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RBAs Pear-Shaped Economy

a work in progress


The high exchange rate's threat to the competitiveness of the nations products;
the loss of industries and the jobs they represent; the threat to national prosperity if exports are put at risk; and a mounting current account deficit;
are issues of concern that have often arisen in Australia over the last several decades. The concern is valid and the issues real. Those issues are also symptomatic of the growing economic chaos evident in other G-20 countries. Unfortunately, G-20 central banks, such as the Reserve Bank of Australia (RBA) have proved incapable of coming to grips with the economic realities that underlie these issues. An appraisal of the monetary systems that they uphold (i.e.: the floating exchange rates system; and deregulation of banking) and the distortions in the market created by those systems, offers insight into those economic realities.

Isolation of the Money Supply

2. The floating exchange rate system (also known as 'the float), a market determined, variable exchange rate system, was adopted by Australia in 1983 (adopted in the US March 1973). It was designed by Milton Friedman to 'buffer' the disruptive effects of external trade shocks on an economy. 1 To do this, the float isolates an economys money supply so that no money can leave or enter. The extent to which it succeeds in its buffering role is debateable. Nevertheless, the float is effective in isolating the economys money supply.
The float isolates the money supply 3..- To ensure that the money supply does not change, the exchange rate rises and falls to balance the flow of currency each way - Hence its' description 'floating'. Payments for imports and other current 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 export earnings to add to national savings!

4. Prior to adopting the float, money earned from exports added to national savings in the form of accumulated foreign reserves.2 When converted to domestic currency, those reserves added to the economies money supply and fuelled growth in the domestic market, and the economy as a whole. Not so, under Friedmans isolated monetary system - Incoming foreign money is spent on imports and other foreign commitments, and leaves the economy. Exporters are paid, but no matter how much is exported, they cannot add to Australias existing money supply.3&3a That is, under an isolated monetary system exports bring no additional wealth to the nation! An alternative variable exchange rate system would allow exports to add wealth.

Two-speed or Pear-shaped Economy

5. The present arrangement of no added money or growth from exports seems an especially unfortunate consequence of government policy. To this adversity, the float adds another! Rising exports increase the amount of foreign currency trying to enter the Australian economy as export earnings. That drives up the exchange rate for the Australian dollar. A rising exchange rate inevitably makes imports cheaper than equivalent goods and services produced in Australia. This causes our domestic industries, and jobs associated with them, to be made uncompetitive and progressively squeezed out of existence. 4 The more Australia exports, the more it has to import. The more it imports, the more Australia undermines its domestic industries.5# It is the same for the UK. In the USA, the product of this kind of occurrence is known as the 'Rust Belt. An alternative, variable exchange rate system would allow Australias domestic industries to be competitive and prosper!
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6. Isolation of the money supply interferes with, and distorts, the demand and supply mechanism of that economy. 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 economys wealth away from domestic industries to exporters. Investment in capital equipment tends to reflect that trend. Australias export industries such as mining, wood chipping, and 'live cattle to Indonesia' to do well and expand at the expense of the nations other productive industries and jobs.6 7. A classic example of the diversion of wealth phenomenon is Western Australias mining boom that causes it to be seen in stark contrast to the more economically challenged south-eastern states. This is the so-called 'two-speed or multi-speed economy' effect, which has often been extolled as a blessing by those unaware of the true circumstances.# It is a phenomenon also evident in the European Monetary Union (EMU). It has benefited the great exporting nation, Germany, with positive Current Account Balances over the last 10 years that are mirrored as negative balances for GIPS countries (Greece, Italy, Portugal, and Spain). Paul Krugmans diagram below illustrates the Two Speed (diversion of wealth) the float .interferes with, and distorts, the demand and supply effect of the float. Some believe that the GIPS countries are mechanism of an economy (causing it to go pear-shaped. See Fig 1 below). detrimental to the survival of the EMU, and that the departure of one or more of them from the union can save the euro. But that would cause the debilitating burden that is being borne by those countries to pass on to the next most vulnerable EMU members. They in turn would succumb and leave. As the EMU steadily shrunk, the currency exchange rate for Germanys export goods would rise, and make their domestic industries less competitive with imports. The rust contagion already evident in Germanys industrial regions would spread. (Saving the Euro theEuro.pdf refers). More recently, the growing concern about GIPS countries debts has been causing the downward pressure on the euro exchange rate, and in the process making Germanys exports more competitive. Thanks to the isolated money supply system, Germanys prosperity is tied to survival of the EMU. Similarly, Western Australia is dependent on the rest of Australia.

Fig 1 Germany and GIPS Countries Mirror Reverse Current Account Balances
(Wishful Thinking And The Road To Eurogeddon, The Opiinion Pages, NY Times 7 Nov 2011 refers).

