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MAKING CONTACT Transcript: #20-99 The Global Casino: Currency Speculation Phillip Babich: This week on Making Contact: Colin Rajah: Currency speculation is like playing the roulette wheel in many ways. When you play it, it is really so risky, but at the same time the return can be potentially very high. And so can the losses. Kevin Danaher: It doesn't produce anything. It doesn't produce one pair of shoes, one tube of toothpaste. It's really useless for most of us, but it makes a lot of money for a few rich guys. Phillip Babich: Each day, over $1.5 trillion dollars are traded in currency exchanges--that's far more than is traded in goods and services. As money is bought and sold through rapid electronic transactions, 24-hours a day, many countries around the world are experiencing volatile fluctuations in monetary value with serious social consequences. On this program we take a look at currency speculation, its effects in Brazil and Malaysia, and some solutions proposed by economists, scholars, and activists. I'm Phillip Babich, your host this week on Making Contact. In today's global economy currencies are bought and sold on the open market, much as products and services are. Once fixed to standards like gold, in the United States, many currencies now "float." That is they rise and fall in value according to some basic and not-so basic economic concepts: supply and demand, industrial strength of a country, and investor's whims to name a few. Supporters of the so called free market argue that these transactions actually help facilitate trade and investment. But many free marketers, which include Joseph Stiglitz, chief economist of the World Bank, are beginning to recognize that currency speculation is a dangerous model and regulatory controls must be implemented. One of the dangers is that a massive sell-off of one country's currency can lead to rapid devaluation. In 1997, the Malaysian ringet, for example, plummeted in value after investors dumped the currency. Colin Rajah: I was in Malaysia three weeks ago. I had this long conversation with a taxi driver. And this is a perfect example of the conditions that we are now under. Phillip Babich: Colin Rajah, a Malaysian national based in the United States, is with the 50 years is Enough U.S. Network for Global Economic Justice. Colin Rajah: Within six months his licenses, his fees, his tolls for highways, have gone up more that fifty percent, within just six months. At the same time, because of the economy, ridership has dropped. His daughter who used to work in a factory has been retrenched because the factory is closing its operation. So the income within the family has significantly diminished. Phillip Babich: A similar situation occurred in Brazil at the beginning of this year. Maria Luisa Mendonca is from Brazil and works here in the United States with the organization Global Exchange. She says that when Brazil's currency was devalued, working families were hit hard. Maria Luisa Mendonca: It's a very strange feeling. Imagine that your salary suddenly drops about twenty five percent in value. And you don't know how much things cost. Or if you are a business person or a farmer you don't know how much you can sell your products for or how much the things you need in order to produce, you don't know the cost of things and you don't know the value of things. So it's a very unstable situation and, of course, that effects the whole economy, that effects jobs, the prices of services, electricity, water, everything. Phillip Babich: So, what exactly is currency speculation? Ruthann Cecil: Essentially when people put money into a stock market or into a currency market they are betting on it, as they buy things they're betting that the prices of them will go up. Just as when you buy a home, you're betting that the value of it will continue to rise and that you'll be able to sell it for more. Phillip Babich: Ruthann Cecil is with a project called The Tobin Tax Initiative, a part of the Center for Environmental and Economic Development. Ruthann Cecil: And what the currency market is, is people basically exchanging the currencies of the world. So, for instance, if you're traveling you want to have pesos if you're going to Mexico, yen if you're going to Japan, and you go and buy those different currencies. Now that is essentially the currency exchange market. But that's what we could call, for purposes of this, not a speculation exchange that occurred. You're doing that because you're traveling. If, however, you purposely buy a whole block of pesos or yen knowing that they're rising in value, and then turn around and sell them, then that's more of a speculative nature. Phillip Babich: In 1980, the daily average of foreign exchange trading was about $80 billion dollars. Today, that figure is over $1.5 trillion dollars. Kevin Danaher, co-founder of Global Exchange, says that the volume in currency trading far surpasses trade in goods and services. Kevin Danaher: It's a million million, or a thousand billion. Most of us can't think this high but we're talking about massive, massive amounts of money that is enough to swamp most economies in the world, most national economies. Phillip Babich: And how does that compare with the amount of trade that we're doing in products and goods? Kevin Danaher: Well, if