CURRENCY TRADING
By
Dr. Mahathir Mohamad
on April 28, 2009 9:59 AM | Permalink | Comments (0) | TrackBacks (0)
(This is the third instalment in a series on the trends that led to the present financial crisis)
///1. Currency trading is another non-real contributor to the wealth of the rich countries. The trading again involves non-existent money. Banks would lend as much as 30 times the amount of investors’ money held by the traders. The loan is again made up of bank created money. So also would be the investors’ money if they borrowed from the banks.///—TDM
Banks are able to lend more than the demand deposits placed with the bank by the clients because the loans taken out are partly kept in a bank, and part of such ‘redeposit’ can again be given out as loans, ad infinite. The fraction of the deposit that is kept from giving out as loan may be termed as ratio of reserve. For a reserve ratio of 10%, the maximum amount of total loans, giving to different borrowers could reach 10 times. To loan out 30 times the amount of ‘investors’ money held by the traders’, the reserve ratio should be only at 3.3%. Banks do not lend to borrowers without collateral. How traders could satisfy the bank to lend them the amount of money to undertake currency trading is a question which requires plausible answer. Banks operate under banking Act, and it is unlikely that banks would undertake currency trading on all the deposits placed by their clients. Banks are required to facilitate currency flow of both financial and real economic sectors too.
The money banks loan out beyond the original deposit is here termed created money. But when the ‘created money’ are not returned by borrowers, the money becomes as real as if it was borrowed from a third party. Banks cannot create money for fun.

///2. The huge borrowings by the currency traders enable them to manipulate the market; pushing the value of the currency up or down. When the value of the currency changes the traders make a profit. Since the currency traders control trillions of dollars, their profits would be huge, and so would the dividends paid to the investors.///–TDM
In the 1990s Malaysia used its vast amount of foreign currency reserve to speculate on pound sterling. George Soros was Malaysia’s counterpart then betting for pound’s devaluation, and he walked away with more than one billion pound in profit. If TDM is right on his statement, then George Soros is financially more powerful than Malaysia. Alternately, George Soros is smarter than the whole of Malaysian team involved in currency speculation. I surmise that because Malaysian government was used to legislate out of trouble that it was not able to act wisely in the real world and ended up going against the currency trend. It was stated by the government then as a paper loss. I would say that on the paper all digits 1 to 10 have equal weight, and it was not a big deal.

///3. The trade in currency is estimated to be 20 times bigger than total world trade. The earnings per dollar invested would be higher than the dividends from production and trading in goods and provision of services. The investors and traders would therefore earn far more than what they would expect if they were to invest only the money they really have.///–TDM
Currency trading is no different from trading commodities futures. That allows traders and manufacturers to concentrate on their business and pay a sum to hedge their loss against changes in currency value or price level of traded commodities. Like gamblers in casinos, not all players win, and currency traders do risk their investments. During the 1997 financial crisis George Soros ended up losing around billion HK$ betting on HK currency and the stock market. Many people invest in stock market, and those who took huge loans from the banks gained more than those who invested with their own money, but others taking out huge loans end up in bankruptcy.
///4. Individuals cannot borrow 30 times more than the money they have in order to invest. But currency traders can. Hence the investors’ preference to invest with the currency traders.///–TDM
There is no sure way of making profit from investment, financial or otherwise. The high gearing companies in real sectors might not make more money than those who are not. There is no simple formula to become rich.

///5. The trade in currency is not in order to finance business or trade. It is for gambling on the appreciation or depression of the particular currency. Either way the bettor (trader) would make a profit. Since the profit is from 30 times more than the investors’ money, both the traders and the investors would make far more than if they trade in the real amount invested./// –TDM
It is true that whether currency value moves up or down, and there are people who make money on movement either way; but they are not the same people who make money either way. It is true also that people lose money either way it they bet against the trend.

///6. The profits earned by the traders and the investors would one way or another go into the calculation of the GDP and per capita income of the country. ///–TDM
If the gains of all gamblers are included in the GDP computation, then countries with a lot of casinos will have high GDP per capita. Perhaps the people involved in national accounts computation should enlighten us on this technical issue.