Response to Roelof...
23 July 2010 at 7:05 a.m.
Sorry this has taken a while have been distracted. Picking up on your post in reverse order:
“Have the world’s Central Banks done a good job? Are there some very serious flaws in the western world’s monetary system?”
I think the answer to the first is no, and yes to the second – how could it be otherwise when you rightly say:
“…the real madness is that it is our need for borrowing that strengthens our $NZ yet the paradox is that our borrowing is actually weakening our economic integrity and makes us less robust and less healthy…”
and you say,
“It is truely perverse that our borrowing actually strengthens our dollar, this is madness and suggests that there are some serious structural flaws in the Global Monetary system.”
And I agree with you that:
“…the CFR is a really good thing.. it has put the yield curve back where the Reserve bank has more direct control over managing monetary policy AND it has mitigated the risks of banks borrowing short term to lend long term...”
Pity it took a global financial crisis to get us to this point.
“What USA, Japan, China, Eurozone do in a monetary policy sense has far more impact on NZ than our own monetary policy. The core funding ratio has not changed that. The core funding ratio is not a solution to what are structural imbalances.”
All true but the contrasts in policy have more impact on smaller economies than the policy setting chose by small economise that have chosen the reality over the rhetoric of the neoliberal agenda. The mechanism for that influence is the carry trade – of its self are neutral but its magnitude and zero sum outcomes are killing real economic activity. Witness the 43% of GDP daily trades in the NZ dollar – who wins on that, not NZ. Tobin was prescient in this regard.
“The relationship between trade flows and exchange rate movements ceased to exist when President Nixon took the world off the gold standard in 1971.”
The theory was that once free of the physical standard fully embracing the neoliberal agenda, trade flows would see exchange rates stabilise and achieve relative levels that represented productivity and performance in each economic sovereign entity – that simply has not happened.
“It is not so much short term interest rates that drive it.... BUT our insatiable thirst for credit. It is the differential in interest rates that determine the potential supply of carry trade funds...BUT... it is actual interest rates that determines the DEMAND for borrowing those funds. It is the Borrowers that determine the volume of carry trade investment. The Govt contributes to this..( next yr it will borrow $12.5 billion .. maybe half of that will be offshore )"
Can’t argue with that, I think of it like this, pressure is the difference in rates, flow is mediated by risk perception on behalf of the lender and propensity to borrow on behalf of the debtor – these are complex considerations but can be grossly described.
Arbitrage on interest rates across jurisdictions include an expectation on the currency impacts, which is linked to perceptions on policy and politics across jurisdictions (or it might just be a traders bet…) people who want money generally want it for the same reasons to gain a better / leveraged return. Fiscal policy has a major impact on this element, and tax breaks say for property pump debt to the detriment of the traded economy facing high interest rates without the tax breaks and high exchange rate. Government borrowing does not help obviously.
“The carry trade is not some kind of bad predatory money flow. It is a wonderful method of borrowing off shore money at favourable interest rates, (without having any exchange rate risk)...”
I can’t help but see the financial economy as the tail, the real economy the dog, I can’t help but see the value add, better product customers will to pay a good price as a win-win sort of world, the money from money, the money with money dis-intermediating the creation of anything is more a win lose zero sum game. As the tail wagged the dog, as the asset Ponzi scheme progressed, as currencies are traded without thought for the meaning in the real economy (with all our comparative advantages on average meat and fibre can’t make a living) – of itself the carry trade is just a mechanism, it is outturn of that mechanism that is so damaging to our future.
I wonder what the borrowing is for; maybe to fund some unproductive investment in housing, but the volume - 43% of GDP daily suggest speculation by various financial derivatives and churn to the benefit of system players. We don't spend 43% of our GDP on housing each day. As I said I really do wonder what those transactions are all about and how they interact with real trade transactions.
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