity, the returns tend to be highest. On ‘portfolio investments’, which includes money allocated by asset managers, pension funds, insurance companies, etc, into foreign equities and bonds, the returns are usually lower than on FDI. Returns are usually lowest of all on money market investments, including loans and deposits. Such returns will vary with economic conditions, but this pattern has been true for the major countries in the past several decades, particularly with the fall of money market interest rates to historically low levels.
Guess what? US foreign assets are concentrated in the higher-yielding FDI and equity assets. These accounted for two-thirds of US foreign assets at end-2018. Meanwhile, over half of US foreign liabilities (the investment foreigners have in the US) are concentrated in the lower-yielding US debt and money market instruments. That is how the US earns more on less, while foreigners earn much less on much more, giving the US that net investment income of $267bn.
A big reason behind this favourable outcome for the US is not that foreigners are a bit stupid and satisfied with low yields, while the US is a centre of shrewd capitalist investors who make well-judged forays into the rest of the world economy. Instead it is a reflection of US global power.
The US government can often force weaker countries to accept US investment on favourable terms, and the volume of US wealth puts its capitalists in a strong position to take advantage of any weakness elsewhere. Another benefit for the US comes from one consequence of the role of the US dollar mentioned before. Foreign central banks, as well as foreign companies doing international business, are in effect obliged to hold reserves of US dollar funds to manage their economic risks and guard against any financial mishap. These are funds held as US Treasury and agency securities, US dollar deposits and other items that give a low return.[6]

What about the rest?

The US pattern of privilege and relative insulation from changes in currency values does not apply to other countries to the same degree, and especially not to countries far lower in the world pecking order. For example, many so-called ‘emerging market’ economies often borrow funds from investors that are denominated in US dollars or another major currency. If the exchange rate of their own currency falls, that can greatly increase the value of their debts, apart from raising the cost of their imports.
These latter countries also find that the flows of international investment into their financial markets tend to be fickle and destabilising. If a country becomes a favoured investment location, billions will flow in to buy companies, bonds and property – boosting prices, because the scale of such flows will overwhelm the relatively small domestic financial markets. Then, when the favourable sentiment turns sour, investors move on to the next big thing, or conditions in world financial markets worsen, the flows can easily reverse and prompt a collapse.
They also have little access to longer-term, more secure funding, or to the far less volatile inflows that come from foreign central bank investments. The US dollar accounts for around 60% of central bank foreign exchange reserves that totalled $11.7 trillion in mid-2019. The euro’s share is next in line, though much smaller at 20%, and the currencies of Japan, the UK, China, Canada and Australia trail far behind the euro.
Being one of the big boys helps in FX markets, as in all the others. In contrast to the leeway given to the US, which occasionally shuts down its own government operations and more frequently strikes out in the world with unilateral policies, weaker countries in the global pecking order can barely put a foot wrong before they find it stamped on.

Market analysis pragmatism

The failure of economic theories to get to grips with the reality of the imperialist world market leads FX market participants – dealers, speculators, investors, advisers – to sideline those theories. Not because they want to analyse imperialism, but because they want to find something that works. So they adopt a range of pragmatic tools with which to try and judge the likely pressures on exchange rates.
Chart or ‘technical’ analysis is one method, where previous patterns of price moves are used to assess potential trigger points and trends in the FX market. That is an endorsement of the view that ‘the market is always right’, even if it has just completely changed its mind! A problem for technical analysis is that ‘key’ price levels expected to trigger a sharp price move, if broken, are usually well known. The result is that other market speculators buy or sell a currency to force prices through such levels. These days, automatic trading systems do a lot of this, commonly reversing position when a price level has been broken to gain a small profit. In this way, they also, as a by-product, undermine the validity of the signals they have depended upon!
The huge scale of the international currency markets – trading some $6.6 trillion per day in 2019 – helps endorse the pragmatic approach. After all, if many companies are buying/selling currencies to manage their business, including hedging against adverse FX moves, if asset managers, investment companies, hedge funds and banks are forever shifting funds into different markets, then it is unlikely that a simple model will work for currency valuation, or, more importantly, to judge currency risk. This can lead to the use of what one might call brainless correlation analysis.
Here, the job is to find another market price, anything, that seems to have a relationship to the changing level of one currency versus another. It could be the price of gold or oil, futures market expectations for changes in interest rates, z-scores of implied option volatility or market positioning data held by banks or by trading exchanges. It does not really matter much whether there is an identifiable causal relationship between the things being correlated. If it looks like the US dollar, the euro, sterling, etc, goes up or down when the implied volatility on the S&P 500 equity index goes down or up, then that’s good enough, just as long as the relationship holds for a while and gives some kind of lead on the forthcoming move in currency values.
When fully dressed up statistically, these correlations are often part of a set of FX market signals used by market participants. Wherever possible, if only to avoid embarrassment, some kind of market causation is usually inferred. No analyst would admit to using the price of lean hog futures on the Chicago Mercantile Exchange to judge the next move in the Norwegian krone versus the euro, even if there happened to be a decent correlation between the two.

