Here is a good example of the damage caused by currency fluctuation. It is difficult for a business to make long term plans that affect investments and employment of workers.
http://www.cnbc.com//id/45431195
It takes a few years to plan and set up a factory and a longer period to recover the investments. The profitability of this business depends on predictability of the revenue and cost. If the cost can fluctuate wildly due to currency rates, it will be difficult for any business to invest.
It is a good idea to have floating exchange rates to reflect the economic fundamentals of a country. However, the wild swings, caused by large speculators such as hedge funds, are causing tremendous damages, beyond their useful purpose. There must be some way of preventing these big speculations. Perhaps, the proposal to impose a financial trading tax will be useful. Apart from preventing the wild speculation, it will also raise revenue for the government.
http://www.cnbc.com//id/45431195
It takes a few years to plan and set up a factory and a longer period to recover the investments. The profitability of this business depends on predictability of the revenue and cost. If the cost can fluctuate wildly due to currency rates, it will be difficult for any business to invest.
It is a good idea to have floating exchange rates to reflect the economic fundamentals of a country. However, the wild swings, caused by large speculators such as hedge funds, are causing tremendous damages, beyond their useful purpose. There must be some way of preventing these big speculations. Perhaps, the proposal to impose a financial trading tax will be useful. Apart from preventing the wild speculation, it will also raise revenue for the government.
4 comments:
Mr Tan, while the hedge funds do affect the forex market they are not the only reasons for the large fluctuation in currency. The large fluctuation are also due to central banks intervening and also due to flight to safety issues. Currency fluctuation is one thing, large fluctuation in the interest rate is even worse over the long term. For example, if a business is lured into opening a business in a low interest environment like now, when the interest rate starts to rise dramatically over the next 10yrs, the debt they have assumed at the low interest rate become insolvent at higher interest rate.
The problem with today's floating exchange rate is the tendency for government to involve in currency debasement so that their exports will benefit from a lower exchange rate. Moreover, the US suffers from the Triffin dilemma. Even worse is the fact that the bond market is increasingly divorced from reality in that it is only imaginary capital which is so highly leveraged via derivatives and other instruments that it does not reflect the real capital production in the real world. In simple words a lot of the so called wealth(debt) today are false wealth that will either be destroyed (defaulted) or inflated away. In my opinion, only gold is suitable as the reference point for all currencies to refer to. I am not suggesting a gold standard but that physical gold serves as the reserve assets that reflect the actual real productive capability in the physical world and not the fictitious wealth that debt plays in the monetary world.
Hi Jamesneo
My view is that the business should preferably be funded by capital rather than by debt. This is to avoid the risk of rising interest rate. If they wish to fund it by debt (i.e. loan), they should fix the interest rate for the duration of the loan - and be protected from fluctuating interest rate).
Hi Jamesneo
I believe that the speculative trading is of much larger volume that the actions of the central banks. In fact, the central banks come in mostly to minimise the impact of speculative trading.
There is a need to limit the damage caused by speculative trading, so the imposition of a tax on financial transactions is a good measure.
The difficulty is the competition among countries to these trading services. A good approach is for the tax to be imposed globally and the money to paid to the International Monetary Fund - to be used to stablise the global financial system. We need an international agreement to impose such a tax.
http://www.youtube.com/watch?v=np4LNKaudE4&feature=player_embedded
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