you look at all global trade in goods, products, on an annual basis, it's about five trillion. You're talking in two or three days, doing more turn over of dollar value in the currency markets, than happens in a whole year in all the paper clips and computers and tires and cars that get traded around the world. Phillip Babich: Danaher adds that this is a relatively new phenomenon with roots in the Unites States' decision to take its currency off the gold standard. This became necessary, says Danaher, because large amounts of U.S. dollars overseas were lent by foreign banks without any central controls. These banks could then re-loan those same dollars, drawing interest from lenders. The cycle didn't end there though, says Danaher. Lenders would then lend out those dollars, artificially escalating the amount of currency through a series of interest charges. Kevin Danaher: Up until the seventies, the dollar was based on gold, and there was that saying: "good as gold." And what happened because the United States had been spending so much more money abroad than it was bringing in, than it was earning, there was a huge amount of dollars outside the U.S. economy. And in fact it created a thing called the "Euro-dollar market," because most of these dollars were in European banks and European corporations. Well the problem with that is, when you have money here within the U.S. banking system, there's a central bank of the United States, The Federal Reserve Bank, that requires all banks to keep an actual amount of real wealth on hand, relative to the percentage of money they're lending out. It's about 10%. So that if the customers come in saying, "I want my money back," there's money there to give it. Well in the global economy there is no central bank. The I.M.F., the International Money Fund, actually never fulfilled that role. So if you look at any one dollar that goes outside the United States, say to a British bank, they can lend it to a Dutch bank, they can lend it to a Brazilian manufacturer, they can lend it....And one dollar can theoretically create a thousand dollars. So you have this massive inflation in global liquidity of these dollars. It's part of what contributed to the third world debt crisis. But what happened in the early 1970s was there were so much dollars outside the U.S. economy that the Nixon administration said we can no longer back the dollar with gold. We can't make it directly convertible because we don't have enough gold to cover it. So they took the U.S. dollar off the gold standard. What that did was, that unhinged what was up until then a fairly stable currency exchange rate system. Once it becomes unhinged and there's volatility in the value of different currencies then it becomes easy for speculators to come in and say, "OK, let's bet that the Japanese currency is going to go up vis-a-vis the Thailand currency." So you get this massive market that's really just a casino. It's a gambling venture guessing which way a currency is going to go. Phillip Babich: Not only did money itself become a commodity, but also a new breed of financial products hit the market: securities and derivatives. In essence, investment bankers created these to minimize their own risk while allowing speculators to bet on whether a particular currency will rise or fall in value. Kevin Danaher- Kevin Danaher: If you go back fifteen or twenty years there was no derivatives market. The derivatives market now, today, is up to a point where, like the currency exchange market, in about two or three days the derivatives market generates as much dollar value as all global trade in goods does in a year. It does that in about two or three days, maybe even less by now because it keeps going up. So here's this amount of capital that's skyrocketing in volume. What does it create? Not one tube of toothpaste. Not one pair of shoes. Not one loaf of bread. It's just a betting arrangement, and where it came from historically was the growth of transnational corporations. If I'm running a corporation that's involved in twelve, fifteen countries, I want to hedge my risk. If I have all my money in Japan or in Thailand or one of those countries and that currency dives, I'm in big trouble. So the derivatives market was a mechanism for transnational corporations to hedge against currency losses through currency's devaluing. So, they'll actually bet against themselves. You'll find the same company will be betting that the Japanese currency will go up, and they'll have another derivative contract that will say that it's going to go down because they're trying to minimize their risk. So again, here you have this huge amount of money siphoning money away from the productive economy and the jobs and housing we all depend on, into this gambling casino, for who? The transnationals. Ruthann Cecil: The problem with the size of that market is that the volume is now out of the control of individual countries. Phillip Babich: Ruthann Cecil- Ruthann Cecil: The market is so huge that if speculators attack a particular currency the central bank of that particular country can't defend against the attack. They defend by throwing money into the market and buying up their own currency. The central bank reserves of small countries might only have a billion or two billion in their central bank reserves. If the size of the attack of