When Democracy Dies, the Forex Industry Flourishes

The title of this article may seem controversial, or inaccurate; especially given that the forex industry is one of the largest and most liquid sectors in the global economic dispensation, with large amounts of money being traded, and involving a large number of players across many countries in all the continents.

The statement’s argument in a way contradicts the common knowledge that it is only through democratic governance that any financial sector, including the forex, may flourish and perform as well as it ought to. However, this article points out the reasons why this is not necessarily the case, and this will be discussed in a very clear, concise and well-detailed manner.

Democratic political events and Their Effect on the Forex

In any democracy in the world today, there are a number of democratic events which take place within a few years to bring in a new governance body. These include national elections, cabinet formations as well as cabinet dissolutions.

Many financial economists hold the view that these processes interfere with the currency market. This is due to the fact that there is a risk premium during such times, as the anticipated and actual outcomes of these events more often than not affect the forex in the following ways:

• In some scenarios, especially in less developed countries; the election outcomes may lead to civil unrest. This causes the inflation and hence leading to low trading at the forex. It also makes it hard to do business due to the volatile situation.
• The new government that comes into power on many occasions has not only a new political strategy, but also a new economic strategy that is different from the previous administration’s. It may therefore introduce new financial policies that may lead to a breakdown in trade at the forex.
• Throughout the period of these political events, shifting grounds and predictions make it very difficult for economic experts to forecast the movements of exchange rates in the near future. This affects the future currencies transactions, and hence limits the volumes traded at the stock.

With the above factors in mind, most financial experts are of the opinion that the forex is more stable when the democratization process dies or when the government’s tenure is firmly secured and there are no looming events such as the ones aforementioned.

Democratic Capitalism and its Effect on the Forex

Democratic capitalism, also referred to as capitalist democracy is a socio-politico-economic system or ideology that promotes a market-based economy that is guided by democratic policy and a capitalist free market.

There are a number of reasons as to why the forex market would perform better and flourish more without such a dispensation. These include:

• The policies that are vouched for by this system expose the forex industry from overbearing interference by the government of the day. This discourages investors from streaming in.
• It may more often than not force the players in the forex market to bend to public opinion, which sometimes may not be in the best interest of the forex.