PDF download version of
A brief look at the impact of Central Banks, Floating Exchange Rate System, & Deregulation of Banking on an Economy
Page 1 of
Prosperity, Competition, and the Exchange Rate
he high exchange rate's threat to the competitiveness of the nation’s products;the loss of industries and the jobs they represent;the threat to national prosperity if exports are put at risk; anda mounting current account deficit;
are issues of concern that have often arisen in Australia over the last several decades. The concern is valid and theissues real.They are issues that can be resolved. To begin to appreciate how requires a basic understanding of the'floating' exchange rate system (
also known as 'the float’
) that links them.
Isolation of the Money Supply
2.The float, a market determined, variable exchange rate system, was adoptedby Australia in 1983
adopted in the US March 1973
). It was designed byMiltonFriedmanto 'buffer' the disruptive effects of ‘external trade shocks’ on aneconomy.
To do this, the float isolates an economy’s money supply so thatno money can leave or enter. The extent to which it succeeds in its bufferingrole is debateable. Nevertheless, the float is effective in isolating theeconomy’s money supply. 3..-To ensure that the money supply does not change, the exchange rate rises and
The float isolates the money supply
falls to balance the flow of currency each way - Hence its' description 'floating'. Payments for imports and othercurrent items such as interest on foreign debt must be balanced with foreign receipts from exports and investments.However, payments and receipts being in balance means there is nothing left over - There is no surplus from exportearnings to add to national savings!4.
Prior to adopting the float, money earned from exports added to national savings in theform of accumulated foreign reserves.
When converted to domestic currency, thosereserves added to the economies money supply and fuelled growth in the domestic market,and the economy as a whole. Not so, under Friedman’s float - Incoming foreign money isspent on imports and other foreign commitments, and leaves the economy.Exporters arepaid, butno matterhow much is exported, they cannot add to Australia’s existing moneysupply.
under the float
exports bring no additional wealth to the nation
An alternativevariable exchange rate system would allow exports to add wealth.
Two-speed or Pear-shaped Economy
5. The present arrangement of no added money or growthfrom exports seems an especiallyunfortunate consequence of government policy. To this adversity, the float addsanother!Rising exports increase the amount of foreign currency trying to enter theAustralian economy as export earnings. That drives up the exchange rate for theAustralian dollar.A rising exchange rate inevitably makes imports cheaper thanequivalent goods and services produced in Australia. This causes our domesticindustries, and jobs associated with them, to be made uncompetitive and progressivelysqueezed out of existence.
The more we export, the more we have to import. Themore we import, the more we undermine our domestic industries.
#It is the same fortheUK. In the USA, the product of this kind of occurrence is known as the 'Rust Belt’.
An alternative, variable exchange rate system would allow Australia’s domesticindustries to be competitive and prosper!
Isolation of the money supply interferes with, and distorts, the demand and supply mechanism
of aneconomy. Demand skews to favour imports as supply skews to focus on exports. It is in effect an interference in,and distortion of, the market! That distortion diverts the economy’s wealth away from domestic industries toexporters. Investment in capital equipment tends to reflect that trend. Australia’s export industries such as mining,