Storm Front

Storm shot a glance at Xi Bang that seemed to say Another visit, huh? It didn’t take being a quantitative economist to do the math: Xi Bang had been here before, and had told the guy she was with the CIA. Xi Bang just smiled at Storm demurely. Their trip out to Iowa, which had included a brief stop at a hotel room near Kennedy Airport, had given whole new dimension to the word layover.

“You have to understand, most of the time when I do a paper like this, I assume it’s just going to be read by other academics,” Click continued as he led them into a small rabbit den of an office, with walls lined by packed bookshelves. “The Journal of Global Economics isn’t going to be confused with a page-turning thriller. It’s not like I’m Michael Connelly here.”

Click settled himself into his chair, which groaned accordingly. Storm and Xi Bang took chairs on the other side of his desk.

“Trust me when I say I found it riveting,” Xi Bang said. “And I’d like you to explain it to my CIA colleague here the same way you did to me.”

“Then I guess I’ll start in the same place, with a little background,” Click said, aiming his attention at Storm. “I don’t mean to sound like I’m talking down to you, but how much do you understand about the foreign currency exchange markets?”

“Enough to fill a thimble,” Storm admitted.

“Okay, the basics: The foreign exchange market, sometimes called ForEx, or just FX, is the largest and most liquid market in the world. In some ways, it’s the most volatile, too. Roughly four trillion dollars’ worth of currency is traded every single day. Now, a minority of that volume is what you would think it is: Individuals or corporations that do business in one currency suddenly need to pay for something in another currency. So, say you’re vacationing in India. You land in Mumbai and you change dollars for rupees.”

“Except I always save some greenbacks for bribes,” Storm interjected.

“Of course. In any event, that kind of transaction — which you could argue is what FX was created for — is maybe twenty percent of the market. Eighty percent is banks, hedge funds, and other large financial institutions making speculative trades. That’s why there’s so much volatility. There are all kinds of complicated ways they can make money on these trades, some of which rely on factors the average investor wouldn’t think of. So, for example, there’s one kind of trade, a carry trade, that works because of differing interest rates being offered by the central banks of various countries. Other trades are more straightforward: investors betting which way a currency will head based on some intuition or knowledge about that country’s economy.”

“So it’s a lot like the stock market: rich guys gambling with other people’s money,” Storm said.

“Yes, but there’s an important difference,” Click said. “The FX is not a regulated exchange. Every deal is essentially done on a handshake, or a virtual handshake. There’s no government watching over it, no special clearing house, no rules about the size of the trades, no one watching out for insider traders, no safeguards put in place to prevent large swings in the market. The New York Stock Exchange suspends trading if stock prices are dropping too far too fast or if there’s some kind of disruption in the markets that everyone needs to stop and digest. Not so with FX. It is open twenty-four hours during business days. If traders choose to bail on a certain currency, its value can — at least in theory — drop to zero, and no one will stop it. It’s a marketplace that relies solely on market forces for regulation.”

“Sounds like the Wild West,” Storm said.

“More than you know,” Click said. “Because another key principle is this: All major currencies in the world today are what we call fiat currencies. They’re not backed by any gold or silver or other commodities. They have value because the government that issues the currency says it has value, and the marketplace chooses to agree with it because the economy supporting the currency is fundamentally sound.”

Storm shook his head. “So it’s all based on shared faith.”

“Exactly. Especially with the U.S. dollar. A certain percentage of the value of our money comes from the fact that we’re considered the one unassailable currency — the too-big-to-fail currency. If you’re an international investor and you have a pile of money sitting somewhere, chances are you’re going to have it there in U.S. dollars. But economists have always speculated about what would happen if that stopped being the case.