the IEA weighs in How many oil industry authorities does it take to call the top of the market? Three, so far. Ali Naimi, Saudi Arabia’s oil minister, thinks oil at $120 is “unjustified” because supply fears are overdone. Opec says supply constraints are easing. And, weighing in yesterday, the International Energy Agency says that oil market fundamentals are turning as supply moves ahead of demand – though the shift has yet to translate into the price. Of course, one false move from Iran and this emerging consensus is moot. But what if the pundits are right? The oil price hit a peak of $128 a barrel this year, and is up about 13 per cent so far in 2012. That is mainly attributed to worries about Iran’s conduct in the Strait of Hormuz, through which a fifth of global oil supplies travel. Others blame quantitative easing – either via economic stimulus or by fuelling demand for speculative assets. The latter is hard to prove, although the oil price has come off recently as talk of further QE has receded. Trouble is, a further retreat may not be the boon many hope for. A high and rising oil price affects economic growth, but not by much. Goldman Sachs estimates that a 10 per cent rise in the price of crude slows gross US domestic product growth by between a quarter and half a percentage point. But with the American economy set to expand by 2-2.5 per cent this year, that is within the margin of error. And a falling oil price is unlikely to do much for economies such as the eurozone, which have even more powerful reasons for lack of growth besides the cost of oil. That said, falling oil prices should technically help stocks and bonds. As well as lower input costs, subdued energy prices help to keep interest rates lower for longer, boosting equity valuations. And if bonds rally, too, then it will be time to take the pundits seriously.

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The Internationalisation of the Crisis

The growth of debt over the last two decades in countries like the USA and UK has been dependent on international flows of capital which in turn have resulted from a significant degree of exchange rate stability compared to the turbulence of the early 1980s. Conversely, a move towards a different pattern of accumulation will inevitably put great strain on global monetary arrangements.

So far the crisis has mainly manifested itself in domestic monetary developments in the largest economies, although countries like Iceland, Ukraine, Hungary and the Baltic States have been driven to seek IMF or EU help. But this is now changing and the crisis is being internationalised in three ways.

The first of these is the effect of current developments on so-called `emerging market economies’. Nobel Prize winning economist Paul Krugman gives the example of Russia where `while the Russian government was accumulating an impressive $560bn hoard of foreign exchange, Russian corporations and banks were running up an almost equally impressive $460bn foreign debt...This truly is the mother of all currency crises and it represents a fresh disaster for the world’s financial system’ [4]. The unwinding of the `carry trade’ (where financiers borrow in markets with low interest rates such as Japan and lend abroad) is beginning to have a devastating effect on such currencies.

Secondly, countries like the UK and USA which have been at the centre of the crisis see their currencies in danger of sliding, both because their governments need to borrow abroad and because of a general lack of confidence. At the time of writing the dollar remains relatively strong simply because of the weakness of other currencies, but sterling has fallen dramatically against both the dollar and the euro.

The third factor is increasing pressure on countries to devalue their currencies in order to boost exports at a time of falling demand. Even the Chinese government is now considering this to American consternation [5].

All of these developments are likely to herald a period of much greater turbulence for exchange rates and capital flows. Yet underlying the immediate changes in currency values is a deeper disagreement about future strategies amongst the international capitalist class.

The central long-run task for capital is to develop a strategy of accumulation which does not depend on the build-up of unsustainable debt (Martin Wolf’s article in the Financial Times of November 5 entitled `Why agreeing a new Bretton Woods is vital and so hard’ is in many ways a manifesto for this process). This process involves a wide range of different potential conflicts but one issue in particular is seen as increasingly central. This is the rebalancing of world economic growth away from the USA (and UK) towards the surplus economies of Asia and elsewhere, especially China.

The more far-seeing representatives of capital, such as Wolf, are very clear that if the current pattern of global imbalances persists, so will recurrent financial crises of the kind we have seen recently. Large flows of funds into the US and UK will result in risky lending whatever the regulatory structures created. The only way this can be avoided is through a shift towards domestic consumption in countries like China and a move away from consumption towards investment and, especially, exports in the US.

This kind of strategy is extremely difficult to implement in practice because the unplanned, spontaneous nature of capitalism makes this kind of rebalancing very destabilising and risky. This was shown in the mid-1980s when the decision to co-ordinate a rise in the value of the yen and shift the Japanese economy towards domestic demand and away from exports triggered a speculative frenzy of lending resulting in a slump lasting almost two decades.

Yet, an even more serious problem today is that there is no clear agreement on the way forward between the representatives of different national capitals. That has been shown within Europe with regard to the arguments between the German and British governments over the degree to which government spending and fiscal deficits are an appropriate response to the crisis. More serious, however, are the underlying tensions between the US and Asian governments [6]. These tensions reflect not just economic concerns, but also shifts in the balance of power within international capitalism.

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