Economics Essay 79: Floating Exchange Rates

 Explain how a government or central bank can intervene to prevent the value of its currency rising.

A government or central bank can intervene in the foreign exchange market to prevent the value of its currency from rising through various measures. Here are some common interventions:

1. Foreign exchange market operations: The central bank can directly buy or sell its own currency in the foreign exchange market. If the currency is appreciating, the central bank can sell its own currency and buy foreign currencies, increasing the supply of its currency in the market and reducing its value. Conversely, if the currency is depreciating, the central bank can buy its own currency and sell foreign currencies to decrease the supply and increase the value of its currency.

2. Monetary policy adjustments: The central bank can implement monetary policy measures to influence the value of the currency. For instance, it can decrease interest rates or engage in quantitative easing, which increases the money supply. These actions can make the currency less attractive to foreign investors, leading to a decline in its value.

3. Capital controls: Governments can impose restrictions on capital flows to prevent excessive inflows of foreign capital that could lead to currency appreciation. They may impose limits on foreign investment, restrict the repatriation of funds, or implement taxes or levies on certain capital transactions. These measures aim to reduce the demand for the domestic currency and prevent its value from rising.

4. Intervention coordination: Governments or central banks can coordinate with other countries to intervene collectively in the foreign exchange market. This can involve joint actions to buy or sell currencies to stabilize exchange rates and prevent excessive currency fluctuations.

It is important to note that currency interventions are subject to certain limitations and can have both short-term and long-term effects. Here are some considerations:

1. Effectiveness: The impact of currency interventions may vary, and their effectiveness in influencing exchange rates depends on market conditions, the size of the intervention, and the overall economic factors at play.

2. Costs and risks: Currency interventions can involve significant costs and risks. For example, buying or selling large amounts of foreign currencies can deplete foreign exchange reserves, potentially leading to reduced financial stability. Moreover, interventions may be seen as market manipulation, potentially undermining investor confidence.

3. Policy credibility: Frequent or unpredictable interventions can raise questions about a government's or central bank's commitment to market principles and exchange rate stability. This can erode market confidence and have unintended consequences.

4. Trade implications: Currency interventions can affect trade competitiveness. A weaker currency may make exports more competitive but also increase the cost of imports, potentially impacting a country's trade balance.

Overall, currency interventions can be a tool for governments or central banks to manage exchange rate movements. However, their effectiveness and appropriateness depend on specific circumstances, and policymakers need to carefully consider the potential costs, risks, and trade-offs associated with such interventions.

Economics Essay 47: Floating Exchange Rate

Using a diagram(s), explain how the exchange rate will be determined in a free-floating exchange rate system.

In a free-floating exchange rate system, the exchange rate is primarily determined by market forces of supply and demand in the foreign exchange market. Here's an explanation of how the exchange rate is determined in such a system:

1. Supply and Demand for Currency: The exchange rate is influenced by the supply and demand for different currencies. When a country's currency is in high demand, its value tends to appreciate, and when the demand for a currency is low, its value tends to depreciate. The supply and demand for currencies are driven by various factors, including trade flows, capital flows, interest rate differentials, economic indicators, geopolitical events, and market sentiment.

2. Relative Interest Rates: Differences in interest rates between countries can affect the exchange rate. Higher interest rates in a country can attract foreign investors seeking better returns on their investments. This increased demand for the country's currency can lead to its appreciation. Conversely, lower interest rates can lead to a decrease in demand for the currency and potential depreciation.

3. Trade Balance and Capital Flows: The balance of trade, which includes exports and imports, influences the demand for a country's currency. If a country has a trade surplus (exports exceed imports), there is typically a higher demand for its currency to pay for those exports. This increased demand can lead to currency appreciation. Conversely, a trade deficit (imports exceed exports) may lead to currency depreciation. Capital flows, such as foreign direct investment (FDI) and portfolio investments, also affect the exchange rate as they involve the conversion of one currency into another.

4. Market Speculation: Market participants, including investors, speculators, and financial institutions, play a role in determining exchange rates through their expectations and actions. If they anticipate currency appreciation, they may buy the currency in advance, leading to an increase in demand and potential appreciation. On the other hand, if there is an expectation of currency depreciation, market participants may sell the currency, increasing its supply and potentially causing depreciation.

5. Central Bank Intervention: While exchange rates in a free-floating system are mainly market-driven, central banks may intervene in the foreign exchange market to influence their currency's value. Central bank interventions can take the form of buying or selling currencies to stabilize or manage excessive fluctuations. However, the impact of central bank intervention on the exchange rate is often limited and temporary in a free-floating system.

