The capitalist economists and the mass media called it a second round of “quantitative easing” or QE II, and most workers when hearing such a term would simply throw up their hands and turn to the next news item. That is, if the workers heard about it at all. They would figure they could never understand such highly technical terms; it’s a bit like trying to understand modern quantum physics, and maybe less important as far as how it affects their lives.

$600 Billion

Officially announced just one day after the US midterm elections, this QE II in fact may well ultimately have a greater impact than the elections themselves. Basically, what happened was that the US central bank, the Federal Reserve Bank, or “Fed”, decided to further flood the world with an increased number of dollar bills – at least some $600 billion to start with. They will do this by buying bonds from private investors. These bonds include both Treasury notes and bonds based on real estate. In order to buy them, the Fed will print up new money.

Money – the Universal Equivalent - and Global Capitalism

In order to understand the meaning of this, one must start with an understanding of what money is. Basically, money was developed as the universal expression of value, that is, to express the relative value between one commodity and another – in what proportion these commodities will be exchanged. Among these commodities is human labor power – the ability to work – which the worker rents out by the hour, day, week, etc. in exchange for the money to buy the necessities of life.

Global investment, production and trade are central to the modern capitalist world, so the question is how the measures of value compare between the different nations. The different monetary systems – US dollars, Chinese renminbi (also called the yuan), Western European euro’s, Brazilian real’s – all must have a relationship to each other. It’s a bit like trying to know the length of an item in inches when your neighbor measures in meters, but with some huge complications: One is that almost every nation has its own, independent measure of value. Even more complicating is the fact that, unlike inches and meters, these different measures of value are in constant flux. This is so for several reasons.

The main reason is that each currency has a value in relation to the total production of the country (or group of countries, in the case of the euro) on which it is based. If the number of Brazilian reals in circulation remains constant but Brazil’s total production (gdp) doubles, then everything else remaining equal the real will tend to double in value; one real will be able to buy twice the number of goods in Brazil. The reverse is also true.

Money Supply and Prices

The amount of any currency in circulation is called the money supply, and there are several different ways of measuring it, but the most important thing to understand is that the money supply is not simply determined by the number of physical bills in circulation. If a bank lends somebody $100,000, then the lender suddenly has this amount of money to spend. However, as long as the loan remains on the books and the bank can expect to have the loan repaid, then the bank is considered to have retained this $100,000. The money supply has suddenly increased by this amount. Thus, the total amount of credit – loans – in existence has the effect of increasing the money supply. The US dollar money supply, as measured by “M2” has increased by some 2.6% so far this year, for instance.

There are various measures that different governments and their central banks can take to influence their money supply and the value of their currency relative to other currencies. One of the main ones is to increase or lower interest rates. If they increase interest rates, this will tend to have a couple of effects. One is to increase the demand for their currency, since international investors will want to buy bonds and make other loans in that currency since their returns will be higher. This increases the demand for that currency, thus driving its price up relative to other currencies. On the other hand, if a regime takes measures to increase their money supply, this will tend to lower the value of that currency. Obviously, if a currency’s value is lowered relative to other currencies, then there will be a tendency for more of that currency to be required to buy goods – in other words, inflation.

The Dollar and the International Currency System

One problem that arises is how are these currencies going to be related to each other in the months and years to come? International investors have to know this in order to make their investment decisions, otherwise what might look like a good investment can suddenly turn into a huge loss. If, for instance, an investor decides to build a plant in country X, and in two years the currency of that country collapses in value relative to other currencies, then the value of that investment has also decreased, since it’s measured in that country’s currency. This is just as so for agreements to buy or sell goods from any particular country.

As by far and away the world’s most powerful nation, the US’s dollars are used as the international measure of value. All oil, for instance, is sold in dollars. Most international trade uses dollars, not the currencies of the two respective countries. This gives an additional huge power to US capitalism, and like any self-respecting capitalist they use this power to their advantage.

