(Warning to numerophobes: heavy lifting ahead.)
The estimated total yearly value of worldwide currency transactions — and this is a BIG number even if you’re a corporate CEO — is over $1.2 trillion a day. (No one knows the exact number). Or almost $500 trillion per year. These are guesses made by practitioners of the dismal science.
For comparison, the US annual federal budget these days is up to about $2 trillion (in spite of the recent “tax cuts”), of which about $800 billion or so, or about 41%, is funded by personal income taxes. So all federal personal income taxes in a year in the United States, huge as they may be, are only about 0.16% of annual global currency transactions.
Behind our backs worldwide currency transactions have invisibly exploded in the last few decades. These transactions are almost entirely unregulated and untaxed. Again, we’re talking here only about international currency (or monetary) transactions, not the value of global trade in goods and services, which is “only” about 10% of the currency transactions, or “only” around $50 trillion a year.
The United States total foreign aid budget is about $13 billion. Sounds generously big, right? (Only about half of foreign aid is for humanitarian purposes. The rest goes for “national security assistance.” )
US annual humanitarian aid is only about $7 billion a teeny-tiny fraction of the $500,000 billion (7 out of 500,000) in currency trading, or 0.0015%. (Of course other countries contribute to humanitarian aid at somewhat higher but still comparably stingy levels.)
In other words the humanitarian aid that is “generously” doled out by the United States every year is less than one-and-a-half-thousandths of a percent of worldwide currency transactions. (0.0015% of an annual income of, say, $30,000, is 45 cents.)
Here’s another way to think about it. $500 trillion per year in currency transactions is about $1 billion a minute. So the total US humanitarian aid budget for an entire year is roughly the same amount of money as eight minutes worth of global currency transactions each year.
Big banks do most of these unregulated trades, not individual private currency speculators. And 60% of the $500 trillion is traded in only three large first-world countries: The United States, Britain and Japan.
In November the subject of foreign exchange activity became a brief blip on the international news radar screen when the Manhattan US attorney’s office announced fraud charges against 47 US currency traders in New York who were said to have defrauded investors and banks of “tens of millions of dollars.” Manhattan US attorney James Comey called the crime “a staggering array of criminal conduct.”
One of those charged was Stephen Moore, 55, chief executive of Itrade, a foreign currency trading company, who had previously served on the Foreign Exchange Committee for the Federal Reserve Bank.
The charges stemmed from the undercover work of one lone FBI agent who, according to Comey, “infiltrated” a Manhattan boiler room currency trading operation for 18 months, and video/audio taped the defendants doing their dirty work.
“It wasn’t fancy,” said Comey. “It was fraud.”
In all, prosecutors charged traders from 18 firms. The “victims” of the fraudsters, many of whom were international bank employees, included some large (but mostly unknown, at least in currency trading) international banks such as UBS AG, J.P. Morgan, Israel Discount Bank, Societe Generale, and Dresdner Kleinwort Benson.
Besides Itrade, the boiler rooms had fancy sounding names like Tullet Liberty, Tradition North America, Madison Deane and Associates, First Lexington Group, and ICAP Plc.
Yes, ye olde Deane ploy. Works every time.
Of course, no one would ever suspect the large banks themselves of playing any games with their part of the rest of the “largely unregulated” $500 trillion, especially the US attorney’s office.
In announcing the undercover investigation, FBI officials described the foreign exchange markets as “one of Wall Street’s most closed and insular subcultures.”
FBI Assistant Director Pasquale D’Amuro said that the undercover agent was told that the illegal activity had been going on for at least 20 years.
In theory a little bit of currency exchange activity is regulated by the US Commodities Futures Trading Commission, but in practice they do very little regulation because so much of the activity is worldwide and unreported.
Greg Mocek, head of enforcement for the CFTC, said, “The CFTC does not regulate the interbank Forex [foreign exchange] market. A lot of this activity was occurring in the interbank Forex market. However the fact that at a certain point the money flowed in was transferred in illegal futures contracts that’s what brought us in the fold.”
In other words there’s no real regulation of currency trading — unless it leaks out to other categories of financial activity — and only then if an extremely dedicated lone agent spends 18 months taping it and figuring out what it all means.
The defendants are charged with making around $650,000 in illegal profits from their fraudulent trades. After all, all you’d have to do is tell an “investor” that the exchange rates were only slightly different than what they really were, and pocket the difference.
But the “tens of millions of dollars” involved — say around $30 million — would still be only around two one-hundredths of a percent of one day’s currency transactions.
