Here is a nice read for the thread: (sorry if already posted and please share thoughts):
COMMON MISCONCEPTIONS REGARDING
CURRENCY AND COMMODITY MARKETS
INCLUDING ENVIRONMENTAL EFFECTS
(This is a summary of issues from a talk given by Steven B. Kurtz to a meeting of The Canadian Association for the Club of Rome, Ottawa, February 4,1998)
Environmental and social activists have for many years been using the currency and commodity markets as "whipping boys" while probing for root causes of the "Problematique". Speculators in particular, have been singled out for blame. Although there are negative effects to the ecosphere from virtually all human activities (Patch Disturbance Species, John Logan, 1997), the relative weighting of these can be rather emotional and clouded by moral doctrine. Two claims made here are 1.) that the 500 or so mega-wealthy individuals who control over 40% of global wealth in traditional monetary terms (Toronto Globe and Mail, 1997) should be pleased that speculators are so accused, perhaps even abetting the process via media manipulation, and 2.) that the speculative activity in currency and commodity markets neither transfers wealth from poor to rich nor negatively impacts the environment to the extent of most so-called "productive" economic activities. As long as human economies utilize scrip or tokens as measures and storehouses of value, people will play games with them.
It is unrealistic to assume that wagering and venturing can be willed away from human behavior. Life (the future) is always a gamble in a sense, and some people are more adventurous than others in their approach. Inequality is part of life in all forms that we know; and competition and cooperation occur both inter and intra species for reproduction and habitat expansion. Human economies are complex blends of cooperation and competition, with a social contract/compact (implied or expressed) the supposed mechanism steering towards a common good. Claims of total elimination of competition from human interaction such as by religious orders or other "intentional communities" might be seen as exceptions that prove the rule, if one agrees with the claims.
Now a brief look at the markets in question. There are many formal exchanges worldwide, and they each have contract position limits which attempt to minimize the cornering of markets in commodity and currency futures. Margin deposits are required as collateral, and are marked to the market as prices change over time. Most currency transactions occur interbank (not on any organized exchange), and hence large positions can easily be built. Still, banks must approve credit lines for customers, and often require collateral deposits. Poor credit and control procedures have permitted both employee and customer trading to bankrupt institutions. Bailouts of banks or brokerages using government funds usurp present and future national productivity, and that, in my opinion steals from everyone, including the poor. However, that is a decision made by the designated governing body (mega-wealthy influenced?) to pay for corporate losses. In other words, fault lies with the gatekeepers and fee collectors running the game, and not the game player (who should have been sold out when his margin or credit was exceeded). Sounds similar to requests for bailouts in the recent Asian meltdown, doesn't it? When wealthy institutions screw up, they hold out their hands for alms, and usually collect.
A category error occurs when land speculators and armed hoarders of food, water, fuel, medicine, etc. are compared to players in organized currency and commodity markets. (I am excluding for this discussion the equity (stock/share) and debt markets, which are system growers and perpetuators.) Both groups seek monetary enrichment, but the former do it at the expense of the general populace, while the latter are freely playing amongst themselves. To sit at the poker table, one must have chips; and there is no increase or decrease in total wealth as the game is played. It is a "zero sum game", with only a redistribution occurring amongst the players. The original acquisition of sufficient chips to play is a separate issue. The poor cannot directly lose in the game since they cannot play in it.
There are of course material impacts from commodity related activities such as mining, timbercutting, agribusiness, energy production; but they occur independently of the price bets. There are positive and negative information feedback loops which can benefit as well as deprive the general populace. Recently contracts have begun trading in both electricity generation and emission "credits". While some argue that the latter are immoral, if net emissions decline as a result, air quality improves ceteris paribus. Environmental groups have already bought up and retired some of these credits, and technological advances are indirectly stimulated as a result. Feedback in the form of relative pricing informs the public of physical scarcities, possible substitutes, shipping costs, and economic risks.
