3
$\begingroup$

I would like to know the reasons for any government to allow currency speculation. What is the benefit for a country and for it's people if the currency speculation is allowed?

  • My cousin's farm is producing vegetables. Providing some goods that the consumers need or desire and they are ready to pay for.
  • My fruit shop is selling fruits and vegetables. Providing a service that the consumers need or desire and they are ready to pay for.
  • My uncle's credit bank is helping the people who can save enough to buy a car today instead of waiting many years until they saved enough. Providing a service that the consumers need or desire and they are ready to pay for.
  • My aunt's currency trading company is helping the people based in the EU to buy products or services made in the USA. Providing a service that the consumers need or desire and they are ready to pay for.

If I, or my cousin or my uncle create monopolies or cartels and speculate and fix prices, artificially inflating the cost of the goods/services we provide, the government will put punish us for that, because we harm the consumers. That's why most countries have a Competition Council. But if my aunt creates a monopoly or cartel and buys large amounts of currency (becoming a speculator instead of being a trader) artificially increasing the price of the US dollar for the EU based consumers, reducing their buying power and therefore harming them, shouldn't the government react in the same manner?

Now, the currency speculators do not produce any good or service that consumers actually need or desire. Not even the international traders need to buy currency from speculators—they can buy the currency from the international traders based in the targeted country, or from the currency traders. So, nobody actually need the speculators "services". By the contrary, their actions will make the target currency to be weaker (so the working people can buy less with their money - they have less buying power), and they will make profit from this.

At the end of the day, me, my cousin, my uncle and my aunt will be able to buy less food or clothes or computers with our income, even though we keep producing goods and services the consumer need, helping them to get what they need. And in the same time, the speculators can buy a lot of food or clothes or computers even though they produced nothing that the consumers needed, all that at the expense of the consumers, harming them.

So we have a situation where money do not measure work anymore. Your money do not measure your capacity to produce some needed goods or services. Now the money measure your capacity to speculate and to harm other people by reducing their buying power, driving them poorer.

A very basic logic says that the money were created in order to help the people who produce goods and services to trade those goods and services. So the reason for using money (currency) is because it's supposed that the use of money will help them, instead of harming them. If using money hurts me more than helps me, I will think very seriously about not using money anymore.

It can't be hard at all for a government to detect if Brian Jones buys currency in order to actually buy goods with it or to simply speculate the currency value. They simply have to look at what Brian Jones is buying with the currency once it has it. The government can put a penalty (a fine) for speculating the currency so the consumers and the working people do not have to suffer from the speculation. And then it won't be profitable anymore to speculate a currency.

And then, what would be a government's arguments for allowing the speculation with it's own currency?

I provided all the data above in order to avoid superficial answers like "currency speculators help the people to buy foreign currency" - there are currency traders for that.

$\endgroup$
1
$\begingroup$
  1. Speculators very rarely have large positions that come anywhere near what would count as a monopoly in other sectors. When Soros bet on the pound devaluing he only had a couple of billion dollar in his position.
  2. The distinction between a currency trader and a currency speculator can be hard to make in practice. The difference between market making and market speculation is one reason why the Volker rule has been difficult to write and implement.
  3. There is tremendous social value to informative prices. When prices are right, consumer and producers can rely on them to make better plans of economic activity. When prices are wrong (not reflecting the best information and most informed beliefs) those same agents are mislead by prices, leading to malinvestment and sub-optimal savings and consumption decisions.
  4. It can be difficult to ban such speculative activity because it moves off-shore. In general, a country could ban speculation locally but not in other countries. The UK has little motive to help France ban speculation on the Euro in London. The only way to really do this effectively is with currency controls that make it difficult to bring currency out of the country. But currency controls can bring additional complications into currency markets, often a serious form of financial repression and results in exchange rates even less informative.

Faced with these issues, most well run countries, most of the time, would take functioning currency markets with the warts and wrinkles of speculators, volatility, and the like, over the downsides of trying to control the price of their own currency.

$\endgroup$
  • $\begingroup$ It can't be hard at all to see that George Soros was speculating the currency and was not trying to make any actual trade of goods/services or investment. In fact, everyone can see that, no need for specialists. It is hard to detect the small ones who want to speculate but their small buying power doesn't allow them to speculate anyways. The government of France can ban buying currency from speculators based in the UK, shielding the French consumer. This doesn't look like a valid answer but those arguments are really worth knowing. Thanks a lot for your effort. $\endgroup$ – Joe Jobs Aug 7 '15 at 15:32
  • 1
    $\begingroup$ You are not thinking in equilibrium. It was legal for Soros to speculate in the pound so he had no reason to hide. If it wasn't legal he would have had an incentive to dress up his speculation as something else. That's the issue at the heart of the Volker rule. If there is lots of money to make in trading and you ban it, people keep doing it but calling it something else and mixing it up with other activities. $\endgroup$ – BKay Aug 7 '15 at 15:40
  • $\begingroup$ Speculation on the pound at that time should probably go down as one of the safest bets in the history of trading. A lot of money was made during the creation of the Euro as the traders who understood the monetary system, took advantage of the economists and politicians who clearly didn't. Some of them even claim to have privately warned the central banks in advance. So at worst, we can think of successful speculators at least, as people who exert a small evolutionary effect on the economy by exposing political mistakes with its economic apparatus. $\endgroup$ – Lumi Aug 7 '15 at 16:17
  • $\begingroup$ Most of the people won't do it if there are big penalties for it, just like most Americans won't trade with Cuba or Iran. UK wants good trade relations with France, not hostile relations. If UK allows speculation of France's currency, then France will do the same, and both countries will be hurt. @Lumi: the speculators can still make money at the expense of the working people, how complete is that evolution? And isn't the currency speculation much more harmful for the poor countries? The politicians there don't even understand the most basic economic concepts. $\endgroup$ – Joe Jobs Aug 9 '15 at 2:14

Your Answer

By clicking "Post Your Answer", you acknowledge that you have read our updated terms of service, privacy policy and cookie policy, and that your continued use of the website is subject to these policies.

Not the answer you're looking for? Browse other questions tagged or ask your own question.