I have noticed with much concern that the Jamaican Dollar has fallen almost twenty percent in two months with no economic reason for the fall.  This has come at a time of moderate demand for foreign exchange as businesses after a slow Christmas are not buying as much new inventories, the price of oil is the lowest it has been in many years and the winter tourist season has started better than expected.  Initially it was felt that the financial sector was buying foreign exchange to meet margin calls but both the financial sector and the Financial Services Commission suggest that the exposure of the local financial sector to overseas entities is minimal.  What then is causing this run on the dollar, as far as I have been able to determine the root cause is none other than speculation.
Once again people are buying the U.S. Dollar because they expect the Jamaican Dollar to devalue.  This is what is known as a self-fulfilling prophecy, people expect the dollar to fall and rush out to buy the U.S. Dollars resulting in the value of the Jamaican Dollar falling.  What is surprising is that once again persons are exchanging a short term one off gain for a long term loss.  The majority of goods manufactured or purchased in Jamaica have a significant foreign exchange component.  Whatever gain one makes on the small amount of foreign exchange purchased will be more than lost in the price to be paid for the items that one needs.  We already see this in action because despite the fall in oil prices the price of gas at the pumps is actually going up.
Unfortunately this action will lead to increased inflation putting more pressure on the dollar resulting in higher interest rates being used or maintained to ease pressure on the dollar and if not contained will ultimately lead to the collapse of the Jamaican economy.  We have already seen the result that speculation has had on the world economy and we seem to be headed in the same direction.  It is worth restating that investing is not about getting something for nothing and should not be based on speculation.  Investment is about putting aside money for the future years when one needs it, because you are no longer able to work, and should be based on sound principles.

Feedback question:  Have we learned the lessons from Cash Plus and Olint?

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admin Posted by: admin January 29, 2009 at 9:21 am