Related to speculation is the myth that the hoarding of wealth is a necessary and destructive outcome of free markets. I'm speaking of collectibles and cash, which are kept in safes or mattresses, not of funds invested in "productive" activities via equity and debt markets. Perishable goods cannot be hoarded for long, as their value would soon shrink. When cash is kept out of circulation, it slows economic growth as the impacts from it's velocity through the system never occur. While neo-classical economic analysis considers this a "loss", to the ecosphere it might be seen as a gain! Cash is only a token; as there is no backing to it other than "faith and credit", no material wealth - sustainably derived or not - is lost in any way. In either case, reduction in human consumption of resources and production of waste lowers habitat impact. As to art & collectibles, public display in museums seems to provide more benefit to society than private collections; but preservation of cultural heritage over time is accomplished either way. Land kept free of development (hoarded?) may be a plus if it has natural production or waste processing capacity such as forests, wetlands, prairies; and bio- diversity may be enhanced as well.
It has been claimed that currencies are a new "asset class", and as such divert investments from "productive" activities. This is largely not the case. Most investors are required to put up a margin deposit which is normally in the form of Government Treasury Bills, bonds, equities, or other high quality negotiable instruments. These instruments are part of the "real economy"; and the position in the foreign exchange rate involves a discounted borrowing and lending differential between the two currencies involved. This supply/demand change affects real world interest rates, and prices reflect analysis of performance by national economies, providing information feedback to the world. Frequently there are longer term investments made in foreign countries. The currency exposure may be kept or hedged. There can be an opportunity loss in the alternative use of credit lines by the very large players, but in general currency trading is not a main part of the business. After all, it is a zero sum game, with no net wealth created.
It has been claimed that 97% of the total value of global economic transactions take place in FX trading. This is not likely, since countless barter, underground economy, illicit (including drug) and other "black market" transactions are never reported. Also, there is a double counting occurring in FX transactions, since each national currency is counted domestically. There is still a huge daily turnover, and critics will claim that this is enough for the tail to wag the dog --for speculation to cause massive overshoots in market moves, far exceeding reasonable real economy valuations.
There is some truth to this, in my opinion. As in all active markets, emotions and the herd instinct can dominate during times of panic; and momentum can build and persist. My experience in the markets indicated that "open positions" ( those not offset or closed) were at any time a small fraction of the daily volume. Positions are passed between dealers like hot potatoes, and when new supply or demand enters the stream in the contra-trend direction, a small fraction of the daily volume can reverse the short term trend. Long-term trends are perpetuated by real investment flows and enduring perceptions of relative value. With the coming of the Euro, and perhaps other regional currencies in the future, an increased float/liquidity per currency (lesser number traded) should help temper the wag-the-dog effect.
A common myth is that speculators, like George Soros, can cause a national currency crisis. It is important to remember that it is governments who largely control economic information flows and who are vulnerable to pressure from the mega-rich. Also, when corrupt regimes siphon off billions of dollars from their national economies, they weaken the infrastructure and diminish future productivity. It is the savvy speculators who perceive aberrations in value, and provide the necessary information feedback to the world which helps bring about change.
Finally, the expenditure of energy and natural resources and the production of waste are surprisingly low in the currency and commodity markets when compared to most other business activities. There are opportunity losses to be sure, given the possible alternative uses of human ingenuity such as in sustainable agriculture, education, or social services. But making widgets, and the resource extraction, processing and transportation involved all cause more damage to our habitat. Some might say that the markets aid and abet these activities, and they are correct in my view. There is no way around the fact that human economies destroy the natural asset base upon which they are built; however to target the hedgers and speculators in currency and commodity markets as the prime offenders is misplaced.
Family farms and woodlot owners are examples of capitalists who must nurture their natural assets as well as hedge their future production. The decline of these family businesses is an indicator, in my view, of the real culprit at the root of the problematique - the dominance of the world economy by the mega-wealthy and the huge corporate entities which they control. Their monopoly gameboard must somehow blind them to the self-destructive path they (and their progeny!) walk with the rest of humanity.
Steven B. Kurtz
2 July 1998
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