In the news lately, there have been concerns a worldwide currency war will erupt spurred on by the continued slide of the Japanese Yen. Japan’s recently appointed Prime Minister, Shinzo Abe, has been pressuring the Bank of Japan to print money in order to devalue the yen and lower interest rates. Germany and France have criticized Abe’s actions, and other nations have threatened to reduce the value of their currencies to remain competitive with Japan. At the G20 meeting this week, however, leaders of 20 of the most powerful nations of the world defused talks of a currency war by showing support of Japan. They said in a joint statement they will not be devaluing their own currencies in response to Japan’s expansionary efforts.

In laypeople’s term, both Japan and Germany, for instance, target the same markets in China for their export businesses. If the Japanese Yen continues to weaken, Japan becomes the more attractive trading partner. Germany will have to take counter action in order to remain competitive. Independent investors, not just governments, play key roles in currency trading.

In the article “U.S. Funds Score Big by Betting Against” by Gregory Zuckerman, published 2-14-13 in the Wall Street Journal:

Betting against the yen isn’t for the faint of heart. Japan had for years failed in its efforts to lower its currency and reignite its economy and stock market. Many who adopted short positions on the yen and on Japanese government bonds during that period got pounded when the currency and the bonds instead strengthened. Shorting Japan became known on Wall Street as a “widow maker.”

And yet George Soros is one among many investors who have been, since November, making large profits by “shorting” the yen.

Soros is considered a currency trade expert and infamous for having caused the collapse of the English Pound in 1990. Black Wednesday, September 16, 1992, resulted in England withdrawing from the European Exchange Rate Mechanism, which was the testing ground for the integration of European money involving several nations, including France, Germany, Italy, the Netherlands, Belgium, Denmark, Ireland and Luxemburg.

A brief history of the events that led to Black Wednesday:

Britain entered the European Exchange Rate Mechanism in 1990 and was under pressure, as were all the member nations, to maintain the rate of their national currency by the agreement laid out, or they would have to leave the system. In its efforts to compete with Germany, Britain maintained a fixed exchanged rate English Pound to the Deutschemark. Due to economic imperatives related to the reunification of East and West Germany, Germany’s government instructed its central bank, the Bundesbank bank, to raise its prime rate. This made the Deutschemark more attractive to investors. This created a dilemma for Britain in that, thinking of itself apart from the ERM, its weakened economy would have called for decreasing interest rates. Yet to remain in the ERM and compete with Germany, it needed to raise them. Britain chose its inclusion in ERM as its priority. It raised its interest rates far beyond the English Pound’s worth. George Soros saw the folly in Britain’s decision and began what is termed shorting of the currency.

Regarding the term “shorting”:
To short sell a currency you borrow a set number of it to eventually repurchase what you borrow—that’s the deal both sides agree to. The borrower immediately exchanges the currency in question for a different currency. If the value of the borrowed currency falls relative to the exchanged currency, the cost of repurchasing the borrowed currency is lower, and a profit is realized for the borrower when the trade is closed.

Soros borrowed pounds and sold them for marks. As he predicted, the pound dropped in value dramatically enough to be forced to withdraw from the European Exchange Rate Mechanism.  Soros is largely credited for being the mastermind behind this organized effort to crush the pound (supposedly he made 2 billion dollars), but many investment banks and other speculators were involved.

Some took this as a correction Britain needed to make (particularly Soros in defense of the action). To his credit, unlike many investors, Soros does give large amounts of money away to social causes through the Soros Foundation and Open Society Institute.  Fox News like to portray Soros in a negative light and that means, for its conservative audience, that Soros has radical left leaning politics, but Soros often supports the Democrats and was a major funder for John Kerry and President Obama when they ran against George W. Bush for the presidency.

Soros aside,  how could high finance revamp its money-making (and losing) methods to create a system of fair and responsible wealth? Grameen Bank is an important bank to add to the mix. One of Grameen Bank’s main accomplishments as a bank is that it created a highly replicated model of lending called Grameencredit.

From the section “What is Microcredit ?” on Grameen Bank’s website:

Excerpts:
-Grameencredit is based on the premise that the poor have skills which remain un or under-utilised. It is definitely not the lack of skills which make poor people poor.
-Most distinctive feature of Grameencredit is that it is not based on any collateral, or legally enforceable contracts. It is based on “trust”, not on legal procedures and system.
– In fixing the interest rate market interest rate is taken as the reference rate, rather than the moneylenders’ rate. Reaching the poor is its non-negotiable mission.

Who would have to be on board, leaders on what level of society, to merge these two lending systems into a matrix of interconnected enterprises intended to benefit the citizen sector as a whole? Would we need to see a revolution in banking or could change come through mutual cooperation and shared innovation?

References:

Japanese Yen:
http://www.ibtimes.com/why-japans-yen-sinking-its-stock-market-soaring-so-far-its-not-currency-war-1091316
http://online.wsj.com/article/SB10001424127887324432004578302461873792762.html)
http://www.businessinsider.com/euro-yen-exchange-rate-weighs-on-germany-2013-1#ixzz2LLhnRnTT

Black Wednesday, 9-16-92:
http://support.instaforex.com/en/Chapter_19_George_Soros:_story_of_one_trader
http://www.dw.de/20-years-of-black-wednesday-how-george-soros-toppled-the-bank-of-england/a-16243427
http://www.investopedia.com/ask/answers/08/george-soros-bank-of-england.asp#ixzz2LLlqcpVq
http://www.merkfunds.com/currency-asset-class/currencies-unplugged/what-does-it-mean-to-short-a-currency.html

Grammen Bank:
http://www.grameen-info.org/index.php?option=com_content&task=view&