3071-The political economy of new slavery

Emma Dowling 203
Detrimental effects of currency speculation
Since the breakdown of the Bretton Woods system in 1972, exchange
rates are no longer fixed but can be defined as the ‘relative prices of
national currencies...determined by the interplay of supply and demand
in foreign exchange markets’ (OECD, 1995, cited in Patterson, 2002).
This has led to the development of a market in which financial actors,
such as individuals, companies, governments and international organizations
can speculate on the value of a currency. Speculation is ‘the act
of buying and selling with the aim of benefiting from price movements,
rather than to finance international trade, or to acquire interest-bearing
assets’ (Hayward, 1999, p. 1). Here lies the first problem: 95 per cent of
currency transactions today have no connection with trade in real goods
and services. Over 40 per cent are conducted within three days and
80 per cent within a week. Over 60 per cent take place between foreign
exchange dealers (Patterson, 2002, p. 2). Worldwide daily currency
turnovers have risen from $70 billion in 1970 to $1.5 trillion in 2001,
which is an increase of more than 2,000 per cent (Wahl and Waldow,
2001, p. 5). These figures highlight the extent of currency speculation in
today’s financial markets.
Speculative operations involve, in particular, short-term ‘round-trips’,
whereby tiny currency fluctuations are exploited in order to make profits
from buying a currency and selling it again very quickly, often within a
day. If devaluation of a currency is deemed probable, local and foreign
investors will borrow local currency and then convert the loan into a
stronger currency. If the devaluation occurs, the speculator will be able to
buy back enough local currency to repay the loan and still make a profit.
The problem is that such ‘betting’ actually turns into a self-fulfilling
prophecy and the currency devalues as an increase in the demand for a
certain currency depresses the value of the local currency. Consequently,
markets are destabilized. The human costs are great as currency devaluations
inevitably have an effect on national economies, especially those
of developing countries as they are already more likely to be less stable.
Economic indicators such as the gross domestic product (GDP) often help
to further disguise the problem as they do not reflect how many people
are actually thrust into poverty due to such activity (Hayward, 1999, p. 2).
Examples of the human costs of currency speculation can be found
in particular in South-east Asia, Latin America and Russia. The 1992–3
currency crisis within the European Monetary Union, the banking and
financial crisis in Asia in 1997 and the current debt-servicing crisis