sos-qfl

[<mosler@xxxxxxxx>]

Warren Mosler writes:


> IF A COUNTRY HAS A CURRENT ACCOUNT DEFICIT,
> IT IS BECAUSE THE REST OF THE WORLD HAS AN
> EQUAL DESIRE TO NET HOLD THAT MANY OF ITS FINANCIAL ASSETS

I agree

(But the demand for financial assets could be to purchase property or
businesses in the domestic currency.)

YES.

The current account deficit must equal the capital account surplus in a
country with floating exchange rates.  The exchange rate must move to clear
the market.
YES, THE EXCHANGE RATE MOVES TO CLEAR THE MARKET.


On one side we have the supply of domestic currency or demand for foreign
currency.  This is made up of the demand for foreign funds to pay for
imports, foreign services and foreign capital etc.  On the other side we
have the demand for domestic currency or the supply of foreign currency.
This is made up of the foreign demand for domestic currency which is the
demand for the country's exports, services and capital.
OK
The exchange rate moves to clear the market.
YES
But the demand from the rest of the world to hold a country's foreign assets
cannot of itself create a concurrent excess demand for imports.  If there
were no excess demand for imports and there was strong demand to send
capital into a country, that would drive up the exchange rate.

YES.  MUCH LIKE JAPAN.  NOTE THAT EVEN 9 YEARS OF
ZERO INTEREST RATES HASN'T WEAKENED THE YEN.
ONLY BOJ 'SPENDING' OF YEN ON $US/EUROS HAS
WEAKENED IT FROM TIME TO TIME.

 That won't
cause necessarily excess demand for imports but it makes it far more risky
to invest in the country.
YES,IF ONE IS INVESTING THERE FOR EXPORT,
OR WORRIED THAT IMPORTS WILL EVENTUALLY INCREASE.

 That will burn off the excess capital.

However, for businesses in a country with volatile exchange rates, this is a
disasterour situation.  If it manages itself well and grows, it makes itself
attractive to foreign capital.  This demand for the currency from foreign
capital will drive the exchange rate up, reducing the export incomes of
exporters and making imports cheaper relative to domestic products.
IT IS A SIMPLE MATTER FOR THE CB TO KEEP ITS
CURRENCY FROM RISING- IT CAN SIMPLY BUY THE
'OTHER' CURRENCY AND THEREBY BUILD ITS EXCESS RESERVES.


This could damage the domestic economy.  The country would find that its
export industries are suffering and its import competing industries are
suffering.  The only industries that could continue to exist are those that
don't compete internationally, ie the service industry.
FIRST, CURRENCY APPRECIATION IS QUITE EASY TO
MODERATE.  SECOND, I THINK THE US IS AN EXAMPLE THAT A STRONG CURRENCY AND STRONG ECONOMY CAN
COEXIST.  FOR THIS TO HAPPEN DOMESTIC FORCES NEED TO BE BIASED TOWARDS FULL EMPLOYMENT.  IN THE
US THE DRIVER WAS PRIVATE SECTOR DEBT.  THE US HAD VERY HIGH FDI EVEN WITHOUT LOW UNIT LABOR
COSTS RELATIVE TO THE REST OF THE WORLD,AS IT
WAS PROFITABLE TO DO BUSINESS IN THE US AS IT
WAS A GROWING ECONOMY WITH HIGH EMPLOYMENT AND STRONG DOMESTIC DEMAND.

I don't know about other countries but that is what is happening in
Australia.  Our export industries (agriculture and mining) have been having
hard times together with our import competing industries (manuafacturing).
The only sectors that appear to be doing well are our  services industries,
and even they don't do so well because the other sectors that they serve are
not prospering.

SEEMS TO ME AUSTRALIA IS DOING QUITE WELL???
UNEMPLOYMENT IS FALLING, GDP RISING, ETC.?
AND NOW THE CURRENCY IS RISING AS WELL.  THAT WILL
SHIFT INCOME FROM THE EXPORTERS TO THE REST
OF THE ECONOMY IF YOU USE FISCAL POLICY TO
SUSTAIN DDOMESTIC DEMAND IF NECESSARY.
YOUR FIRST TIME HOME BUYER POLICY ADDED NICELY
TO DOMESTIC DEMAND AND AUSTRALIA THEREBY AVOIDED THE WORLD SLOW DOWN.  IT RELIED SOMEWHAT ON
INCREASING PRIVATE SECTOR DEBT, WHICH WORKS FOR A WHILE BUT IS NOT SUSTAINABLE WITHOUT INCREASING INCOMES, ETC.  SO AT SOME POINT THE POLICY NEEDS TO SHIFT TO DIRECT FISCAL ADJUSTMENTS BY GOVT.

W

Regards

Leigh