Hidden FX hedging

At the risk of complicating further a discussion of what might seem to some as already a little arcane, I will turn to FX hedging. Basically, this means doing deals in the FX markets that reduce or eliminate the currency risk that is faced. It may look like a subsidiary aspect of the FX market, but hedging can play a big role in driving currency values up or down, often for reasons not evident to market observers.
All bigger companies tend to hedge their risk in currency markets, in other words to protect themselves against adverse moves in currency values for the things they need to buy or sell. For example, if a euro-based company knows it will receive $100m in three months’ time, then it will face a loss if the exchange rate of the US dollar falls against the euro. So it may decide to insure itself against the dollar’s fall. The most common way is for the company to do a deal to sell the $100m in the FX forward market at a fixed price for three months’ time.
If it does this, then there are two potential costs. Firstly, the dollar may actually rise in value, not fall, so the company has missed out on a higher euro value for its future revenues. However, if it does nothing, then it is just gambling the dollar will rise or at least not fall, and the whole point of the hedging exercise is to eliminate risk. Secondly, the FX forward deal will usually be done at an exchange rate that is different from the prevailing ‘spot’ rate of the currency.
The way it works is that if three-month US deposit rates are higher than the deposit rate on the base currency – the euro, Japanese, yen, sterling, etc – then the forward value of the dollar will be lower by the same degree. If three-month US deposit rates are lower, then the forward value of the dollar is correspondingly higher than the spot rate. If that were not the case, then there would be an arbitrage gap, and dealers would buy and sell the dollars in the spot and forward markets to bring about the required relationship between the spot rate and the forward rate. Nevertheless, although the two rates would be different, the forward value of the dollar would be fixed, thus eliminating risk.