the speculators is larger than that, the currency of that country call fall, can be devalued, and then what will happen is speculators will pull out rapidly and so will investors, so will factories. And then we'll see what we saw in Asia last year and in Brazil in January. So, for instance, Brazil threw several billion and the figure is not exactly clear from the newspaper articles I've read certainly, but it may have been upwards of twenty or thirty billion dollars that were thrown in to defending their currency before they decided to stop defending it. Now that's money that they may have had in their reserves for that purpose, but it is essentially money that is tax payer money that cannot be spent on anything else. So what often happens is it creates a condition of austerity in a country. There is less money for social programs. There's less money for education etc. You're listening to Making Contact a production of the National Radio Project. If you want more information about the subject of this week's program, please give us a call. It's toll free: 800-529-5736. Call that same phone number for tape and transcript orders. That's 800-529-5736. Phillip Babich: Today in Brazil the unemployment rate in urban areas is as high as twenty percent. Also, exceptionally high interest rates -- thiryty-five percent -- make it difficult for small business and farmers to operate. Many observers link fluctuations in the value of the Brazilian currency, the real, to economic hardship and an atmosphere of uncertainty. Beginning four years ago Brazilian president Fernando Cardosa maintained the real at an inflated rate to give a sense of stability to the economy. Some say that he played this economic shell game to insure his re-election. The ploy worked, but in January of this year it was pay-back time for the Brazilian economy as speculators lost confidence and began dumping the real -- sometimes referred to as a speculative "attack." The government then tried to defend itself by using its foreign exchange reserves to buy-up its own currency. But its reserves were no match for the amount of reals dumped on the market. Eventually, the International Monetary Fund stepped in and Brazil was forced to devalue its currency. Maria Luisa Mendonca says that while working people are earning less in real wages -- if they have jobs -- the wealthy are still benefiting from Cardosa's economic policies. Maria Luisa Mendonca: If you are a rich person, if you have money in the stock market in Brazil you always are going to make more money because the Brazilian economy -- the policies are geared toward that sector of the population. So one thing that the government did in order to keep the currency stable before the devaluation, was to have interest rates very high, at a level of almost fifty percent. So it was very good for speculative investment, but wasn't good for any people, anybody who was trying to produce anything. So if you were a business person, especially a small business or a small farmer, and if you had to get credit at fifty percent interest rates, which is impossible, so thousands of Brazilian industries went bankrupt. The agricultural sector was very hurt by that as well. But the weird part of all of this is that even after the devaluation, interest rates are still very high. Now they are up to thirty five percent. So that is just an indication that the Brazilian government still favors speculative investment. Phillip Babich: Similarly, Malaysia's economic crisis which began in 1997 has caused social and political turmoil in the country. Colin Rajah says that many professionals in Malaysian society have been wooed by free market ideology, allowing for unimpeded foreign investment, also known as economic liberalization. Colin Rajah: I would say while some upper middle class people were co-opted into this economic growth, for most of the people, especially the working classes, landless people, people working in factories, it was actually a fallacy -- an image -- that Malaysia was now enjoying a new growth and we were heading into an industrialized status. But in fact it was -- the situation for a lot of working people was actually getting worse. Because what you have is you're forced to work more and more for less and less real wages. Phillip Babich: At the same time, the price of national resources and industries drops, becoming appealing acquisitions for multinational corporations, says Mendonca. Maria Luisa Mendonca: Brazil is a very rich country. It has great amounts of natural resources. The Brazilian mining industry is one of the biggest in the world. Also, the oil industry in Brazil has developed very high-tech mechanisms. Now what is going to happen is that after you develop your industry for decades, you just turn them over to private international corporations. With the devaluation of the currency, the price of these industries are going to drop. The same happened in Asia. So these people build their assets for years and then the international businesses come and buy them very cheap. Phillip Babich: As economies falter -- especially since the so-called "Asian Flu" -- the function of currency speculation is being called into question. Norman Uy Carnay: There's actually an illusion that currency speculation promotes development in countries. Phillip Babich: Norman Uy Carnay is regional secretariat