Re: sos-qfl

["Leigh Harkness" <Leigh@xxxxxxxxxxxxxxxxxxxx>]

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.)

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.

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.

The exchange rate moves to clear the market.

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.  That won't
cause necessarily excess demand for imports but it makes it far more risky
to invest in the country.  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.

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.

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.

Regards

Leigh