Can someone explain to me why free-market currency trading is a good thing? I don't get it. I'm just a normal guy trying to convert a large sum of Currency A into Currency B to make a normal transaction. Why should I be at the mercy of uber-wealthy hedge-fund speculators and micro-traders? The British pound has dropped from 1.22 to 1.14 to the Euro in 3 weeks. This drop can be attributed to two things, one of them real: house prices have dropped in a UK (a bit - not much). The second "factor" is the belief that maybe, possibly, the UK might think about doing some "quantitive easing" (i.e. creating money out of thin air).
However, nothing fundamental has changed between the EU and the UK in the last 6 months - everything's around about the same. In fact, today the UK voted NOT to increase QE. Why hasn't the price miraculously jumped back to 1.22 as it was before all these QE rumours started? Why has the currency been allowed to bop up and down between 1.14 and 1.23 over the last six months? This makes absolutely no sense to me and is one hundred percent down to script-kiddie machine auto-buying and selling faster than you can think and random wealthy organisations and people using the worlds economy as their own private casino.
Surely Mr Posen and Mr Sentance would know what effect their comments would have? Why are the minutes of these BoE minutes made public - I don't care what they discussed, i just want to know what the outcome of the vote was - all this information leads to speculation which means that the currency moves on hot-air - literally.
Governments should fix their currency value against a standard (some rare heavy metal whose street price has been pretty constant because there's not much of it around) for a defined period of time (1 year). When there are so many other ways for people to gamble their money away, why do they need currencies, which deeply affect normal people (like me), as well? What's wrong with this idea?
Rant over.
6 comments:
Hi mate, some thoughts on your post/mini-article (from one who works in a bank and sits near the researchers all day...)
"Can someone explain to me why free-market currency trading is a good thing?"
If you are a company buying large supplies from overseas, you can hedge the risk of your base currency changing by taking an opposite position in the FX market.
"The British pound has dropped from 1.22 to 1.14 to the Euro in 3 weeks. This drop can be attributed to two things, one of them real: house prices have dropped in UK. The second "factor" is the belief that maybe, possibly, the UK might think about doing some creating money out of thin air."
Also the new government has been trying to explain to the voting public just how buggered the UK finances are. One theory I heard was that Labour knew they would never win the election so they purposely pissed it away in order to knacker up the new government!
"However, nothing fundamental has changed between the EU and the UK in the last 6 months."
Not really - there's been massive changes in the economies of the UK and others which add up to fairly fundamental changes in the relationships between the countries. Not to say that it's all logical, far from it, but that's why the changes are so dramatic.
"In fact, today the UK voted NOT to increase QE. Why hasn't the price miraculously jumped back to 1.22 as it was before all these QE rumours started? Why has the currency been allowed to bop up and down between 1.14 and 1.23 over the last six months? This makes absolutely no sense to me and is one hundred percent down to script-kiddie machine auto-buying and selling faster than you can think and random wealthy organisations and people using the worlds economy as their own private casino."
There's two main types of movers of the FX markets - biggest by far are governments, who hold the most influence and purposely drive up or down the value of their currencies in order to improve export costs etc. Their influence is shown in the longer-term swings between 'levels'. The machine-trading is over much smaller ranges (the bobbing between closer levels) and there's various mechanisms in most of the exchanges/markets that limit the speed of transactions anyway.
"Why are the minutes of these BoE minutes made public - I don't care what they discussed, i just want to know what the outcome of the vote was - all this information leads to speculation which means that the currency moves on hot-air - literally."
Pretty much. Analysts want to try and understand what the sentiment was behind the vote in order to try and gain insight into the chance of future decisions. If they make it obvious that the next move will be a certain way, then you can plan accordingly. That's the theory at least...! Most of the time it's indecision and fear driving it.
"Governments should fix their currency value against a standard (some rare heavy metal whose street price has been pretty constant because there's not much of it around) for a defined period of time (1 year). When there are so many other ways for people to gamble their money away, why do they need currencies, which deeply affect normal people (like me), as well? What's wrong with this idea?"
Certainly would be sensible. The USA used to be priced off gold but the creation of the (incredibly dubious) Federal Reserve did for all that and the US$ is only dominant because it's based to price oil globally. Research the history of the Fed - very dodgy and makes a huge amount off the US government as its a private company. Unfortunately the Bretton Woods agreement was basically a push for a one-world government and spawned the World Bank and IMF, who between them have nicely crippled any countries forced to use their services...
The governments at the moment are making banks the focus of public anger at the bad economy but in reality it's all due to the governments. They set the laws and policies that control the banks behaviour after all!
"Rant over."
Hey, nothing wrong with ranting. You dare to think for yourself, such a rare quality :)
I thought you might have an opinion on this one! :) My main gripe is that the currency has seen a 10% swing both ways in 6 months but i don't believe that the fundamentals of the UK vs EU economies have changed by 10% (i could be wrong but it doesn't "feel" that way).
We've been relatively smart in buying at good prices (> 1.20). But i've been rather devastated watching a little under 10% just evaporate over the last 3 weeks just when we need to do our last transfers!
I'm also deeply sensitive to this because of the joy of having ZAR go to 20:1 to GBP around the time we moved to the UK!
I totally get what you are saying about hedging, but i (representing everyman briefly) cannot afford to do this and it's only the wealthy that benefit. Wealthy people and governments and large corporations - not entirely surprising i suppose...
Re: Bretton Woods and gold standards- Well, because they're absolutely terrible ideas. A money supply fixed against a single commodity makes every sector of that economy vulnerable to supply or demand shocks of the commodity. It also means that any economy undergoing constant growth will experience constant deflation. The last problem is that is makes trade very difficult to balance.
Also, I think Andrew is right about the pound swings- future expectations of the EU/UK economies and their international trade have been all over the place.
And another thing - if you bang on the door of the bank of england, they will not pay the bearer anything, despite promises to the contrary.
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