Wednesday, April 27, 2005

Living in a Global Casino

A certain report (The Triennial Central Bank Survey of Foreign Exchange and Derivative Market Activity 2004) issued by the Bank of International Settlement quotes that "In traditional foreign exchange markets, average daily turnover in April 2004 was $1.9 trillion, a 57% increase at current exchange rates and a 36% rise at constant exchange rates compared to April 2001."

This is a huge volume of trade, if one considers that:

  • According to WTO statistics, the value of the Annual global exports of goods and services in 2003 was around $9 trillion (i.e., volumes of less than one week of Foreign Exchange transactions!!)

  • $1.9 trillion is about 100 times more than the trading volume of all the stockmarkets of the world combined.

    What makes it slightly scary is also the fact that by World Bank's estimates, 95% of these transactions are short term speculations, with 4 out of 5 trades completed in less than a week.

    Thus, given the fact that every day, only 2% of FX transactions relate to any "real" economic trade of goods or services, we are actually living in a global casino, where 98% transactions are speculative.

    Ever since the major world currencies became "float", and got commoditised, the global Currency Market or Foreign Exchange(FX) Market has emerged as one of the largest markets in the world. Currency traders obtain substantial gains by taking advantage of extreme fluctuations in currency price while using the well-known "buy lower - sell higher" principle. In comparing to other sectors of the financial world, foreign currency exchange is quite unique in that it is highly sensitive to many factors, open access to many classes of investors, high liquidity, and 24 hour access - and can transfer billions of dollars across continants at the click of a mouse.

    The major players - and winners - in this market are the investment banks. The world's largest ten banks (which include Merrill Lynch, Citigroup and Chase Manhattan, etc.) control 52% of the global foreign exchange market. The value of foreign exchange transactions conducted by Citigroup Bank in 1998 - $8.5 trillion - exceeded the value of the GDP of the United States in that year. The banks operate in their own interest and on behalf of large corporate and private clients, insurance companies and superannuation funds.

    The FX market also differs from investments in goods and services, in that speculators make money from money alone. No jobs are created and no services provided. The losers are often those least able to pay the price - the poor and marginalised who are the victims of financial crises triggered by (a) "capital account convertibility", normally a condition for loans by the international financial institutions, and (b) the rapid withdrawal of funds from emerging economies by speculators.

    This global casino is a shadowy world, where rumour and mood can shift billions of pounds in minutes, once described by Citibank chairman John Reed as "a little like the physicist who created the bomb".

    In the past, this global casino has triggered the foreign exchange crises which shook Mexico in 1994-5, Asia in 1997 and Russia in 1998.

    In the Nov.'97 7th Summit Level Meeting of the Group of 15 the then Prime Minister Mahathir of Malaysia had made these observations about these speculations:
    (while he was speaking in the meltdown of Malaysian economy around that time, but his remarks are true for all other "economic meltdowns")

    "In Malaysia and in other countries of South East Asia, we spent decades of sweat, toil and tears since independence to develop our countries and grow our economies. Our countries recorded the highest growth rates continuously for many years. But all these seem to have come to nought when, in the space of a few months, currency traders impoverished our countries merely by devaluing our currencies... The rules of trading are devised solely by the traders and these rules have been designed to benefit them. Thus for every dollar that they deposit, the bankers allow them gearing of 20 times. Since the funds at the disposal of these traders run into billions of dollars they have more money to play with than the reserves of most developing nations.

    ...Weak fundamentals are often cited as if these can mysteriously on their own weaken currencies. The truth is that currencies weaken only if currency traders sell them for US dollars. These traders are not doing so to save their investments. In fact they have no investments in our countries. What they actually do is to borrow the particular currency from foreigners or locals and then sell this currency for US dollars.

    ... This deliberate devaluation of the currency of a country by currency traders purely for profit... reduces the purchasing power of the country concerned, as well as the incomes of the people, rich and poor alike. It leads to inflation and economic regression. ..."

    "On the other hand the currency traders take billions of dollars of profits and pay absolutely no taxes to the countries they impoverish and make profits from."



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