EARLIER this month, the euro-US dollar (EUR/USD) exchange rate fell about the same time that sterling fell after the Bank of England raised its main interest rate by 0.75 percentage points to 3 per cent. This brought borrowing costs to the highest level since 2008.

The exchange rate shift has also resulted in a slowdown in employment growth.

This is a direct result of the US Federal Reserve tightening its policy earlier this year around longer-term interest rates that have moved significantly higher, where stock prices have declined sharply and the dollar has increased in value.

Then last week the pound rose to its highest in almost three months against the US dollar. 

In delivering his Autumn Statement, Chancellor Jeremy Hunt announced a slew of tax rises and spending cuts as he attempts to close a £55 billion hole in the public finances.

The result of Hunt’s Budget will mean millions more Britons will be paying higher rates of income tax and higher energy bills.

Confirming a substantial increase to windfall taxes on the profits of oil and gas companies, Hunt confirmed more investment in schools and the National Health Service.

Together with Prime Minister Rishi Sunak’s fiscal prudence, the idea is to roll back, if not entirely avoid, the market volatility that Sunak’s predecessor, Liz Truss, had unleashed in September with her proposed fiscal plans.

These changes in financial conditions directly affect the economies in the US and Britain.

In both countries, higher mortgage interest rates have slowed housing activity, lower stock prices weigh heavily on consumer spending by reducing household wealth, and the strong dollar, in turn, suffocates foreign demand for US exports since their cost in foreign currency is necessarily higher. 

The effects of the changes in currency rates directly affects the housing and employment markets which, after the last almost three years, the working class is simply not prepared for.

Britain’s GDP has contracted by less than expected, with sterling coming under pressure as recession warnings were repeated. Why does this matter?

In “Exchange Rates and Employment,” Stewart Ngandu explains how equating labour demand to labour supply produces a “solution of simultaneous equations for employment and wages.”

He asserts that labour demand is necessarily more sensitive to exchange rates if foreign companies maintain pricing power in domestic markets, adding: “The higher the price elasticity of demand facing producers and the lower the implied price-over-cost mark-ups in the industry, the more responsive labour demand will be to exchange rates.”

This has very much been the case on both sides of the proverbial pond.

Where employment growth has been slowing in reaction to exchange rates, this is likely to slow further as the Federal Reserve in the US continues to tighten monetary policy.

While the relationship between exchange rates and employment has been of interest to many economists, there is good reason to worry about the effect that monetary policy will have on housing and employment.

The monetary policy committee had warned last month that growing inflationary pressures would require a more substantial response than previously thought.

As members of the committee voted to raise the base rate, they cautioned that Britain may be heading for the longest recession since the origin of reliable records in the 1920s.

The end result is that many transnational businesses score financial wins, such that exchange companies like Money Transfer Comparison by assisting foreign companies and SMEs (small and medium-sized enterprises) find bargain exchange rates, this not only helps their pricing power in domestic markets, but it also directly affects employment rates and wages.

US economist Michael Hudson saw this coming long ago in what he characterises as a cold war where the billionaire class is now embracing the “multipolar financial system” by diversifying assets in a pivot towards Asian markets.

Hudson believes that soon even oil will soon be sold in Asian currencies where the cold war is already divided between those autocratic countries that seek to protect public regulation against monopolies over the oligarchic free market model and where autocracy prevents the oligarchic class from taking over while seeking to protect the unionisation of labourers and the job market. 

Hudson criticises the US model where inflation is invariably blamed on “wages, on low levels of unemployment and on working people.”

Analysing how is the end product of financial management. Hudson explains that it serves a role in alienating labour from its own value: “You need unemployment in order to prevent labour from getting most of the value of what it produces, so that the employers can get the value, and pay that to the banks and the financial managers that have taken over corporate industry in the United States.”

This is Marx’s “labour theory of value” and this is the linchpin of the current economic situation for thousands of workers being laid off by big tech in addition to the millions who have never regained employment since lockdown.