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Thursday, October 19, 2017

Striking Fear into the Hearts of Peace Loving People: A Lesson in Economics

by Editor (editor), , August 26, 2017

The old adage, ‘One man’s terrorist is another man’s freedom fighter’ certainly doesn’t hold ground when innocent lives are put at risk. A terrorist is a terrorist.

Civil disobedience, unrest and nonviolent protest – as was the case with the civil rights movement and Dr. Martin Luther King – is far more effective at gaining the respect and support of the masses than bombings, wanton violence, and mayhem.

We have seen a resurgence of global terrorism in recent years. London, Paris, Boston, and scores of cities around the world have been subject to the merciless advances of depraved individuals with a poisoned ideology intent to spill the blood of innocents. The free world balks at these incidents, and financial markets recoil in horror as investors and traders shift their funds around in search of safe-haven assets. There is no doubt that stocks, commodities, indices and currency pairs are directly impacted by terrorist activity.

Since people are intent on maximizing their financial portfolios, and stretching their dollars, pounds, euros and Yen as far as possible – a failsafe strategy needs to be put in place to ensure the viability of currencies during heightened terrorist activity. This begs the question: What is the precise terror and economy relationship? What banks are safe – perhaps even immune – to the nefarious activities of bloodthirsty terrorists? Truth be told, banks are simply holders of currency and do not protect it from depreciating when investor sentiment sours.

It is difficult to find consensus on these issues, given that in a room full of economists, there is always a room full of differing opinions. As such, there is no blanket strategy that works best for this issue. It is difficult to anticipate the future direction of an individual currency when there is a terrorist attack. Trends have shown that the world’s safe haven currencies such as Japanese Yen, the USD and the Canadian dollar have fared better than emerging market currencies during times of terrorist activity. This is not ironclad however.

The Solution to Terrorist Activity: Invest in Thriving Democracies

When it comes to volatility, everyone agrees that terrorist activity increases the volatility level in the economy. Volatility describes the sharp fluctuations in market movements – up or down – when terror strikes. We saw high volatility roiling financial markets at the Manchester concert in 2017, and we saw it in its impact on the GBP/USD currency pair. That the cable weekened dramatically after the terror attacks is to be expected.

Investors, traders and international speculators are turned away from economies that appear vulnerable to terrorist onslaughts. At that time, the GBP plunged 0.3% against the greenback. Fortunately, markets are always quick to react to volatility, and we invariably see a resurgence following a downturn. For example, strong condemnation from Britain’s leadership helped to restore a modicum of respectability to the UK financial markets.

Over the long-term, terrorist attacks do not appear to have a sustained effect on the financial markets. Given that these incidents are the work of individuals, and not sustained barrages of assaults by militia groups or foreign militaries, the impact is short-lived. The consensus is as follows: terror attacks have a short-term impact on currency movements. They cannot break the GBP, the USD, the JPY, the EUR or any currency for a sustained period of time. They create a jolt in the market, during which time speculators and currency traders buy the relatively cheaper currency, thereby raising its price with higher demand levels in the economy.

Securing Your Investments in the Right Countries

The severity and intensity of the attack can prolong the weakness in the currency. This is undeniable. On September 11, 2001, the US was hit by multiple coordinated attacks in the worst terrorist attack in the history of the United States. Some 3,000 people died on that fateful day, and the US economy took a massive hit for quite some time.

Fortunately, financial markets – stocks, commodities, indices and currencies – always recover from terrorist attacks. It is clear that the solution for traders and investors is to have their money safely stored in a country that is secure, espouses democracy, and has strong fundamentals. These countries’ currencies will always show the necessary steel to recover in the event of a terror onslaught.



About the Writer

Editor is an editor for BrooWaha. For more information, visit the writer's website.
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