exchange rates Archives - the patient investor

June 9, 2014

Creating a Learning Society | Joseph Stiglitz | Project Syndicate

By Joseph Stiglitz:

The Nobel laureate economist Robert Solow noted some 60 years ago that rising incomes should largely be attributed not to capital accumulation, but to technological progress – to learning how to do things better. While some of the productivity increase reflects the impact of dramatic discoveries, much of it has been due to small, incremental changes. And, if that is the case, it makes sense to focus attention on how societies learn, and what can be done to promote learning – including learning how to learn.

Stiglitz also includes an observation particularly relevant to Australia, with its shrinking manufacturing sector.

The great economist Kenneth Arrow emphasized the importance of learning by doing. The only way to learn what is required for industrial growth, for example, is to have industry. And that may require ….ensuring that one’s exchange rate is competitive….

December 10, 2012

What to do about the US currency war | Alan Kohler | Business Spectator

Alan Kohler writes about the Fed’s quantitative easing strategy which is effectively debasing the US dollar:

Because it is trying to reduce the world’s reserve currency, the Fed is effectively giving other countries two choices: either allow your currencies to appreciate against the US dollar and thus make your economies less competitive and crunch your export industries, or print money with us and risk (or perhaps guarantee) inflation.

It is a Hobson’s Choice, and like most other countries’ central banks, the Reserve Bank of Australia doesn’t quite know what to do.

The strategy is also debasing the more than $2 trillion of US Treasuries held by China and Japan, placing these Asian exporters in an awkward position. Repatriating their investments would send the dollar plummeting against the yuan and the yen, reversing their export advantage maintained over the last two decades through capital account inflows into US Treasuries. Capital inflows were used to offset the current account outflows and prevented the yen and yuan from appreciating against the dollar. If the flows reverse, the US will enjoy an unfair trade advantage from an under-valued dollar.

Methinks those who predict a globally dominant China with continued growth rates of 7% to 8% are a mite premature. …….Possibly a century or two.

October 8, 2012

Is the high Australian Dollar the real culprit?

Excellent comment from Loonyright at Macrobusiness.com.au on damage to Australian industry caused by the higher dollar:

Australia has been losing investment in research and manufacturing well prior to 2002. The volatility of our currency is of nothing compared to the static, elevated cost of doing business – all resulting from higher wages, unattractive taxation, and unattractive levels of regulation. We are a stable, well educated populace – this should be the ideal home of all kinds of investment. Instead we have slowly and steadily dug ourselves into an entitlement mindset out of proportion to our ability to fund it. If we truly want a competitive, diversified economy that is not reliant on commodity prices and low interest rates to drive activity via the property market, then our uncompetitive wages, taxation and regulation MUST be addressed. It is fantasy to think we can change our fortunes without changing these factors.

via Gotti canvasses the unthinkable | | MacroBusiness.

September 22, 2012

As the U.S. Borrows, Who Lends? – NYTimes.com

By Floyd Norris

Estimates by the Treasury Department released this week indicated that over the 12 months through July, China reduced its position in Treasury securities by $165 billion, cutting them to $1.15 trillion despite making a small amount of purchases in July. And the Federal Reserve reported that, as of Wednesday, it owned $1.65 trillion in Treasury securities, $17 billion less than it had owned a year earlier.

…..China’s selling of Treasuries over the 12-month period was offset by the actions of Japan, another country whose trade surplus with the United States remains large. The Japanese are estimated to have increased their holdings by $232 billion over the 12 months, to $1.12 trillion. Those figures include both government and private holders of Treasuries.

via As the U.S. Borrows, Who Lends? – NYTimes.com.

October 27, 2011

Here’s What Will Happen When China’s Bubble Bursts

What would a China slowdown mean for the rest of us? In the main, three things will become evident.

First, China will remain committed to letting its currency, the yuan, rise in international foreign-exchange markets. A stronger currency will encourage companies to rely less on exports and more on goods and services consumed domestically.
Second, Chinese products will no longer be the cheapest on the shelves in years to come because China’s inflation rate will rise along with its wages. This is natural when any nation climbs a rung on the development ladder, which is what China is now doing.
Third, the Chinese market for raw materials and heavy equipment—cranes, bulldozers, factory machinery—will slow….

via Here’s What Will Happen When China’s Bubble Bursts.

August 24, 2011

What we need and what we actually get may be vastly different

This is in response to a question raised by Thomas Franklin:

Hi Colin,

….. My question is not just about the bond market although it is part of it but a reflection of the bigger picture globally with what is unfolding. With many governments facing rising debt levels and the Feds policy of financial stimulus, surely this is just delaying the inevitable of “Global Financial Meltdown” The USA and the dollar is a sinking ship, with the Fed losing the battle of bailing the ship out. So what do you think will replace the system we currently have?

Hi Thomas,
What we need and what we actually get may be vastly different.
Firstly, what we need:

A consensus Swiss-style democracy instead of the winner-takes-all system we have at present, where incumbent politicians run up fiscal debt in order to boost their chances of re-election.
Restrict the Fed to a single mandate, to protect the currency, rather than targeting inflation to help the politicians.
Restrict capital flows between countries, like China/Japan’s purchase of >$2 trillion of US Treasurys, used to manipulate exchange rates and create a massive advantage for their export industries.
Austerity to cut unnecessary spending and public works programs to improve national infrastructure and create employment — but the programs must deliver real returns on investment so they can later be sold off to repay debt.
Europe needs a eurobond system, with central borrowing and restrictions on individual member deficits.

What we will probably get is:

More of the same: government controlled by special interests and dominated by fear of the next election.
The Fed going nuclear and buying more Treasurys — creating inflation to bail out the banks and save Treasury from default.
Inflation as a soft form of default to give bondholders (read China/Japan) a haircut and deter them from buying more Treasurys.
More profligate spending and ill-chosen, bridge-to-nowhere infrastructure projects.
A breakup of the Euro?

Hope that doesn’t sound to optimistic 🙂

Regards, Colin