Like many capitalist regimes, the US regime runs a steady deficit. As is well known, this deficit is funded by selling of Treasury “securities” (bonds, Treasury Notes, etc.), many of which are purchased by foreign investors. In deciding whether or not to purchase a Treasury security, the potential investor must consider several factors. One is the return on the investment – i.e., the interest rate he or she will receive. That rate is down to near zero now; it has been lowered so much in order to try to stimulate lending and thus stimulate the economy. The US regime can get away with this because its economy is so huge and the regime is so powerful and relatively stable. International investors are willing to buy these securities because in an era of global uncertainty their investment seems more secure than lending the Greek government, for instance, money.

Most such bonds are not held for the life of the bond; they are bought for speculation to be bought and sold. When the Fed announced QE II, one day after the mid term elections, they were announcing their plans to buy back some $600 bn. of bonds that international speculators held. The claimed idea was to put more money in the hands of these speculators so that they would lend money to businesses in the US who would invest and thereby get the economy going again. In addition, they hoped that consumers would take out more loans to purchase more goods, thus also stimulating the economy.

Had the Fed cut interest rates, it would have had a similar effect, but it has already reduced those rates to nearly zero, so this tool was no longer available for them.

Investing in Production vs. Speculating

Ever on the alert for a quick profit, however, these investors – finance capital – are not doing this; instead they are sending the money all around the world. They are investing in the Brazilian stock market and the Thai bond market. The economies of these nations, with their cheap labor and few environmental or safety regulations, have large trade surpluses. Since their economies are not stagnating as much as that of the US, their interest rates can be kept higher also. These factors are keeping the value of their currencies higher, which is attracting even more foreign capital – capital which is used to buy debt, invest in their stock markets and speculate on real estate. This only drives their currencies even higher, which makes it more difficult for them to export.

While US capitalism criticizes China for “currency manipulation”, it is in effect engaging in the same thing with this QE II. Meanwhile, Obama is calling for a “balancing” of world trade, meaning that the exporting nations should take measures to reduce their exports. This, again, is another step – although only rhetorical at this point – towards trade war. (In the past, when US capitalism was one of the main exporters, it had no problems with an unbalanced world economy.)

QE II also helps maintain the price of US bonds since it increases the demand for them. This helps maintain the profits of these speculators.

Increased International Tensions

What QE II will not do is create any significant number of jobs in the US. However, by effectively further lowering the dollar’s value, relative to other currencies, it is tending to further destabilize the world’s currency system. Several countries are now taking unilateral measures to try to prevent the entrance of large amounts of speculative capital. This is, in effect, the first step towards a round of competitive devaluations – driving down the value of a currency to facilitate exporting goods. This, in turn, is the first step in trade wars, which tend to led to military wars.

In the US, if the economy ever gets going again, this cheapening of the US dollar will lead to higher prices – inflation.

Ultimately, of course, monetary instability and crisis is a reflection of the inherent contradictions of the capitalist system of production and distribution. One of these contradictions is the existence of the nation states in the era of world production and distribution. This contradiction is reflected in the inability to reliably measure value through a global monetary system. In turn, this inability disrupts production itself, since the capitalist cannot be assured of profits. Another contradiction is the tendency of the rate of profit to fall. This tendency is strongest in the production of goods, so capitalists increasingly use their capital to speculate on money, real estate, etc., and this speculation itself disrupts and destabilizes world production.

The workers’ movement must ask why does the creation of money have to be done through buying bonds from private banks? Why cannot a central bank simply print the money to directly finance government operations? Second, it is considered the equivalent of a sin against nature for the state to control, or “manipulate” the value of its currency. What this means in practice is that the private banks should be allowed to send capital washing all around the world like a giant tsunami. Why should this be so?

Public Ownership

As the expression of relative, or exchange, values, the monetary system operates like a giant communication network for global production and exchange. Clearly, just like the internet and telephone, whoever controls this network and determines the messages sent and received also controls the content of the messages themselves. A renewed and conscious workers’ movement cannot afford to ignore these issues. It must put the banks and financial centers into public ownership under workers’ control and management. And more than any other development, this rising crisis in the world’s monetary system once again shows the need for an internationally coordinated world working class movement.