[PEN-L:667] Re: Re: Re: What are we doing here

["Ellen T. Frank" <frank@xxxxxxxxxxxx>]

At 08:25 AM 10/23/98 -Jim Devine wrote:

>right! trade issues only affect exchange rates in the long run (several
>years) via purchasing power parity -- or via speculator expectations. It's
>trading in assets that's crucial in the short run, not trading in goods and
>services. (BTW, this is the basis for arguments against a purely-floating
>exchange rate system, a la Milton Friedman.)


The problem with this statement is that so-called long-run tendencies (like
purchasing power parity) aren't likely to turn up unless short-run forces
(real-world trading in acutal historical time) are somehow driving things
in the right direction.

Efficient market types try desperately to put a good face on foreign
exchange markets by claiming that everything will make sense in the long
run.  All real-world evidence contradicts this.  I find it most helpful to
regard the exchange rate as a purely speculative variable --hanging by it's
bootstraps.  Sometimes speculation is stabilizing, moving to correct
obvious problems of over-
and under-valuation.  This is what efficient market boosters would have us
believe. Korea, Indonesia, Mexico, et al, were victims of nothing more than
way-overdue market "corrections" to long-run equilibrium.

Then again, sometimes speculation is distabilizing. I would say the won,
rupiah, baht, ruble, peso all fell victim to destabilizing speculators. The
Clinton administration is, just now, arranging a tax-financed,
$30b pay-off to keep destabilizing speculators from bringing down the real.
 How much easier (and cheaper) to just control currency trading.

			Ellen Frank