COMMENT 191

Neutering speculation M ost of us love to have a go at currency speculators. When Britain crashed out of the

ERM, the popularity of those fresh faced, over-paid dealers rivalled that of estate agents. But do these people impose real economic costs on us? If so, what can we

actually do about them? One argument says speculation triggers wild swings in the exchange rate that are bad for business. Another claims it can cause prolonged undervaluation of the currency leading to inflationary problems, or, more usually, overvaluation, so making British goods uncompetitive.

Of course, if, as Kevin Gardiner argues, the value of the currency is not the key to the real economy, we needn’t worry too much about its movements. At another level, leading monetarist Peter Warburton says we should regard speculation as a symptom of bad policy not the cause of economic ills, that speculation becomes rife only when politicians are following daft policies. Yet while taking these points on board, theory and experience suggest that speculation can give rise to excess volatility and mis-alignment of a m c y and that these do affect the real economy.

For the Left, another much discussed fear is that a m c y crisis will blow a new Labour government off course before it has even started. The markets will - rightly or wrongly - anticipate higher inflation, and the devaluation they force as a consequence will make this self-fdfihg unless the Labour government counters with deeply deflationary policies.

Another dilemma springs from the fact that the decisive moment ih a currency crisis is when the big savings institutions - pensions funds and the like - shift their money. Yet would we, whose savings they have, deny that the funds should sell the currency if they have good reason to believe that its value is gohg to f d - whatever problems that causes for the government we had just elected?

So how do we take the sting out of speculation? Andrew Glyn suggests a dual exchange rate system to distinguish between currency flows associated with trade and those that are ’purely speculative’. Yet even some apparently speculative behaviour is merely people insuring themselves against the risk of currency and interest rate movements. It will be difficult to find a policy that infubits ‘bad’ speculation but leaves the ‘good‘ alone.

The best approach is to focus on the fact that speculators can make money only if they bet that the exchange rate is going to move, and if someone else is prepared to take on the bet. This tells us several things. First, uncertainty about what policy setters are up to fuels speculation, so we might lean towards policy based on pre-announced rules of economic management as argued by Driver ef al. Second, bets will be made only if the speculators’ hoped-for gain exceeds the costs involved in the deal, hence the proposal for a tax on currency movements set out in the Autumn issue of New Economy by James Tobin, although this may be easier said than done. Third, if you accept Graham Bishop’s argument that the scale of flows rules out most forms of control, and Will Hutton’s that a new Bretton Woods system is unlikely, then a single European currency to eluninate specula- tion between the EU currencies must be attractive.

Many on the Left who have wanted strong action to tackle speculation were motivated by a desire to ‘re-nationalise’ economic policy making and so isolate British economic management from international pressures. But if we really think speculation causes major problems, then, ironically, the solution is likely to involve some pooling of economic sovereignty with other countries 0

DAN CORRY

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