Still relevant today, from '97, to honour Angela Merkel's ban on "naked"
short selling and on purchases of CDS on eurozone gov't bonds, other
than for hedging, in Germany. I read she also urged the EU to speed up
supervision of financial markets and introduce a new tax on them.
Gamblers are trying to squash her.
Natalia
http://www.twnside.org.sg/title/nar-cn.htm
<http://www.twnside.org.sg/title/nar-cn.htm>
Global currency speculation and its implications
In the following excerpt from remarks at an International Forum on
Globalisation (IFG) seminar, Bernard Lietaer focuses on the alarming
increase in global currency speculation. The potential implications are
truly explosive, threatening global power arrangements, the sovereignty
of nation-states, and the abilities of ordinary people to survive.
------------------------------------------------------------------------
IN 1975, about 80% of foreign exchange transactions (where one national
currency is exchanged for another) were to conduct business in the real
economy. For instance, currencies change hands to import oil, export
cars, buy corporations, invest in portfolios, or build factories. Real
transactions actually produce or trade goods and services. The remaining
20% of transactions in 1975 were speculative, which means that the sole
purpose was an expected profit from buying and selling currencies
themselves, based on their changing values. So, even in the days when
the real economy was dominant, some currency speculation was going on.
There had always been that little bit of frosting on the cake.
Today, the real economy in foreign exchange transactions is down to 2.5%
and 97.5% is now speculative. What had been the frosting has become the
cake. The real economy has become just a small percentage of total
financial currency activity.
My estimate is that in 1997 we will have close to $2 trillion in
currencies being traded per day. This is equivalent to the entire annual
gross domestic product (GDP) volume of the United States being turned
over via currency trading every three days.
There are three cumulative causes for this explosive increase in
currency speculation:
*
Systemic redefinition: The first important act was US President
Richard Nixon's unleashing of the dollar from the gold standard in
1971. 'Floating' the dollar allowed currency values to be
determined by traders in currency exchange markets. Currencies
from countries with strong economies and sound monetary and fiscal
policies were given more value than currencies from countries with
shaky or weak economies and policies. This'opening' of the system
created a framework for the speculation game.
*
Legal deregulation: In the 1980s, both former President Ronald
Reagan and former Prime Minister Margaret Thatcher introduced
deregulation strategies. The Baker Plan, implemented by the World
Bank and the International Monetary Fund (IMF), applied those
changes to a dozen key Third World countries. This created a lot
more leeway for movement of capital internationally, and for
corporations that previously would not have participated in
speculation.
*
Technology: The structural, deep-lying phenomenon behind the whole
system, is the technological shift: the electronification of money
and the computerisation of market systems.
The Business Viewpoint
Economic textbooks say that corporations and individuals compete for
markets and resources. This is not true. Corporations and individuals
compete for money by using markets and resources.
The opening of the system, which led to 'floating exchanges', also
created a new asset class. Traditional asset classes are real estate,
bonds, stocks, and commodities. Today, we also have currencies. This
means that money, the medium of exchange, has itself become an asset to
be played into investment portfolios. This shift has different
implications for businesses, depending on whether you're an investor or
a 'real' business.
>From an investor's viewpoint, this new asset class - currencies - has
some significant advantages over the old ones:
*
Extraordinarily low transaction costs. Placing a few billion
dollars in foreign exchange costs very little; as much as 10 or 20
times cheaper than a stock transaction.
*
Twenty-four-hour market environment; one can actually play around
the clock.
*
The foreign currency market is the largest and deepest market
around by a long shot. If you have a few billion dollars to place,
bringing them to the stock market is going to move the stock's
value and tip off other traders as to what you are doing. This is
true in most bond markets (except for the US and some European
markets because of their large size). In foreign exchange, even $5
or $10 billion won't make a blip. So if you have a substantial
amount of money to move around, this is the place to do it. You
can get in and out without affecting the market.
Because of these three advantages, the act of lending money to people
(to buy houses, cars, expand businesses or whatever) is no longer the
best way to make money. The foreign currency market is the place to do
it. Banks are no longer the big players in terms of supplying credit. In
the last 25 years, banks, as a source of financing in America, have
dropped from 75% of the total supply of credit to 26.5%. For the major
international banks, like Chase Manhattan, Citicorp, Bank of America,
Barclays, or Sumitomo, currency trading typically accounts for at least
20% of total earnings. In a good year, it will be more than 50%.
'Foreign exchange risk'
In considering the viewpoint of so-called real businesses (those that
make cars, mine, produce electronics, etc.), the 'foreign exchange risk'
has by far become the largest risk in international business today,
often larger than political or market risk. For example, if a German
chemical company invests in a plant in India, it makes the investment in
deutsch-marks. The chemical products sold locally from that plant are
paid in rupees, India's currency. If the value of the rupee then drops
in terms of the deutschmark, the return on the original investment will
drop as well. In short, the biggest risk of such investments is not
whether Indians will buy the chemicals (market risk) or whether the
Indian government will nationalise the plant (political risk), but the
changes in the values of the currencies involved (foreign exchange risk).
Corporations have followed two major strategies to deal with this risk.
The first strategy is the reorganisation of the corporate conglomerate.
