Efficient Economic Theory

Modern Forex

If you learn anything about modern FOREX, it should be that it is part of a regulatory mechanism. For all practical purposes, money as it is created today is a fic-tion. Assets backing much of the world’s currency do not actu-ally exist, although government authorities will beg to differ! Whether we examine operations of the U.S. Federal Reserve(affectionately called the FED),or look at western

European cen-tral banks operating under the Maastricht Treaty, the principlesand facilities are designed to achieve the same results—regulatemoney in circulation. Efficient Economic Theory in Modern Currency TradingRecall our first discussion of barter and the evolution of money. We know monetary value is associated with the ratio of a unit ofcurrency such as $1 and the amount it can buy.

What is theamount it can buy? Obviously, we must know the referencecommodity. Is it an amount of gold or sugar? Assume it is sugar. Suppose $1 can buy 10 pounds of white sugar. Assume £1 canbuy 20 pounds of sugar. It stands to reason that £1 will have avalue of $2. It is simple algebra.

This simplistic algebraic relationship was expressed by Navarro Martin de Azpilcueta who lived during the time of Christopher Columbus (1492—1586). He postulated that the val-ues of the same goods in different countries created a ratio for theMoney, Currency, and Foreign Exchange relative value of different currencies.