Archive for June 30th, 2009

So armed with this de?nition, however inadequate, let us now look at the issue of currency speculation in more depth. The second aspect of currency speculation to realize is its size. On the face of it, it is immense. The global currency markets turn over some USD1.2 trillion in daily volume, according to the 2001 report by the Bank of International Settlements. That is the rough equivalent of world trade in global goods and services every day. In the last two decades, as barriers to capital have broken down and capital markets become liberalized, in line with the move to liberalize trade in goods and services, capital ?ows have played an increasingly important role in global currency markets. By comparison, world trade has seen its role diminish proportionally as a determining factor in exchange rate movement. Trying to work out the percentages of global currency volume is very far from an exact science given that one is faced with issues such as double counting and so forth. Nevertheless, it is possible to get a rough idea of the relative ?ow importance of the different sectors of the market. Put together, and being generous rather than conservative in one’s estimation, world trade and investment (portfolio and direct) makes up around 30% of currency market volume. The rest, using our de?nition, is currency speculation, with no underlying asset behind it. I have not the slightest doubt that these ?gures will cause debate, if not outright rejection. The truth however is that I have been charitable and generous with the ?rst half of the equation, that of trade and investment. The imbalance in favour of currency speculation should actually not be that surprising. If one thinks about it, the economic text book de?nition of a currency speculator as a liquidity provider to the productive areas of the economy might suggest an eventual 50/50 role between the two sides. The liberalization and deregulation process seen over the last three decades has meant that we have gone far beyond that.