As their economies continue to stagnate and the risks of further global financial turbulence increase, the major powers led by the United States, are waging an increasingly open economic war against China, demanding that its currency, the renminbi rise significantly.

The descent into the kind of tensions not seen since the 1930s underscores the fact the collapse of Lehman Brothers in September 2008 was the start of a breakdown of the entire economic framework set in place after the World War II.

One fact alone points to the extent and depth of this process Two weeks ago, Washington Post economic commentator Robert Samuelson invoked Smoot-Hawley as he called for trade war against China. Ten days later Financial Times economics commentator Martin Wolf declared that the time for a currency war against China had come as there was “no alternative”. What was unthinkable yesterday has become necessary today.

The mounting global economic tensions have sparked a call from the Institute of International Finance (IFF), representing more than 400 of the world's leading banks and financial institutions, for a new currency pact to be agreed by the world's leading countries by the time of the G20 meeting scheduled in Seoul, South Korea, next month.

A letter from the IIF's managing director Charles H. Dallara warns that the world economy faced a situation as critical as that confronted in the early months of 2009. At that time industrial production, world trade and stock markets were contracting at a faster rate than the corresponding period following the October 1929 share market crash.

“As countries struggle to cope individually with the lack of upward momentum in global growth—and in many cases unacceptably high unemployment—urgent action is needed to arrest the disturbing trend towards unilateral moves on macroeconomic, trade and currency issues,” he wrote.

Calling for policymakers to engage in “multilateral negotiation” to deliver a set of consistent and mutually-reinforcing measures to address the problems, Dallara warned that a “communiqué of platitudes” from the G20 only risked further undermining market confidence.

Billionaire financier George Soros added his voice to the calls for China to take action over its currency in a comment published in Financial Times. “The chances of a positive outcome are not good,” he wrote, “yet we must strive for it because in the absence of international cooperation the world is heading for a period of great turbulence and disruptions.”

However an examination of the origin and development of the currency wars shows why such co-operation is impossible.

In the early months of 2009, when governments around the world were carrying out stimulus packages aimed at boosting their economies, there was talk of global collaboration. But it was short-lived. By the end of 2009 new contradictions had emerged as the near-bankruptcy of Dubai and the Greek financial crisis pointed to the emergence of the so-called sovereign debt crisis.

By May of this year, the European banking system faced collapse and was only propped up through the provision of a euro750 billion bailout. The crisis effected a policy reversal as financial markets dictated their agenda to national governments. Henceforth, they demanded, fiscal stimulus packages had to be ended and a programme of sweeping spending cuts initiated, aimed at wiping out social gains won by the working class over the entire post-war period.

At the same time, the economic stimulus provided by the lowering of interest rates had run its course. In both the US and Japan short-term interest rates set by the central bank are so low that monetary authorities have resorted to “quantitative easing”—the purchase of government bonds—in a bid to lower long-term rates.

But these measures have failed to boost economic growth. In six of the world's major economies—the US, Japan, Germany, France, the UK and Italy—gross domestic product in the second quarter of this year still had not returned to where it was in the second quarter of 2008. Moreover, these economies are estimated to be operating at about 10 per cent below their past trends.

With stimulus packages and interest rate cuts either ruled out or ineffective, national governments are seeking to expand exports, by reducing the value of their currencies, as the sole remaining measure available to provide an economic boost. But, by its very nature, an export stimulus cannot boost the world economy as a whole. Rather than providing a life raft, competitive devaluations are, as a comment in the Wall Street Journal recently noted, more like shipwrecked sailors trying to stay afloat by climbing on each other's shoulders. Even more deadly consequences are certain to follow.

Writing in Sunday Telegraph, leading economist Joseph Stiglitz warned that the world economy faces “a Japanese- style malaise, with no end in sight.” “What makes matter worse, he adds, is that Japan's “ lost decade” of low growth was accompanied by low unemployment and high “social cohesion,” unlike now. He said “ the prospect of another crisis down the road remains not insignificant.” “ We have bought ourselves a little extra time before the next crisis.”

Stiglitz called for the eurozone to a create a solidarity fund to help those facing economic problems

But he was not confident that the eurozone currency can survive the present economic crisis. One solution, he suggests, may be for Germany to leave the zone or for the zone to be divided into two.

Courtesy wsws