It's important to note that exchange rates in a free-floating system can be volatile and subject to short-term fluctuations based on market dynamics. The exchange rate determination process reflects the continuous interaction of market participants, economic fundamentals, and expectations.

Robots + Capital - The redundancy of human beings

Tabish Khair in The Hindu



Human beings are being made redundant by something they created. This is not a humanoid, robot, or computer but money as capital


We have all read stories, or seen films, about robots taking over. How, some time in the future, human beings will be marginalised, effectively replaced by machines, real or virtual. Common to these stories is the trope of the world taken over by something constructed of inert material, something mechanical and ‘heartless’. Also common to these stories is the idea that this will happen in the future.

What if I tell you that it has already happened? The future is here!


The culprit that humans created

In fact, the future has been building up for some decades. Roughly from the 1970s onwards, human beings have been increasingly made redundant by something they created, and that was once of use to them. Except that this ‘something’ is not a humanoid, robot, or even a computer; it is money. Or, more precisely, it is money as capital.

It was precipitated in 1973, when floating exchange rates were introduced. As economist Samir Amin notes, this was the logical result of the “concomitance of the U.S. deficit (leading to an excess of dollars available on the market) and the crisis of productive investment” which had produced “a mass of floating capital with no place to go.” With floating exchange rates, this excess of dollars could be plunged into sheer financial speculation across national borders. Financial speculation had always been a part of capitalism, but floating exchange rates dissolved the ties between capital, goods (trade and production) and labour. Financial speculation gradually floated free of human labour and even of money, as a medium of exchange. If I were a theorist of capitalism of the Adam Smith variety, I would say that capitalism, as we knew it (and still, erroneously, imagine it), started dying in 1973.

Amin goes on to stress the consequences of this: The ratio between hedging operations on the one side and production and international trading on the other rose to 28:1 by 2002 — “a disproportion that has been constantly growing for about the last twenty years and which has never been witnessed in the entire history of capitalism.” In other words, while world trade was valued at $2 billion around 2005, international capital movements were estimated at $50 billion.

How can there be capital movements in such excess of trade? Adam Smith would have failed to understand it. Karl Marx, who feared something like this, would have failed to imagine its scale.

This is what has happened: capital, which was always the abstract logic of money, has riven free of money as a medium of exchange. It no longer needs anything to exchange — and, hence, anyone to produce — in order to grow. (I am exaggerating, but only a bit.)

Theorists have argued that money is a social relation and a medium of exchange. That is not true of most capital today, which need not be ploughed back into any kind of production, trade, labour or even services. It can just be moved around as numbers. This is what day traders do. They do not look at company balance sheets or supply-demand statistics; they simply look at numbers on the computer screen.

This is what explains the dichotomy — most obvious in Donald Trump’s U.S., but not absent in places like the U.K., France or India — between the rhetoric of politicians and their actual actions. Politicians might come to power by promising to ‘drain the swamp’, but what they do, once assured of political power, is to partake in the monopoly of finance capital. This abstract capital is the ‘robot’ — call it Robital — that has marginalised human beings.

I am not making a Marxist point about capital under classical capitalism: despite its tendency towards exploitation, this was still largely invested in human labour. This is not the case any longer. Finance capital does not really need humans — apart from the 1% that own most of it, and another 30% or so of necessary service providers, including IT ones, whose numbers should be expected to steadily shrink.

Robotisation has already taken place: it is only its physical enactment (actual robots) that is still building up. Robots, as replacements for human beings, are the consequence of the abstract nature of finance capital. Robotised agriculture and office robots are a consequence of this. If most humans are redundant and most capital is in the hands of a 1% superclass, it is inevitable that this capital will be invested in creating machines that can make the elite even less dependent on other human beings.

The underlying cause

My American friends wonder about the blindness of Republican politicians who refuse to provide medical support to ordinary Americans and even dismantle the few supports that exist. My British friends talk of the slow spread of homelessness in the U.K. My Indian friends worry about matters such as thousands of farmer suicides. The working middle class crumbles in most countries.

Here is the underlying cause of all of this: the redundancy of human beings, because capital can now replicate itself, endlessly, without being forced back into human labour and trade. We are entering an age where visible genocides — as in Syria or Yemen — might be matched by invisible ones, such as the unremarked deaths of the homeless, the deprived and the marginal.

Robital is here.