Rock and a Hard Place

The Pound Sterling might be in the unfortunate position of being between the US Dollar and the Euro, in a geographical sense, but the tensions between the three currencies might be better described as an infernal triangle. Stable exchange rates between them would be a fundamental component of a fair world trade system. Dramatic and sudden changes are destabilising of their respective economies and result from markets reacting to events and rumours, often irrationally and on occasions deliberately with the intent of profiting from the movement up or down of a particular targeted currency.  Money traders and hedge funds can make a profit either way and a stable currency market is barren ground for them. If we want to prevent a future financial crisis, and criminal trading, there needs to be a concerted attempt to better regulate their activities, or even better to ban them altogether.

It is no surprise that most of the richest in the world are men who operate in the financial sector. Even in these difficult times their wealth increases. For example in the US, between 2013 and 2014, Warren Buffett’s worth increased 9% to £38.4 bn, George Soros increased his wealth by 20% to £15.2 bn, Michael Bloomberg up 22% to £21.8 bn, Carl Icahn (specialising in leverage buyouts) up 23% to £16.2 bn, and Abigail Johnson (money management) up 36% to £11.4 bn. Of course this wealth is calculated on the value of their assets, which we are regularly warned – the value of investments can go up or down. It is easy to delight in money traders getting their fingers burned when things do not go according to plan. The recent sudden decoupling of the Swiss Franc from the Euro caught many of them out. Some genuine futures trades were affected and it is unfortunate that the market which is intended to help trade is distorted and manipulated by people who are on the make.

Growing disparity between rich and poor was a major talking point at this months World Economic Forum at Davos in Switzerland where Mrs Winnie Byanyima of Oxfam International said, “In the past twelve months we have seen world leaders, from President Obama to Christine Lagarde [IMF], talk more about tackling extreme inequality, but we are still waiting for many of them to walk the walk.  The poor are hurt twice by rising inequality – they get a smaller share of the economic pie and because extreme inequality hurts growth, there is less of the pie to be shared around”.  Oxfam is calling on governments to adopt a seven point plan to tackle inequality, including clamping down on tax dodging by corporations and the rich.

Oxfam warn that by next year just 1% of the world’s population will own more than everyone else.  The global elite will overtake the combined wealth of the other 99%.  Those with the most have seen their share of wealth increase from 44% in 2009 to 48% in 2014, with the figure set to rise to more than 50% in 2016.  Of the remaining 52% of global wealth, 46% is owned by the rest of the richest 20%.  Members of the global elite had an average wealth of £1.8 million per adult in 2014.  More than a third of the 1,645 dollar billionaires listed by Forbes inherited some or all of their riches.

In contrast, about 12% of people do not have enough to eat and more than 1 billion still live on less than £0.83 per day.  In this country 8 million households lack the funds required for a socially acceptable standard of living, according to a study by the Joseph Rowntree Foundation.  That is two in five of British families with young children cannot afford to buy essentials.  Single parents and families with only one bread-winner  are among the worst hit, following cuts to benefits and tax credits and real-terms fall in wages.  Katie Schmuecker of JRF said, “Without action by the government and employers to address families with children as part of a wider anti-poverty strategy, this trend is likely to have serious consequences for the next generation”.

The government does question the JRF definition of what constitutes an acceptable standard of living.  They claim that 8.3 million families where both parents work will be £1330 better off due to the increase in personal tax allowance, together with tax-free childcare for dual-earner couples worth up to £2000 each year for each child.  Critics of the government complain that these measures discriminate against families where the mother stays at home to care for and bring up their children.  The transferable personal tax allowance is only worth a meagre £200 and child benefit has been curtailed.  Child benefit has been transformed in to a complicated system with higher administration costs, and the higher personal tax allowance has been clawed back from higher rate tax payers.  There is no doubt that families have been affected by the suppression of real take-home pay.  Those on minimum wage have lost out because it has not kept pace with inflation and the target of a living wage looks further away.  They are even more reliant on in-work tax credits.

The gap between the workers and their bosses has increased, even in this country.  There are policies that would remedy this, not least the introduction of a family wage and full transferability of unused personal tax allowances between spouses.  In the poorest countries aid should be channelled through the development charities, like CAFOD who help people to help themselves.  Micro financing directed at women has been proved to be very effective in improving living standards for families and this feeds through to the wider community.  This also requires fair trade, aid for clean water supply and sanitation, together with improved access to education for the poorest, with healthcare provided at the local level – especially antenatal and midwifery.

Any attempt to curb the rewards enjoyed by the richest 1% will be met with fierce resistance as they have the money and influence to lobby for and further their own interests.  These people are out in force at Davos and unfortunately we witness elected political leaders fawning around them.  Questions need to be asked about how they have made their fortunes.  In most cases they use other people investing money in their investment vehicles with the promise of high returns – preying on greed.  Sometimes, as in the case of Bernie Madoff, they cross the line into criminality.  This can also be seen on a grand scale with the collapse of Enron twelve years ago, which was corrupted by an institutional lack of ethics, honesty and integrity.  British banks succumbed to the same disease and this culture can become pervasive and infect the lower echelons.

One story doing the rounds relates to the decision of the Swiss National Bank this month to decouple the Swiss Franc from the Euro, which then shot up in value by 30%.  The day after there was the extraordinary sight at London’s Liverpool Street station of City gents forming a long queue outside the bureau de change.  Nobody had told the bureau staff and their exchange rate was stuck at the old rate.  A  fatal error as the station is the gateway to the capital of the global-finance centre of the world.  Instead of informing the bureau staff so that they could correct the error, they were snapping up bundles of francs at the old rate knowing that they could make a huge instant profit for themselves, and a terrible loss for the bureau that was only limited when its safe eventually ran out of francs.

By any standard their behaviour was reprehensible, but within the culture of the banks and investment institutions in which they work it would be normal behaviour.  In that respect they are no different from the likes of George Soros, who was reported to have made $1 bn profit in 1992, betting against the Pound that would then have to be devalued and leave the European Exchange Rate Mechanism.  The only difference is that they are playing in different leagues.  George and his chums are regular participants at the World Economic Forum and they will be congratulating themselves that the action of the Swiss National Bank has increased the value of their Swiss chalets.

Meanwhile, the currency markets react and adjustments are made to the relative values of the dollar, pound and euro.  There are winners and losers; companies go bust and jobs are lost.  A day of reckoning cannot be far off – when the money changers have their tables overturned.

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