for the Asian Students Association, an independent alliance of 51 national student organizations from 29 countries in the Asia-Pacific region. Norman Uy Carnay: But the reality is we've been fed with a lot of currency speculation, which is actually hot money, which doesn't create employment. It is just there rotating within these computers generating profits -- generating increases in their amounts. And if it doesn't become profitable anymore then suddenly this withdrawal of money causes the whole economy to collapse. Because the whole economy is dependent on this movement of capital -- very, very fast movement of capital. And it's not simply a roulette, it's a Russian Roulette because once the bullet is in, it gets pinned there. Then it's suicide for an economy, which is what's happened in a lot of Asian countries. In Malaysia and Indonesia you would witness riots because of food security being threatened by currency speculation. I think for a lot of people there needs to be a simplification of this concept so that people can understand that even the issue of stocks, of bonds, of hot money, can actually effect the food of people. Phillip Babich: And, as working people struggle to make ends meet, they watch their governments slash social spending to pay back loans. Meanwhile, multinational banks and wealthy investors rarely lose. In the case of Brazil, says Mendonca, big banks got the heads up before the government devalued the real. Maria Louisa Mendonca: Big banks like Citibank or Chase Manhattan, they always make money, no matter what. So before the devaluation with high interest rates, those banks and international financial institutions were making lots of money in the Brazilian stock market. The day before the devaluation those banks got inside information about the devaluation and they sold the equivalent of a billion dollars, Brazilian currency, the day before. So, they made lots of money with the devaluation. So, you know, big banks never lose with this situation. Phillip Babich: There's also a chain reaction when currency values fluctuate. The cost of imports and exports can rise and fall relative to another country's purchasing power. When Brazil's currency dipped, for example, its steel became very cheap for American importers. This, says Kevin Danaher, had an adverse effect on the U. S. steel industry. Kevin Danaher: Look at, say, three of the major steel producers: Japan, Russia and Brazil. Well, there's two things going on. One is part of the economic collapse of those countries is the value of their currency goes down vis a vis the dollar. Well that means their products being sold in the United States become a lot cheaper because one dollar can now buy fifty widgets instead of thirty widgets because the value of the ruble or the yen, or the Brazilian real has gone down so much. The second factor is that those countries are so desperate to earn money to feed their population and pay for the many things they need to buy in the world, that they are willing to be very aggressive, maybe even take a loss on selling steel and other products to a market like into the United States, which is still the biggest market in the world. So what's happening is our steel sector is getting clobbered and the steel workers are losing their jobs and steel companies are going out of business. So then you find the president in between his free market rhetoric, on the one hand, and a large constituency, like steel companies and steel workers on the other hand. Phillip Babich: Prior to Brazil's devaluation, Brazilian workers faced a similar problem. Cheap imports bankrupted the shoe and textile industries, according to Mendonca. She adds that devaluation was the right thing to do since the real was over-inflated. But, she says, it should have been done at a slower rate. Maria Louisa Mendonca: The problem is not with the devaluation per se, the problem was that the Brazilian currency was over-valued for four years and that hurt the economy very badly. So, then when you have suddenly a very severe devaluation from one day to the next, then you create instability and recession. So the currency should have been devalued slowly over the last four years. Kevin Danaher: A small farmer, a family farmer, and we're talking, you know thirty -- forty percent of the world's population are family farmers -- for them, price stability is essential. Phillip Babich: Kevin Danaher. Kevin Danaher: You have to be sure that when you're planting your crops, six months -- eight months down the road, you're going to get a certain price for that. Because if not, your whole family could be bankrupted and you could be in a lot of trouble. You're going to be hearing your kids crying from hunger at night. For the speculators, they don't want price stability. Their whole way to make profit is price volatility -- betting whether it's going to go up or down. So you have a very structural, deep structural contradiction between the interests of the speculators who want price volatility and the rest of us who would like price stability. Phillip Babich: Some countries, such as Chile, Taiwan, China and Malaysia, have instituted tight regulations on foreign investments to curb over night trading while encouraging long term investments in industry and other productive sectors. In September 1998 the Malaysian government passed a series