Is Foreign Exchange important?

This is a question that I’ve always wondered.

Neoclassical economics thinks that the market prevails and currency value movements balance trade so everyone is pretty much equal. As ever, this is a lovely idea that really doesn’t hold up in practice…

Foreign exchange flows are anything between sixty and a hundred times the actual requirements of the world’s foreign exchange physical ‘trade’ – even allowing for banks to have say, three or four times the trade flows as ‘stock’ of major currencies for safety. This would appear to indicate that at least eighty per cent of foreign exchange ‘trade’ is actually speculative capital flows.

I was friendly with a New Zealand wine supplier and when they alerted me to this fact, I naively presumed it was because New Zealand was a small economy and this applied solely to them and I gave it very little attention. But, I was wrong and it turns out that these flows are similar for all economies.

Now most of this information comes from an interesting podcast (the foreign exchange info is after about 26 minutes in) interviewing Steven Hail.

Steven Hail is adamant that ‘the market makers’ are making a small margin on currency exchange, such that the traders – as ever – the financial speculators, are happy to let them take their small percentage. They are interested in bigger profits.

I have not come to any firm conclusions but it does seem to me that these enormous capital flows could arguably dampen – because of their volume, or again because of their volume, they might enhance currency movements.

If these capital flows weren’t there at all, the currency exchange would surely more truly reflect the actual trade of the country – and in Britain’s case I wonder would that actually benefit the UK with its substantial food trade deficit, but allegedly not a deficit overall?

I’m not certain – but I begin to wonder if it might not?

Actually protecting the exchange rate is, in an advanced economy, unlikely to be important. Even though Brexit has reduced the pound’s value by 25%, because Britain is a large economy it is not earth shattering.

Capital controls, that I had previously thought were important, might be solely for emergencies?

It now seems to me that in fact capital controls are more realistically about defending our commerce against world speculative capital, which so often puts domestic jobs in jeopardy – and without any accountability.

It also frequently threatens the UK diversity of domestic activity.

That, I now think, is the reason for capital controls.