http://mrzine.monthlyreview.org/2015/images/imf_in_china.jpgChina's economy is now beginning to slow down; the asset market bubble in China has collapsed; and China is now looking for an export thrust to boost its growth rate, which is why it has devalued its currency. All this means that the stimulus which the world economy was getting until now from an appreciating yuan will now no longer be forthcoming. And this augurs ill for the world economic crisis. . . . Now, as far as the US is concerned, if the value of its currency appreciates vis-à-vis other currencies, then that affects the net exports of the US adversely, and hence its domestic activity and employment. Of late there had been much pressure on the US Federal Reserve Board to increase its interest rates which are currently as low as they could possibly be, at almost zero, since its domestic economy was supposed to have been "looking up"; and everybody was expecting the Fed to raise its interest rates in September. This, however, will now have to be postponed, since any such interest rate hike, by making the US dollar more attractive to hold, would have the effect of further raising its value vis-à-vis the world's currencies, and hence further lowering the US economy's level of activity even below what the current appreciation of the dollar (at near zero interest rates) would give rise to. The problem with the US however is that even though it can postpone an interest rate hike, it can do little else to prevent a dollar appreciation. It cannot lower its interest rates any further, since they are already at rock bottom. Short of imposing import controls in open or clandestine ways, it will find it difficult to prevent a lowering of its level of activity and employment. This explains why the US, which had been pressurising China all these years to allow greater market determination of its exchange rate, is so peeved when China claims to have done precisely that. The US calculation was that "greater market determination" of China's exchange rate would produce an appreciation of the Chinese currency vis-à-vis the US dollar, and hence be of benefit to the United States in enlarging its market. As a matter of fact, since "greater market determination" has resulted in a depreciation of the Chinese currency, many US lawmakers have now started lashing out at this denouement. . . . Two other factors are likely to work in the same direction. One is the collapse of the capitalists' already feeble "inducement to invest". Until now, for instance, being able to sell to China had acted as some sort of an investment stimulus for advanced country capitalists; this is now being removed. In addition, the currency price fluctuations, all of which do not move up or down synchronously, make profitability calculations much more difficult, and hence increase the risks of investment. For these reasons, again as in the 1930s, when "beggar-my-neighbour" policies were rampant, the capitalists' "inducement to invest" would get adversely affected, compounding the recession. The second factor is that the appreciation in the value of the dollar makes it more attractive for speculators to hold dollars rather than primary commodities, which is why world primary commodity prices, already on a falling trend (which incidentally explains the "negative" inflation in India according to the Wholesale Price Index), have fallen even more sharply after the devaluation of the yuan. This is further aggravated by the fact that China's demand, which had shored up primary commodity prices to an extent, would now be expected by speculators not to be doing so; this would also contribute to a collapse of primary commodity prices. This fall in primary commodity prices has three effects: First, several countries like Australia, Brazil, Russia, and Chile, which are significant primary commodity exporters and whose fortunes therefore are tied up with primary commodity prices, will now experience a collapse of their growth rates. Secondly, debtor countries like Greece will now find that the real burden of their debt has gone up, which would push them further towards insolvency, and make creditor countries and creditor institutions impose even stiffer measures of "austerity" upon them. This, by reducing aggregate demand in those countries to an even greater extent, and hence, by implication, doing so all over the world, will aggravate the crisis even further. The third effect is through what the American economist Irving Fisher, who had been a professor at Yale and had himself lost his entire personal fortune in the 1930s Great Depression, had called "debt deflation".

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