Re: Stiglitz on Soros--question for Leigh

["Leigh Harkness" <Leigh@xxxxxxxxxxxxxxxxxxxx>]

Bill wrote:

> I am quite willing to admit that there might be a correlation between
> bank credit in Australia and its current account deficit for the period
> in question.  It appears to me that there has been no net capital
formation
> in Australia during that period

Before you come to conclussions such as that, why don't you check the facts.
They are readily available. If by capital formation you mean investment,
then the there was $720 billion of investment over that period of which $256
billion was investment in equipment.

and that net bank credit has effectively
> financed an increase in imports even though the bank credit may have
> initially been extended to entrepreneurs and paid by entrepreneurs to
> Australian consumers in the course of production, who used some of their
> wages to purchase foreign goods rather than the "overpriced" goods offered
> by "less competitive" Australian entrepreneurs.

Are you implying here that the Australian dollar is overvalued or that
Chinese workers are more efficient?


> Correlation does not infer causation.  The necessary identity between
> bank credit and the current account deficit is merely at this stage of
> analysis a working hypothesis.  To "prove" your case you will have to
> do a great deal more research.  You will have to look at Australia all
> the way back into history.  You will have to look at all the other deficit
> economies all the way back into history.  If the increase in bank credit
> is equal to the current account deficit as a matter of necessity, then
> I would think that a reduction in bank credit must be the case for surplus
> economies.  I seriously doubt you can establish that to be the case.

I doubt if you could "prove" anything.

I found the relationship in Australia after finding a similar relationship
in another country where I was able to implement policy.  By coincidence,
the country did not experience any balance of payments problems while that
policy was in plac.  When the policy was removed, the country experienced
balance of payments policies.  This does not prove anything, but if the
coincidence could be found to exist in other countries, it might be the
basis of some policies that could be effective in dealing with balance of
payments problems.

e and by coincidence,  which, by coincidence, cha


>  You will have to explain why some economies perennially run deficits
> and others perennially run surpluses.  How does your theory explain that?
>

You may find a paper I wrote on this entitled "The failings of the floating
exchange rate system." available from www.pcug.org.au/~leigh

> You must also remember that conclusions always follow from assumptions
> even if there is seemingly a great deal of supporting data.  Biases are
> always built in to the METHOD of analysis.
>
> Some of your assumptions are patently absurd; in particular I am thinking
> of your "pool of goods" metaphor.  The pool of goods is not a constant
> nor is the entrepreneurial activity that brings them into being.
Entrepreneurial
> activity is fundamentally contractual and money and credit in generalized
> form is contractual.  It cannot be "quantified" and placed in a box.

You are welcome to come up with better metaphors for explaining the
evidence.

Leihg