Although its author still thinks, mistakenly, that banking is based on the fractional reserve system, the article “Why it’s time we manufactured money as we manufacture goods” contains some interesting observations – not least a title which rather echoes the piece ‘Welcome to the Money Factory’!
It is apparent that money is simply faith. As soon as there are doubts, as there were with Northern Rock in 2007, it becomes obvious that banks’ finance is an eggshell structure. There is a common belief that there is a calculable value to money. But it is only a belief and can be destroyed easily. One of the paradoxes is that speculators effectively determine the value of currencies. Why should the £Sterling drop 10% in a matter of minutes when the vote to leave the EU was announced? Britain didn’t suddenly reduce making goods or providing services by 10% overnight. Currencies behave in a whim-like fashion. As soon as there is a suspicion of an imbalance in a nation’s economy, speculators buy or sell that nation’s currency.
What he didn’t add to the “whim like fashion” is that the overwhelming majority of currency trading, is indeed, pure speculation – the estimates I’ve heard are more than 90%. So that is, amazingly, just 10% of currency trading from ‘real’ world commerce. International companies undoubtedly try to play the market and the rest is allegedly explained as follows: a real and legitimate commercial trade from the Sterling zone requires, say, Turkish Lira. The bank supplies it to their customer but, uncertain of their exact overall need, buys more than it actually requires. It does not wish to hold on to Turkish currency as it has irregular demand and also sees the currency and country as rather unstable, so then sells its remaining balance on to a trader who doesn’t really want it either but sees a ‘profit opportunity’. He then passes it on, hot potato fashion, to someone else.
All this is, of course, how and why people believed in the Euro.They knew about trading, but not, alas, about money.
The piece continues:
Britain’s Balance of Payments was nearly 6% in deficit in 2016. For many decades it has been in deficit and yet, for the reasons mentioned above, the £Sterling has been so inflated that it is less attractive to manufacture in UK as compared with making in China or the East. If in the past, £Sterling had fallen in direct relationship to the nation’s productive capacity, the price of manufactured goods would have remained competitive and businesses would have invested in UK industries.
So speculation is to blame. Again enter a plus for the Euro.
I have to say that, although I get his drift, competitive business is something the UK government has not, in my view, been good at encouraging, so I’d suggest the conclusion is a little hasty, but in broad measure it shows the way of the world.
It is another vote, Brexit or not, for a well thought out industrial policy.