Sunday Night Musings: Currencies and more
Added a new post to Da Rules! Check out Rule 7: When To Average Down. Of course, we already know when, don’t we?
I’m off from the ICK! regular job tomorrow, and so will be shooting for a little day trading. As the market’s in a pullback right now, and many participants are on hold until next week (i.e. next quarter), we may not be able to take advantage of much excitement. We’ll know in about 12 hours.
I’m a big fan of currencies. I’ve followed currencies actively for about four years now (as opposed to 20 or so years for stocks). I’ve never traded currencies– I’m much too small of a fish, as I see it. But I believe the currency markets often hold the missing piece to the puzzle of how all this economic activity adds up on a global scale, and they often can show us a clearer picture of where our consumption habits and the policies of our government are taking us than we’ll ever see on TV or read in the news.
To get an idea of the scale of the currency markets, I did a little impromptu research to find some current numbers. Right now the NYSE and NASDAQ combined account for about 105 billion dollars in trades each day. This figure is dwarfed by trading in the Treasury market. Bonds and their siblings account for approximately 900 billion dollars’ worth of trades daily.
This leads to the currency market. It’s known as the Foreign Exchange Market, or Forex for short, and accounts for nearly 2 TRILLION dollars in trades every day!!
Free markets are one of the greatest miracles of modern life. They allow us to trade our skills and labor for currency, then to trade that currency for the things we need and want, even if those things are created by the cooperative efforts of thousands of different people all over the world who don’t know or necessarily even like each other.
Free markets work brilliantly, creating the most efficient pricing and the most efficient flow of the current supply to fill the current demand. The problems arise when someone meddles. This someone is usually a government.
Our government’s meddling… er, intervention began in earnest after the Great Depression, always with the best of intentions, and with some success along the way, but at the price of the greatest economic tragedy in our history- the unfunded entitlement programs which, without draconian reforms, are destined to crush our economy and our childrens’ future.
When a government meddles with the currency market, the results can have severe global repercussions. For years now the Chinese and Japanese governments have meddled, in order to keep their currencies weak relative to ours. This has allowed their trade surplus with us (i.e. our trade deficits with them) to continue to expand when a free market would have checked that expansion through the escalation of the price of their products we demand and the (gradual) devaluation of the dollars which we supply.
This artificial sale on their goods has happened at the worst possible time… the period when our own Federal Reserve was flooding our market with dollars like a pusher floods the youngsters with free drugs, to get us addicted to spending and to encourage us to continually expand our habit, ostensibly for the “good” of the nation. (I’ll leave alone the question of whether the pushers had any political motivation).
As I state from time to time in an article or rant or when I just feel like dragging out my soapbox, our economy should not be teetering between slow growth and stagnation right now- it should be growing at a record-breaking rate with the Fed desperately trying to reign it in. The fact that we’re just drifting after so much “throttle” over the last few years is disturbing.
I’m working on a graphical representation of how the Chinese government in particular has interfered with the Free Market to try and maintain a competitive advantage. Right now I’m waffling between a doodle on Photoshop and just scanning my hand drawings. 
When I post the drawing, I’ll continue with this topic, and particularly with my concerns over how the Chinese and Japanese may be forced to reduce the rate at which they are adding liquidity to our markets by buying U.S. Treasuries, at precisely the moment when our economy is stalling and going into the recession delayed, and intensified, by our Fed’s excessive intervention at the beginning of this century.
New High for Yuan • dummyspots.com said,
October 31, 2006 @ 2:53 pm
[…] If our economy were growing strongly, and if as a result the Fed were actually having to “fight inflation,” this would be great news. I’m all for free markets and floating currencies. But we’re too far down the rabbit hole- our economy is about as strong as a cancer patient with severe bone marrow depression, so this type of move has to be “measured” in order to keep it from cratering our (and the world’s) growth. I’ve written various posts and articles about it, like here and here. […]