Looking at screens, charts and flashing numbers all day, you tend to forget the impact financial markets – particularly foreign currency prices – have on the ‘real’ world.
But they have a big impact.
And yesterday, with China’s devaluation of the yuan, I had a little reminder of this.
Winners and losers in the currency markets
I’m off to Thailand soon and I was just buying some baht.
On my last visit, back in April, £1,000 bought me ฿46,300.
Less than four months later, £1,000 – with the same forex company – buys me ฿55,100.
“Oh, goody!” I thought. “Flights aside, my holiday just got 20% cheaper.” Or rather – since in my head I’d already spent the money – “we can enjoy 20% more luxury while we’re there”.
Being the charitable fellow that I am, my thoughts then went out to the chap who runs the guest house where we usually stay. He’s planning to sell his business soon and retire back to Europe. Yet his retirement fund has just taken a wallop – through no fault of his own.
It is all just a tiny symptom of the currency wars. A weaker currency boosts foreign spending. If you’re an exporter of some kind, as long as you plan to spend the money you earn at home, then you benefit.
But if you plan on spending your money overseas – if you’re an importer – you pay the price. A weaker currency means imported goods cost more – which usually leads to inflation, as central banks now define it.
I sympathise with those involved in international business. Forex is a right pain. I have no idea what gets spent in terms of time, manpower, brainpower and money, but having to deal with the vagaries of the foreign exchange markets just to protect what the company has already earned must be a major headache.
It’s a business on top of a business. You get no thanks from shareholders when you get it right, and you get an earful and more if you get it wrong.
And it’s not as if international business leaders can suddenly demand that governments and central banks put a stop to all their monetary machinations, so that trade can enjoy internationally stable currencies. It just won’t happen. Currency wars, as Jim Rickards dubs them, are not a new thing.
What could replace today’s currency regime, come the next revolution?
What is more likely in the future is that more and more businesses will adopt new currencies (and ancient ones) that are not so prone to interference. I’m talking, of course, about the likes of bitcoin at one end of the spectrum, and, at the other, some kind of digital gold.
But bitcoin is – in terms of real world use – still in the experimental phase of a new tech. There’s too much risk involved for a business to embrace it fully. It needs to be more established and widely used first. Plus, bitcoin is still way too volatile – even more so than government currencies – though its volatility is steadily decreasing.
Meanwhile, the jury is still well and truly out as far as I’m concerned as to whether digital gold will find day-to-day use as a means of payment.
Then, of course, there’s the matter of SDRs (special drawing rights). These are international reserve assets, created by the International Monetary Fund (IMF). Once they represented gold, now they are a ‘basket’ of currencies – part dollar, part euro, part yen, part pound. It’s also widely believed by economists (75%, according to Bloomberg) that SDRs will be part Chinese yuan before long.
One wonders if SDRs or some derivative thereof will become an international currency at some stage. Interventionists would certainly favour that option above the likes of gold and crypto-currencies.
But, for sure, the more currency wars intensify, and the more dastardly tactics get, the more both people and businesses will embrace alternative currencies. And the ‘fintech’ revolution that is currently underway means it might well happen rather quickly.
I’ve suggested before that there might be a rough 100-year cycle in money. The early 17th century saw the use of ‘running cash notes’ – paper that represented gold – in the UK.
The years around the late 17th and early 18th centuries saw the founding of the Bank of England and the ‘great recoinage’ under Isaac Newton, who then established Britain on a gold standard in 1716.
In 1816, following the Napoleonic Wars, there was another ‘great recoinage’. Then, nearly 100 years later, Britain, France and Germany abandoned the gold standard in 1914 to print the money to pay for WW1.
Here we are 100 years after that, with a fintech boom in place, a new digital cash system in bitcoin, currency wars raging, central bank action experimental and unprecedented, gold back in the consciousness, and increasing public dissatisfaction with the inequality that monetary policy is creating. The seeds are all there.
I’m quite good at trading forex, but that’s a ‘computer’ thing. In the real world it irks me. For those that have to deal with it on a daily basis as part of their business – and trade is growing increasingly international, remember – the day the volatility goes away cannot come soon enough.
There is a real need for money to change, evolve and improve.
And that’s why it will.
• Dominic Frisby is the author of Life After The State and Bitcoin: the Future of Money.
Category: Market updates