Dollar-yen hedging

Taking the example of the US dollar versus the Japanese yen, the FX market prices work as follows. If US 3-month interest rates are 2.0%, Japanese yen 3-month rates are minus 0.1%, and the US-dollar is worth 107.0 yen in the spot market, then the 3-month forward value of the dollar would be lower than 107.0 to offset the higher US interest rate. The interest rate gap is 2.1% per annum in favour of the US dollar, but the term is only for three months, so the forward value of the US dollar would be roughly 0.5% (a quarter of 2.1%) less than the spot value, or close to 106.4.[7] So, if the Japanese company sells dollars in the forward market, it will lose roughly 0.5% compared to prevailing exchange rates in the spot market. However, it will have eliminated the risk to its finances that the dollar will fall even further.
That 0.5% (or 2.1% annualised) number is the cost of hedging currency risk for three months. It rises and falls with the degree to which the US dollar interest rate is above the Japanese yen interest rate. If the two deposit rates were equal, then the cost of hedging would be close to zero; if Japanese rates were above US rates, then there would be a forward currency gain compared to the spot rate for the Japanese company in hedging its dollar risk.
In Japan’s case, its close to zero or even negative interest rates for many years has meant that there has almost always been a positive cost of hedging. Yet, when the premium of US rates over Japan’s falls to very low levels, this reduces that cost and can encourage its corporates and investors to increase their hedging activity as the expense of eliminating currency risk is reduced. Equally, if US interest rates rise versus Japan’s, then the cost of hedging will also rise and this will tend to reduce the amount of hedging that is done.
Admittedly, this can all appear like an obscure FX market technicality. But it becomes an important driver of foreign exchange moves when the amounts concerned are not just the odd $100m, and instead are measured in the tens, even hundreds of billions of dollars.
Consider the example of Japan’s life insurance companies. They have hundreds of billions of dollars in foreign bond and equity investments, funded by their insurance premiums, and the returns on their investments are used to pay out on policies. Principally, they invest in bonds, to gain a regular income from coupons and interest payments, and the many years of low interest rates in Japan have led them to seek better returns in foreign securities. While their domestic policies pay out in terms of Japanese yen, the income and the asset value of their foreign investments is in US dollars, euros, sterling, etc. So they are exposed to a lot of foreign exchange risk.
How much risk can be illustrated by the largest Japanese life insurer, Nippon Life. The company has invested huge sums in foreign securities, mainly bonds. At the end of March 2019, it held a total of ¥14.2 trillion in foreign bonds, nearly $130bn, about 60% of which were in US dollars, nearly 30% in euros and near 10% in sterling. Its policy is to hedge the currency risk on these bond assets, but not fully. (Foreign equity holdings are far smaller, as for other life insurance companies, and tend not to be hedged) How much hedging depends both upon its expectations for currency markets and the cost of hedging, with the latest data showing that roughly 60% of Nippon Life’s currency risk on foreign bonds is hedged.
Other Japanese life insurance companies have similar policies, although their hedging ratios will differ. In total, the foreign bond holdings of the lifers probably amount to some $300bn, perhaps more.
Now consider what happens in currency markets when hedging activity changes. Just taking the Japanese life insurers, and excluding other investment companies whose activities will also have an impact, there could be a very big amount of foreign currency buying or selling.
If the average hedge ratio was 50% on $200bn of US dollar bond holdings, then the lifers will have done forward selling of the US dollar of roughly $100bn for the next three months. However, when it is time to renew the hedge, the cost of hedging may have risen a lot (higher US deposit interest rates versus Japan), so they decide only to hedge 25%. The net effect would be to buy $50bn in the FX market and so boost the dollar’s value versus the Japanese yen.
Alternatively, if the cost of hedging fell a lot (with the US Fed cutting interest rates), the hedge ratio may rise to 75%. Then they would sell another $50bn in the FX market. It might even rise to 100%, when they would sell an extra $100bn, pressuring the dollar’s value lower. This latter move was one factor in the US dollar’s collapse versus the Japanese yen from 2008 to 2011, from around 100-110 down to 75-80, as the US Fed cut interest rates towards 0.25% and also came close to pushing the cost of hedging down to zero.
These large-scale US dollar buying or selling actions would be driven by the cost of hedging. They would be independent of whatever the average Japanese life insurance company thought of Donald Trump, the US Fed or US political developments!
Mutatis mutandis, similar pressures in the FX market will follow from European asset managers adjusting their hedge ratios on US investments, or US asset managers doing the same for their European investments, and so forth. Note that the FX hedging decision is separate from the decision to buy or sell the underlying asset (usually applying only to bonds), and that lots of dollars, etc, may be sold, even if the asset manager maintains its dollar, etc, bond holdings.
That’s enough on FX hedging.

FX markets express economic power

The privileged position of the US stands out in global FX markets, from US companies facing far less currency risk than others, to the country receiving low cost financing for its consumption and military adventures. However, these are not things that any US politician has seen fit to recognise; it is an outlook not confined to Trump and friends. Instead the powerful position of the US is taken as a given, and one that they will fight to sustain, with pressures on other countries to open up their markets and submit to the imperial law of value.
As the example of FX hedging shows, moves in currency markets may have little to do with the standard assessment of trade balances. Instead, the full panoply of wealth, investment and financial dealing also has to be taken into account. In particular, a country is a player in these markets if it belongs to the rich club that dominates the international flows of funds. If it does not, then it has to wait in the wings and seek to gain access to the funds available by showing the requisite degree of obeisance to the major capitalist powers.


Tony Norfield, 7 October 2019


[1] My bona fides for discussing the FX market are the more than 20 years I spent analysing financial markets, including more than 10 when I was global head of FX research at a major European bank. During that time I constructed a number of models for the FX market, or participated in their development, paying attention to the many and varied theories available.
[2] This example also ignores that payments for the goods generally do not occur at the same time as the actual imports and exports are despatched and delivered.
[3] There is not a one-to-one relationship, however, because the value of assets and of liabilities changes with changes in financial market prices and the value of the US dollar versus other currencies.
[4] These asset-liability figures exclude financial derivatives.
[5] See https://www.federalreserve.gov/releases/h10/summary/jrxwtfbc_nm.htm
[6] To some extent, a number of countries have become aware of this and have diversified their foreign asset holdings from low-yielding debt securities into equities, property and other assets by setting up ‘sovereign wealth funds’, etc, that are separate from central bank FX reserves.
[7] This example is only approximate, to indicate the size of the difference between spot and forward FX values. In the market, the bid-offer spread, day count, form of interest rate, etc, also have to be taken into account.