Production and marketing sectors are decentralizing because the risk
doesn't lie there, and because adaptation to local circumstances can
best be handled on a local level. This also leads to the dispersal of
production facilities to other countries. But while marketing and
production are decentralising, the corporation's financial and treasury
functions are being centralised. Twenty or 30 years ago, when an
American company had a big plant in Germany, the plant would handle its
own finances. Not any more. Now, this is all done centrally at corporate
headquarters.
The second strategy that large corporations pursue is an adjustment of
their executive officers. In the 1940s and 1950s, anybody who could
manufacture any product could sell it. So, a manager with a background
in production or engineering would typically be made the CEO. In the
1960s and the 1970s, that shifted. Suddenly marketing was the key
background necessary for people at the top. However, in the 1980s and
1990s, finance specialists are in charge. They are the ones who call the
shots. That shift in career paths has also changed the corporation's
outlook, and is a reaction to the new risk that we are talking about.
Now, I have two questions for you: First: Who do you think is the
largest private financial institution in the US today? It is General
Electric (GE). The largest profit sector in GE is not defence, not light
bulbs, not power stations. It is GE's treasury department, because of
its many financial transactions.
The second question is: Who do you think is taking the largest foreign
exchange risk? It's everybody who holds only one currency. That is, most
people. Anyone who owns their own house, which sits in one currency
(like dollars, deutschmarks, or yen), and who has their savings and
income in that same currency, is at the greatest risk. By holding only
one currency, they risk all their assets being devalued in the event of
their currency crashing. In a world of floating exchanges, not being
diversified in currencies is like having a stock portfolio with only one
stock.
Three Consequences
The first consequence of this state of affairs is that national
governments are in the process of losing power. The nation-state is the
one entity that cannot manage in this new climate. It has no way to gain
power against global capital and information technology.
Currency traders are effectively 'policing' governments by selling off a
nation's currency when they are dissatisfied with that government's
policies. If enough traders act together, the value of a currency can
plummet, creating a 'currency crisis'. These sudden large sell-offs are
viewed by governments as 'attacks' on the value of their currencies.
Currency devalution can happen in a very short time, days or even hours,
because of the new global communications system. There are no
negotiations, there's no talking, there's nobody sitting around a table
saying, 'This is what we're going to do,' or, 'How about re-negotiating
this part?' That's not the way it happens. You just suddenly end up with
a crisis in a particular country's currency. Such was the case with the
collapse of the British pound sterling in 1991, the Scandinavian
currencies in 1992 and 1993, and Mexico in 1994.
One of the things to watch for in the future will be such a devaluation
of (an 'attack' on) the US dollar, which is the linchpin of the whole
system. Now, one might ask, 'Why would traders want to pull out the
linchpin?' Well, from an individual trader's point of view, it doesn't
matter which currency you profit from, you just trade. If enough traders
see an opportunity to profit by the dollar's fluctuations, they will
exploit it because nobody believes that his or her individual action
will bring down the entire system.
Central banks can often intervene when a currency is under attack by
either buying or selling to counter speculators. But the volumes of
money now being traded are so vast that even central banks may not have
an impact. All the reserves of all the central banks together amount to
about $640 billion, so all their reserves could be depleted in a third
of a normal trading day.
This points directly to a second consequence: a growing interest in
market instability because that is where one finds the opportunity for
windfall profits. Big fluctuations in the values of currencies allow for
big profits to be made by trading them. Consider the following
statements by leaders at opposite ends of the spectrum:
'The biggest concern today is the growing constituency for instability.'
- Paul Volcker, ex-governor of the Federal Reserve, in Changing Fortunes.
'Instability is cumulative, so that the eventual breakdown of freely
floating exchanges is ensured.' - George Soros, the largest currency
speculator today, in The Alchemy of Finance.
They both agree that there are many more people now who have an interest
in profiting from instability; previously, they had an interest in
stability. If you have an unstable system, it is just a question of when
it will fly off the handle. It will blow apart at the moment when the US
dollar experiences a crisis. When the dollar crisis occurs, the world
will have no system left.
The only precedent I know is the collapse of the Roman monetary system.
In the 1929 crash, the monetary system held. We had all kinds of other
problems - unemployment, stock market crashes, currency inflation in
Germany - but there was a gold standard that held. Today, we have no
gold standard to fall back on. So there is no precedent for a collapse
of this nature. And this would be a truly global phenomenon. All
currencies in the world are based on the dollar. So if you have a crisis
on the dollar, you pull out the linchpin and... boom.
The third consequence is some thing with which you are very familiar. As
a great portion of the national currencies - about $2 trillion per day -
is being turned around in the financial cyber-economy, there is just no
satisfactory medium of exchange available to people at the bottom.
National currencies are not widely available to the poorer parts of the
population. The age of labour as a key component of production is gone.
If you don't have a job, you don't have 'money' (i.e., national
currency). Even despite the fact that structural unemployment is
increasing, the economy can continue to 'grow' very well. Technology
will shift us still further in that direction.
What is beginning to happen in the developed countries is a new
phenomenon: an explosion of 'local currencies' - money that is not the
national currency. We haven't seen this since the Great Depression when
there were literally thousands of local currencies in the US and other
countries affected by massive unemployment. By supporting the
development of local money schemes, we may in fact create the groundwork
for the next system. This could become one of the most powerful ways
available to support citizen control.
(Third World Resurgence No.89, January 1997)
The above is reproduced from IFG News, Issue Two, Summer 1997.
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