Currency Targets Opposed

This discussion was based around “All nations have currency targets”.

19^th January 2013.

Edward Ingram • Having currency targets is wrong. Having cross currency capital movements is wrong. Every economy has enough money for its own economy.

 

The currency value is there to help to get world trade into its best (balanced) format and to stabilise world currencies in that regard. It is down to the World Trade Organisation. If they want a prosperous world trade then they have to make it happen.

CHALLENGER

Hello Mr. Edward Ingram,

 

I respect your view, but you did not give any clue of evidence to support your argument. You could be right theoretically, but practically I can prove you wrong. 

China is blamed by all major economies for artificially keeping its currency to boost its exports though I do agree to the opinion as every country has its right to protect its currency and China certainly had a target in mind. 

To protect Swiss exporters, SNB had set a floor of 1.20 against Euro so discourage investment in Swiss Franc.

 

The world knows that Japanese Prime Minister Snizo Abe has been very vocal about keeping its currency weak, as Japan has been suffering from recession since last almost 2-decades and thinks that weak Yen will boost exports. yen has so far lost 15 pct of its value against US Dollar. 

Luxembourg PM, Junker has recently shown concern about the strength of Euro probable because he is aware of the consequences of strong Euro and had stepped in to slowdown the pace. 

Brazil, Bank of Korea, Indonesian Central Bank and most of the Far Eastern Central Banks are uncomfortable with strong currency. 

You are saying every economy has its own money. I am not sure what makes you think that because European crisis is caused due to foreign borrowing, injecting over Euro 1.3 trillion though quantitative easing and yet you say there is enough money. 

Investment in US government is roughly around USD 4. 3 Dollars and yet you are arguing that every economy has enough money. 

Today, only Oil producing countries, China, Russia has cash money available. Rest of the economies are managed by changing accounting rules/entries, by changing laws through parliamentary approval. This is called window dressing. 

Edward Ingram replies:

Any country that does not have enough MONEY SUPPLY can print more. They can all have enough money.

What they should not do is to import more money in ways that distort trade.

Japan has had a weak currency that made them into exporters of cars. Now they want to keep that imbalance in place, naturally, to protect the economy.

And so on and so forth with all of these economies.

What has been very noticeable is that the Chinese bought a lot of USA debt. This inflated the spending power of the USA government and it reduced the interest rates there which produced huge instabilities in currencies and in asset prices which led to the current problems of over-priced property and weak bank reserves.

CHALLENGER

 Hi again,

 

-Theoretically according to economic teachings, printing more money doesn’t increase economic output in any way, as it merely causes inflation and the funniest part is that Japan inventor of quantitative easing since almost last 2-decades wants 2 pct inflation. In last 5-years GOLD is up from $ 750 to 1684 per oz. Similarly we saw surge in oil and commodity prices, but FED is maintaining its Zero interest rate policy since last 4-years and inflation remains below 2 pct. I call this economic comedy by the global economist that can only survive in Bullish environment. There is no job available for the economist/analyst in a Long Bearish environment.

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- With regards to your comment on Chinese investments in US treasuries, I wish to add that China during all these years played smart. It was concentrating on growth and was less involved in global politics. The IMF’s, the World Bank and other Global institution was praising the Western policy and criticizing China, but China since 1980 with a broad smile on its face was growing between 9-10 pct. It took advantage of its cheap labor and currency and concentrated on exports.

China’s growth is based on Western model, but the key to the success is its ability to modify it according to the country’s culture and specification. Chinese leaders that were responsible for launching China’s economic model had the intention to make China big and strong. In 1981 the poverty rate in China was 64 pct that has come down to below 10 pct. The world is struggling to raise its national savings rate. China enjoys a savings rate in excess of 40%. Imagine China’s determination, its ability and future prospect. In 2009, China produced 560 million watches and in the same year Switzerland produced 22 million watches. 

China is discussing a new economic model. China has engaged USA in vendor finance, providing the money that helps finance the huge US fiscal and trade deficits, allowing Americans to buy more goods than they sell. 

In true sense, China has engaged the US in vendor finance, providing the money that helps finance the huge US fiscal and trade deficits, allowing Americans to buy more and more goods with the purported ability to make choices free from fiscal constraints. 

Cheers 

Edward Ingram:

You are on target now.

The main quibble is that you say printing money doesn't work. Having no money certainly does not work. Where does money come from? The printing press. That's where.

A population of 2 million needs half the money of a population of 4 million in an equivalent economy.

As Professor Friedman said, the central banks should drip feed the economy with something approximating to the estimated need for it.

But first, you have to get the political feedback (interference) out of the economic model. This arises because the economic model is unstable.

There are two main sources of that instability.

One is currency instability which arises as capital inflows destroy money supply stability, interest rate stability, and currency stability all at one time.

The other main one instability is linked to varying rates of interest whether fixed interest or otherwise.

What happens is we are taught that repayments comprise capital and income. That is not correct. They comprise capital, inflation adjustment (as incomes rise or fall) so as to ensure the affordability of the repayments, and the residual, or marginal rate of interest relative to the incomes index.

Friedman's idea will start to work maybe when we have sorted those two out. Then the economy (and the world economy) will not undulate much and we will get enough control to stop political panic and panic interventions.

Keynes' idea might also work in those circumstance, but not right now when property values are unsafe and undermining the banks. You cannot stimulate spending by reducing sales taxes or in any other way until that has been corrected. The cause was the use of inflated mortgages at low interest rates - in short the blame lies with the lending model that we are using - capital and interest, with no margins for a 'return to mean' by the interest rate and a generally unsafe lending structure. 

Government debt is also destabilising the economy because it has a huge wealth risk attached making it very expensive for governments to borrow, and very unsafe for them to borrow as much as they are borrowing because of that. So we have to include all forms of debt in the reforms.