of measures to protect its currency, the ringet. Colin Rajah- Colin Rajah: When there was indications that the economy was souring what happened was that there was a huge tidal wave of investments being drawn out of Malaysia that caused the Malaysian economy to further downfall as kind of a snowball effect. It became worse and worse and as everybody saw that it was getting bad they started to jump out. And that caused a depreciation in the value of the Malaysian ringet. In early 1997 it was at around, almost two ringets to one U.S. dollar. And it went as far as 4.5 in just ten months. Malaysia recognized that there was a problem with this -- pinpointed especially sudden foreign investors as manipulating the Malaysian economy so that it would downfall. They decided by the end of 1998 that this especially should be stopped and that there should be controls put on that. And really broke a lot of taboos among economists around controlling speculation, and controlling currency. Phillip Babich: Those measures included: tying the ringet to the U.S. dollar, requiring foreign investors to leave their money in the country for a minimum of one year, recalling its overseas currency, and allowing stock trades at only Malaysia's Kuala Lumpur stock exchange. Another measure to shrink the volume of currency speculation is a proposal known as the Tobin Tax, named after Nobel Laureate James Tobin, a Yale economist. This is a small transaction fee ranging from one-tenth to one-quarter of a percent. Supporters of the tax say that this surcharge is enough to discourage daily trading -- the rapid-fire electronic exchanges -- but would hardly be felt by long term investors. Ruthann Cecil: His idea was a small transaction tax. A tiny tax on each transaction would throw sand in the gears of this market and slow it down. Phillip Babich: Ruthann Cecil of the organization Tobin Tax Initiative... Ruthann Cecil: It won't necessarily effect the volatility of the market, in the sense that the rise and fall of currency value could still be quite great but it should shrink the market so it would go from perhaps, one and a half trillion per day being exchanged down to, say, a couple hundred billion per day. What that could do is relieve the effect on individual government's ability to intervene because they would need less currency to intervene. Phillip Babich: On March 23 the Canadian House of Commons passed a motion calling on its government to enact the Tobin Tax in concert with other governments. Also, there are strong grassroots efforts in France, Brazil, and the United States supporting the Tobin Tax. The idea is swirling around establishment institutions such as the World Bank...and U.S. congressman Bernie Sanders, an independent, is sponsoring legislation which includes the Tobin Tax. Should the Tobin Tax take effect, some are estimating that the surcharge could generate as much money as $100 billion to $300 billion annually. That money, say supporters, could be used for socially beneficial purposes: renewable energy projects, AIDS programs, combating poverty and hunger...the list goes on. But one problem remains: how would that money be managed and distributed? And, another criticism -- an ironic twist -- is that should this money be used for socially beneficial causes, these causes could become dependent on continued currency speculation. Meanwhile, according to Cecil, there's already and infrastructure in place to implement the tax. Ruthann Cecil: So the mechanisms for collecting and enforcing compliance are fairly simple. If the nations of the world decide to adopt this, individually, there is already a mechanism in currency trading that is currently recording the exchanges. So the process of recording and compliance is existent. How the funds would be then used is a big question, of course. One of the things that needs to be talked about here is the idea that this will not work unless many , many nations in the world adopt it at the same time. Now they could adopt it separately but it might need to enter into force of law at the same time around the world, just so you wouldn't have currency jumping off to markets that didn't have the tax. Phillip Babich: If you want more information about the Tobin Tax, you can check out the web site www.tobintax.org. That's www.tobintax.org. That's it for this edition of Making Contact, a look at currency speculation. Thanks for listening. This has been a production of the National Radio Project's Globalization Desk. Special thanks this week to Stephanie Welch and Courtney Malone who helped to produce this program. We had background information from Economic Justice Now. Laura Livoti is our managing director. Peggy Law is executive director. Our production assistant is Shereen Meraji. Norman Solomon is senior advisor. Our national producer is David Barsamian. And I'm your host and managing producer Phillip Babich. If you want more information about the subject of this week's program call the National Radio Project at 800-529-5736. Call that same phone number for tapes and transcripts. That's 800-529-5736. Making Contact is an independent production. We're committed to providing a forum for voices and opinions not often heard in the mass media. If you have suggestions for future programs we'd like to hear from you. Our theme music is by the Charlie Hunter trio. Bye for now. |