Recently had a discussion around whether government should intervene to influence the exchange rate.
Now, I don’t have fully thought-through views on if and when and how and by how much this should be done. Still thinking it through (and having to reconsider many things about currencies, interest rates, inflation, open market purchases, sovereign wealth funds and most everything from economics as a result).
However, I do take issue with some of the arguments against government intervention in currency markets:
The conversation started with the view that forex traders disagree that the rand is too strong, to which I commented that I wouldn’t trust a forex trader to know where the rand should be for anyone by the forex trader concerned. The response:
A single market actor, or a single bureaucrat, cannot know. There is no “right” price.
Which is true, and I have respect for these kinds of views. However, to imply that Pravin Gordhan was acting as a single individual, a single “bureaucrat” is a little exasperating. Almost as if someone is deliberately creating a strawman to be knocked down. In response, I suggested that a group / committee of economists with experience and skills and some models might have a view more trustworthy than a forex speculator. My view is, and remains, that even if one cannot know for certainty the “right price”, throwing ones hands in the air and saying whatever will be will be is not useful. “Abdicating responsibility” per se is not useful.
You cannot abdicate a responsibility you never had. Bureaucrats should not fix prices, for currencies or anything else.
And here is the crux. The normative “should” in this sentence reflects a libertarian, anti-government view (again, one which much of the time I strongly share). However, in this case, it’s patently ridiculous.
Governments create currency in the first place. They create it through issuing notes and open market transactions. The allow banks to create more of it through reserve requirements. Governments (the “bureaucrats” so to speak) are setting prices for currencies all the time. Monetary policy, interest rates, inflation, central bank reserves, exchange controls and yes, exchange rates, are heavily influenced by government and central bank actions.
Government cannot not impact the exchange rate, so they may as well have a view on what they’re doing and why.
(Just in case anybody jumps up and down, froths at the mouth and starts shrieking about if we were on the gold standard none of this would be true, please read my post on the gold standard currency and what a terrible, terrible idea it is for reasons that have been established over and over again for decades for anyone who bothers to research it.)