W R E Reynolds on Sun, 21 Jul 2002 19:33:45 +0200 (CEST)

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RE: <nettime> Re: Deflation, anyone?

> These falls directly reflect capital flight
> from the US, principally the US stock markets. 

While this may have been accurate at one point, the changing nature of
currency markets means it is no longer so. While there may well be
substantial capital leaving the US today, it is incorrect to link
currency values with capital flows.

I recent years I have researched the currency markets extensively for
articles I wrote for Mother Jones, The Globe and Mail and Shift
magazine. These markets have become even more speculative than equity
(stock) markets.

Such capital flows may impact on the markets, but the overwhelming
majority of transactions in the currency markets are purely speculative.
Sentiment also plays a huge role, as it does in any large market system.

Over $1 trillion in currency is traded each day. When the market is
hopping, as it is right now, the value of those trades can exceed $2

Actual requirements (for bank settlements and other tangible needs)
rarely exceed $50 billion.

The value of these trades has increased so dramatically in the past
decade they can no longer be taken as an indicator of anything but the
nervousness of currency traders.

The value of currencies is as speculative as those of stocks and do not
reflect underlying economic realities. Witness the overvalued Asian
currencies prior to their crash in the fall of '98, and their incredible
devaluation (some by as much as 70 per cent) within a matter of days - a
period when little changed in their economies, but when sentiment
amongst traders changed dramatically.

Also witness the fact that the Canadian dollar has dropped almost four
per cent in the past week relative to the US dollar, while Canada
possesses the strongest economy (in terms of GDP growth) is the OECD,
and has strong positive inflows of capital from the US and large and
growing trade surplus with the US - both of which have been true for
years and, in theory are sucking capital out of the US. 

W R E Reynolds

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