Democracy, dollars and dialectic

Wriston, Walter B.

1987

Democracy, dollars and dialectic

Democracy, dollars and dialectic

 

The value of the dollar in international markets is a subject that affects us all, but much of what has been written and said suggests a nostalgia for yesterday or a misunderstanding of today.

Whenever an international meeting of government officials is convened, we learn that the dollar is either "overvalued" or "undervalued," depending on one's point of view. Academics suggest a new institutional framework, businessmen entreat Washington to do something and the huge Federal deficit that was blamed not long ago for keeping the dollar too high is now linked to its fall.

Since we all form views of the way the world works through experience and study, new ideas are generally screened against what we "know." People with a vested interest in yesterday often refuse to credit evidence, no matter how strong, that the world has changed. The great science fiction writer, Arthur C. Clarke, described this phenomenon as a "failure of nerve" that occurs when, "even given all the relevant facts, the would-be prophet cannot see that they point to an inescapable conclusion."

At present, the relevant facts are that the current international financial system was not built by finance ministers and central bankers; it was built by technology. There is an enormous flow of information along our electronic infrastructure. Whenever anything of importance happens in the world, the tens of thousands of computer screens in the trading rooms of the world light up and traders buy or sell currencies based on their evaluation of the news. There is simply no place to hide on this planet. The enormous and instantaneous flow of data from all over the world has created the "information standard," which has replaced the gold standard and the Bretton Woods agreements.

The factors that determine exchange rates are instantaneously available to every television viewer. For the first time in history, countless investors, merchants and ordinary consumers have immediate access to breaking events all over the world. Events taking place on the other side of the earth influence the stability of currency. We watch a live television broadcast of riots, and soon after a nation's currency falls. We hear by satellite bulletin that a leadership crisis has been resolved, and within minutes a currency rises. Who interprets those events, how they wish to use that interpretation and whether they desire to hold more or less of a currency will translate into a rise or fall in its exchange value.

In today's international financial markets, the integrity of American fiscal and monetary policies, as measured against the policies of every other country, is determined in the trading rooms of the world every minute of the day. As every type of information moves across the electronic infrastructure that binds the globe together, the latest political joke makes its way from trading room to trading room in minutes. The latest figures on the G.N.P. and the money supply, or the words of a political leader enter databases and move markets.

This continuing plebiscite on the value of currencies and commodities proceeds by methods that are growing more sophisticated every day. In California, a privately owned earth station receives news and market information from a satellite. Ten minutes after the news of the disaster at Chernobyl was printed out, market data showed that the stocks of agricultural companies began to move up in all world markets.

With the Bretton Woods agreements, a club of bankers and politicians believed it could partially control the value of a given currency. Today, with the new technologies, no one is in control; rather, everyone is in control through our collective valuations. The global market has turned into a giant vote-counting machine that produces a continuous tally of what the world thinks of a government's fiscal and monetary policies. On any given day, two trillion dollars may change hands in New York City alone. The size of that number makes it clear that there is not enough money in the reserves of the world's central banks to influence exchange rates on any more than a momentary basis.

No wonder the new information standard does not sit well with the power structure. Many of them see it in the same way the absolute monarchs saw the advent of universal suffrage: Who are these untutored people who would rule Our country? Today, the power structure echoes this old refrain by asking, Who are these greedy traders who are driving the value of our currency up or down?

In America we have reached the point where our politicians no longer blame the electorate if they lose an election. Blaming the global market for our political or economic mistakes, as reflected in the value of the dollar, is equally useless, although some economists and politicians still do so.

Politicians often manage to trick the electorate for a short period, but ultimately they are exposed and removed from office. Similarly, central bankers, finance ministers and parliaments sometimes create the illusion that their words can make the price of a currency go up or down. But over time the market will not be fooled; fundamentals will always prevail. When governments fail to practice what they preach, world markets see through the sham. The politically astute officials are the ones who see where the fundamentals are driving the market and then jaw it in that direction. The phenomenon is that of cockcrow being followed by sunrise.

The good news is that the information standard is more Draconian than the gold standard. The size and speed of the market now dooms all types of central bank intervention to expensive failure. So unless governments have sound policies, the market will punish them by revaluing their currency. The bad news is reserved for those who pursue poor policies and then try to hide them. In this age, that is no longer possible.

The information standard, like other forms of universal suffrage, is here to stay. And like it or not, we have to learn to live with it.

 
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