The whole idea of “currency exchange markets” is a little nutty, you’ve got to admit. Imagine the taped conversations of “traders” as they roam the aisles at the local currency market: “I’ll give you a thousand shekels for those 800,000 pesos and I’ll throw in two loans in the future if you’ll promise to fund my friend’s internet startup.” Or, “Hey, you got any of them yen left? I have a few extra dinar and lotsa lira I’m having trouble unloading.” Or, “I know you say you’re outta rials, but I think I can get my hands on some new euros. How many euros do you want for all the rials your hiding out back? … No, no. They’re not going up — fuggedaboutit.”
In light of these humongous figures and these recent charges giving us a passing glimpse into the dark currency subculture (the charges even mentioned “cash kickbacks” and envelopes full of cash changing hands in New York City diners), it seems appropriate to again raise what some countries and some prominent economists have actually proposed — an “international currency transaction tax.”
The concept was first proposed in 1972 by Nobel prize-winning economist James Tobin who originally suggested a tax rate of 0.5%. Subsequent economics research has determined that a smaller tax, as low as 0.02% to 0.1%, would still be an effective deterrent to speculative, short-term trading, and would be the basis for at least a little bit of regulation since transactions would have to be reported and logged in a computer somewhere. (Tobin’s proposal was originally intended only as a deterrent to short-term currency speculation, not as a tax or a way to fund humanitarian aid projects.)
But the idea is getting a little more attention these days from people who are not economists– and even from some major countries — who think a tiny transaction tax would also be a decent, fair, and relatively painless way to reduce the kind of crushing poverty, starvation and grotesque income inequalities that produce not only envy and animosity toward the industrialized world but, in a few crazy extremists, a visceral hatred of the West.
If sized a teensy bit higher than .1% and applied just to US based transactions, such a tax could eliminate the US personal income tax and America’s big loophole industry — i.e., lobbying and corruption — that goes with it. But that’s probably too much to ask.
Mr. Tobin is no humanitarian or critic of the international banking system or the World Bank. He recently told an interviewer for the World Bank’s newsletter, “I don’t have the slightest thing in common with these anti-globalization revolutionaries. I’m an economist and, like most economists, a backer of free trade. I also support the IMF (International Monetary Fund), the WTO (World Trade Organization), and all the things this movement is attacking. In fact, I believe the IMF should be strengthened and enlarged. Of course, it has made many mistakes, but, as is the case with the World Bank, it has too few means at its disposal to help above all poor and underdeveloped economies. The World Bank and the IMF are not part of some conspiracy called globalization.”
Mr. Tobin may be at least partially right. And, by extension, the anti-globalization protesters may have it at least partially wrong. To make a better world, the protesters might want to stop preaching to themselves about the horrors of globalization, the World Bank and the International Monetary Fund, and on and on and on.
Instead, using the magic of mathematics and teeny-tiny percentages of very large numbers, they could join with countries like Canada and India and other member nations of the United Nations General Assembly, several leading international economists, Ralph Nader, Fidel Castro, and even some of the world’s biggest financiers, and work to enact an international currency transaction tax (on only the world’s three richest countries, or with a minimum transaction threshold, if you prefer). The proceeds of the tax could be aimed directly at the poor, not the middlemen.
The currency traders would hardly notice.
According to the United Nations, there are 1.3 billion people living in extreme poverty in the world (surviving on less than $1 a day), and that number grows annually. So if you wanted to get really ambitious, only one-thousandth of global currency transactions would more than eliminate extreme poverty worldwide.
Given a choice between eliminating the World Bank (highly unlikely) or eliminating extreme poverty USING the World Bank (a real possibility), wouldn’t most people choose the latter, by imposing a simple, tiny, already-on-the-table tax on international currency transactions, administered by the World Bank or the IMF? (Remember that poverty eradication is already one of the World Bank’s stated goals.)
Of course any currency exchange tax revenue given to poverty-stricken people should be democratically controlled by those people. And the World Bank or IMF must see to it that it gets where it’s supposed to get.
Ambitious? Sure, but these are more manageable objectives than eliminating the World Bank and the IMF, much less currency transactions.
Even if you could eliminate the top two or three big international banks, there will still be banks and they will still be in the profitable international banking business. The well-meaning but obviously math-challenged anti-globalization protesters — not to mention the world’s many poor people — might discover that the world’s banking system (which is long overdue for regulation as well as taxation anyway) could become their best source of revenue.