We all know that the best way to get a true value is with a true market; unfortunately some markets aren’t truly free, they are influenced by vested interests and speculators. A true market has many independent parties on both sides and is influenced solely by supply and demand. High demand or low supply and prices go up while low demand or high supply and prices go down. This results in the balanced price. One example of a distorted market was houses in the UK several years ago. In this case the market generated its own momentum, which was independent of supply and demand. Everyone believed prices would go up and therefore they did go up at least until the bubble burst.
The economic experts believe that currencies should be allowed to float because this will achieve the right balance. This is a further example of economists ignoring the facts. Currencies get their value from the economies that they are based on, for example the pound sterling gets its value from the strength or otherwise of the UK economy. The strength of a currency being determined by the economy’s ability to supply goods and services. The proof that a currency is of the correct value is balanced trade. An economy that has a deficit needs its currency devaluing until trade is balanced, while an economy with a surplus needs its currency value increasing until balance is achieved.
Clearly since we have a consistent current account deficit our currency has the wrong value. Changing the strength of an economy is a slow process hence values should not change on a day by day basis, even month by month, once they are in balance. Today the pound moves daily which shows that we don’t have a true market place. The currency markets suffer from speculators and momentum. Markets should be driven by events that bring things into balance. If people buy fewer apples because say pears are cheaper to grow then prices fall and some apple trees will be taken out of production to bring supply and demand into balance. On June 23rd the pound dropped in value, not because there was an event but because traders anticipated the economy would get weaker at some future date. The market acted without any evidence, which shows how the market place is flawed. Unfortunately traders make money out of volatility. We would be better off if the currency was fixed and only moved slightly on a monthly or quarterly basis. If the reason for the valuation drop was to bring our trade in balance we would be investing in manufacturing more in the UK. This has not happened because there is no confidence in future currency valuations.
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