I promise to pay the bearer

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.)

Published by David Kirk

The opinions expressed on this site are those of the author and other commenters and are not necessarily those of his employer or any other organisation. David Kirk runs Milliman’s actuarial consulting practice in Africa. He is an actuary and is the creator of New Business Margin on Revenue. He specialises in risk and capital management, regulatory change and insurance strategy . He also has extensive experience in embedded value reporting, insurance-related IFRS and share option valuation.

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1 Comment

  1. I admit I tend more towards the “don’t interfere” camp and am no expert in the subject, so .

    You make a good argument here David, but i have to disagree. Is this not similar to a listed entity intentionally influencing its own market price through whatever means are at its disposal? The listed share only exists because of the company itself. They can affect the price by issuing or buying back shares (or in many other ways). Yes, they “cannot not impact” the share price (I like the way you put that above) – and they certainly have a view on what they’re doing and why.

    But this doesn’t mean its right for the company to manipulate its share price – the exchange market reflecting willing buyers and willing sellers should set that price, regardless of whether the company itself (being the sum total of its experienced staff) knows better than the market what its price should be.

    Let the market speak!

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