Monday, October 10, 2016

Neil Wilson — A Sterling Performance

Why you can ignore most of what is written about floating rate currencies and why the commentariat always gets it wrong.
As long as banks supply liquidity to speculators, speculators can dominate markets. In external trade, as long a central banks provide liquidity to speculators, speculators can dominate international markets.

Currency is a policy tool and the government is the monopoly issuer through its central bank.

Yes, this implies that so-called capitalist free market economies are actually command systems. Central banks chose the policy to follow in any case, although they usually strive to create an illusion that the market is setting prices through competition. Even in setting interest rates, they are supposedly "following market expectations" rather than setting policy. Even Paul Krugman believes this.

Modern Money Matters
A Sterling Performance
Neil Wilson


Ryan Harris said...

The parliament and downing street don't appear to be making much progress in legislation to replace the laws and standards that will be missing once the membership in EU is eliminated. There is a monumental amount, years worth, of legislation and regulation that must happen, and the parliament is working on? Well today they talked about Neighborhood planning and last week it was Domestic Abuse Victims in Family Court and Debating the Merits of Quantitative Easing.

I think markets are growing alarmed that maybe the house of commons doesn't have a clue? Do they even know what the EU did, what they provided to the "common market"?

In this political climate, It seems to me quite rational to reduce or hedge any exposure to the pound until the politicians show they understand what it is they are doing. The lack of action means that businesses can't plan. They don't know whether they will be able to conduct business in the UK legally in six months or a year. It is that serious, if they can't get their goods out of or into the UK, even temporarily, it creates havoc.

There are many uses for pound. The problem right now is political more than financial. The lack of buyers in the market for pounds seem pretty rational given the rhetoric coming out of Europe and lack of action in London.

I realize, Neil hates financial markets and this is more of an axe grinding piece than anything else but still. The issues are real. Portraying this as a speculative attack when there is more uncertainty in the UK economy and trade than in hundreds of years, even during the war, they at least knew what the rules were!

Nick Edmonds said...

What do you mean by "provide liquidity" here? Do you mean providing short term finance? Whilst there may be some currency fluctuations fuelled by leveraged speculators, I'm not sure that somehow barring them would do much to mitigate the dominance of capital balances in determining short term currency movements.

All major economies have significant inbound and outbound portfolio investment. Much of this is held by unleveraged institutions such as pension funds. These funds allocate investments between currencies based on their perceived prospects. If there is a shift in sentiment away from a currency, then it has to fall until enough people consider it undervalued that they are prepared to hold it. This doesn't require banks to provide funding; it simply requires that the currency is freely traded.

Tom Hickey said...

Low interest rates, low margin requirements, and liberal lending for financial leverage will result in higher prices for asset than high rates, high margin requirements and tight credit conditions wrt assets,

Therefore banks, central banks and regulators have a significant influence of assets prices in so-called free markets since asset prices are influenced by the use of leverage, both its availability and cost.

Ignacio said...

I fear lower pound is propelling the real estate bubble in the London area further. It's really insane, I was there last week and reminds me of the "best" years of the bubble in Spain.

Wages are not keeping up with rents. Politicians don't know what they are doing, once the whole thing settles UK economy is going to blow up into little pieces, with it's huge focus on London-centered economic system and everything else a wasteland.

UK has huge problems ahead, and the Tories know it, they been living of financial rents and the bubbles those rents have propelled for decades, Brexit is just gonna accelerate the crash of an unsustainable economic model.

Unfortunately people will see the causation backwards and blame Brexit for the ills, which will strengthen the current EU and ECB dictatorial powers and the TINA narrative. Bad stuff...

Tom Hickey said...

This is the problem with reforming a system before the problems fully mature and implode, making a call for reform pretty much universal. Otherwise, reforms take away the punchbowl and it is the reformers that get blamed.

That's a reason that Greenspan the US powers that be let the good times roll until it all blew up. Now there more many fingers pointing the blame is many different directions and people are using confirmation bias as a criterion.

Nick Edmonds said...


I don't dispute that - I've made the same point myself on numerous occasions.

But I'm not sure that point translates to currencies. If dollar / sterling is high, that means sterling / dollar is low. Which one is inflated by greater leverage?

(btw, this doesn't mean that I don't think the dominant role of portfolio adjustment in currency movements isn't a problem.)

Tom Hickey said...

Nick, a lot of international financial speculation uses carry trade. Banks and central banks facilitate this.