It can be tough to keep track of all the newsworthy events happening in the world. From wars to natural disasters, it seems like there is always something going on. Amidst this chaos, it can be easy to forget about another critical global struggle: the wrestle over the value of money.
Governments and financial institutions are fighting this battle worldwide, and it can have a significant impact on ordinary investors. As a result, we explore why average investors should care about the global wrestle over the value of money.
1. Currency Volatility
For most individual investors, the value of their assets is one of the primary considerations when making financial decisions. Investors usually want to know that they can convert their assets into a stable and secure form of purchasing power. Thus, volatility in currency prices tends to be an essential issue for average individuals trading in currencies (and therefore need to predict future changes).
Unfortunately, large-scale geopolitical events can significantly impact the price of money. For example, Russia’s annexation of Crimea pushed down the value of its currency by 20 percent relative to other major world currencies like the US dollar and Euro. As such, international investors must limit their risk exposure and consider seeking out investments with limited or hedged foreign exchange risks.
2. The Fear of Capital Controls
A primary concern for average individuals trading in currencies is the possibility of capital controls. In such an event, a country (usually due to financial crises or other geopolitical issues) will institute policies that limit the flow of money out of the country.
Capital control can take many forms, everything from taxes on departing capital to outright bans on the purchase of foreign currency. The impact of capital controls is that they could prevent an individual from selling their assets for hard money in a financial crisis limiting one’s ability to protect their wealth. For example, in some instances, you might find it hard to buy Iraqi dinar in some areas.
All in all, investors must monitor geopolitical events closely if they want to make sound decisions when investing. With that in mind, it can be easy to see why average investors should care about the global wrestle over the value of money.
3. The Global Economic System
The global economic system is a vast and interconnected web of investments, currencies, trade agreements, and financial institutions. As a result, even small changes in one area can have significant effects on the entire system. The 2007-2008 U.S. housing crisis proved how a relatively minor event in the financial sector could trigger substantial global problems.
For example, when large companies or governments default on their debts, it can lead to systematic risks for other companies worldwide with similar issues. It forces banks and bond funds that hold such securities to cut back spending or raise capital to meet capital adequacy ratios mandated by regulators.
4. Financial Instability Leads to Political Instability
Typically, political scientists are probably not very familiar with financial markets or the specific intricacies of how currencies work. However, in recent years it is becoming increasingly apparent that high levels of market volatility can lead to political instability worldwide.
In countries with governments that exercise strict control over the activities of their citizens, there is often little to no warning when political instability begins. This can lead to average individuals becoming victims in the ensuing violence and turmoil. As you can see, this makes it easy to understand why the global wrestle over the value of money is vital for average individuals.
5. Globalization Increases Exposure to Risk
One of the main reasons that average individuals have increased exposure to risk in today’s globalized world is that international markets are becoming more interlinked. For example, when a Chinese factory goes out of business, this has implications for American companies who may have come to rely on cheap labor supplied by the said factory.
When foreign economies suffer due to problems with their currency or other aspects of their economy, it can lead to widespread unemployment (and thus unrest among citizens) within countries that do not directly experience the problem. This can then lead to economic instability in those countries, even if they did not face direct issues themselves.
In essence, this means that there are ripple effects throughout the globalized economy, which can be very difficult to predict. While this is still true for investors with the knowledge and expertise to properly assess risk, average individuals cannot hope to keep up with all of the complexities involved. As a result, they are exposed to more danger than ever before in today’s world, which is unfortunate given how many other ways average individuals can grow their wealth nowadays.
As you can see, the global wrestle over the value of money is vital for average individuals because it affects everyone. While investors with experience in dealing with assets like currencies will be able to make decisions that help them avoid significant losses, most people cannot hope to keep up with everything going on. Thus, they need to rely on someone who does follow these matters closely enough to give them advice once in a while.