Growth of Debt and its Distortion of the Market

8. As indicated in the opening paragraphs, in adopting an isolated monetary system, Australia denied itself the ability to stimulate its economic growth through the accumulation of foreign reserves (national savings) that can be earned by exports. The Australian currency released into the money supply in exchange for those accumulated foreign reserves had enabled economic expansion. However, removing this facility for economic growth meant that the only other significant source of money available to the economy was from the growth of bank credit, that is, increased lending, and debt.7 8a. When banks issue loans, they increases the amount of money deposited in the accounts of their customers. The additional deposits enable the borrowers to buy more than they have produced. When borrowers repay their loans, they are reciprocating. But until a borrower has reciprocated, the banking system has, in effect, facilitated a theft of products from the market economy. 7a Thus, the
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banks have been creating money for which there is no prior entitlement (i.e. unendowed or unentitled) to their nations productive capacity Money that no-one worked for or saved. 8b.In 1984 and 1985, to stimulate its economy, the Australian government deregulated the nation's banking industry. They relaxed constraints on the banks money creation process. This allowed the nation's expenditure to be no longer constrained by its income.7b Banks have been allowed to create more money, causing demand to further outstrip supply, and distort the market. As a result, Australians have increasingly spent future national earnings in the present. For the banks, things have never been so good.8

Fig. 2 Australia Bank credit, the current account, and fiscal deficit - per 12

Fig. 2a Australian CPI (Inflation) & Monetary Pressure

(Square root of change in Unendowed Money over change in GDP)

9. Deregulation of the banks has enabled Australia and other G-20 countries to buy more than they have produced. That is, unrestrained bank lending (backed by foreign capital) has caused them to import more than they have exported.9 See Figures 2 and 7 for examples of the correlation between growth in bank lending and the growth in Current Account Deficits. It is a corruption of the market mechanism that imposes other significant distortions on a nations whole economy. Those distortions include a corresponding growths in the: persistent trade deficits (see Fig. 6 below), and inflation (see Fig. 2a above).10# The law discourages forgers because of this kind of damage to the economy that their unendowed money can produce. However, banks the do the very same thing with their unendowed money!

Inflationary Madness
10. Uncomprehending or in disregard of these various systemic distortions, G-20 central banks worldwide are eager supporters and facilitators of the deregulation and the isolated monetary system. Perhaps not surprising, given these instruments of monetary policy are designed to favor the profitability of banks, not benefit the economy as a whole. 10a. Indicative of G-20 central banks, the Reserve Bank of Australia (RBA) make much of inflation rather than exchange rate level being the prime target of monetary policy.10a However, as Fig.2a testifies, RBAs battle to rein-in inflation is ineffective. Significantly, the values for money price pressure show a strong correlation with CPI over nearly three decades - But exchange rate and fiscal policy has not had any noticeable impact on that relationship. 11. For its assault on inflation, RBA (indicative of other central banks) utilise the variable exchange rate to encourage cheap imports into the Australian economy and drive down domestic industry prices. Towards this end, RBA chooses not to target or limit the level to which the exchange rate rises. From time to time, RBA has traded currency to adjust the exchange rate in keeping with this strategy. Their maintenance of high interest rates that attract foreign investment has also played its part in driving up the exchange rate and making imports cheaper.17 RBAs advocacy on behalf of foreign suppliers is unnecessarily generous, given that it provides no benefit in controlling inflation. RBAs irrational encouragement of high exchange rates also accentuates the two speed transfer of wealth) distortion of the Australian economy. The consequent loss of Australian industries and jobs is not only an unnecessary and costly waste, it also undermines the nations productivity.17a Typical of
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other G-20 central banks, RBA dismisses these victims of its policies as being incompetent and inefficient. More obvious, (especially to exporters, is the high exchange rates inflationary and anti-competitive impact on the price of Australian export products, and their component costs such as labour. RBAs obsession with a strong but uncompetitive Australian dollar is taking its toll. If collateral damage is to be regarded as irrelevant, then the method in this madness can be rationalised - RBAs unrelenting destruction of the economys productive capacity, taken to its not so logical long-term conclusion, will certainly eliminate inflation.

Declining Wages
12. Another indicator of the negative effect of the float and deregulation is average award wages. In Australia, average real wages were rising until June 1984. The real rate of wages growth had been around 4% between 1969 to 1975. Then it slowed to 0.6% until 1983 when Australia floated its dollar. It jumped more than 8% in the year to June 1984 following the float and when the value of the Australian dollar declined rapidly. In the six years from June 1984 to June 1990, average real wages declined at an average rate of more than 1.6% per annum. Since then, average real wages have been rising at about 1.4% per annum. Despite this improvement, the rate of real wages growth is less than half the rate of the 1960s and 70s. Average real wages did not return to their June 1984 levels until June 2003. That is, Australia experienced nineteen years without any growth in average real wages above 1984 levels (See Fig 3). As minimum wages are regulated in Australia, Australian workers did not experience the same dramatic reduction in wages as in the USA. Per Impact of the
Floating Exchange Rate System on Employment and Growth.

Fig. 3 - Australia: Average Real Weekly Wages (Discounted by CPI base 1989/90) 1973 US floated its currency, 1983 Australia floated its dollar.

Defensive Strategies
13. Several strategies have been tried repeatedly in an effort to redress the anti-competitive nature of the float and the imbalance in trade caused by deregulation of banking. One has been in the form of export drives - But unfortunately, an export drive is liable to cause a more concerted upward pressure on the exchange rate for the Australian dollar thus making Australian products even less competitive. Another approach is a Buy Australian campaign. Nor is this a panacea for addressing the attrition of our domestic industries by the float. The demand generated by such a campaign inevitably competes for the same supply of Australian dollars that exporters seek in exchange for their foreign currency earnings. This puts further upward pressure on the exchange rate for our dollar, and ironically makes imports more competitive.

Selling-off the Farm

14. 'The float's requirement that 'payments for imports and other current items such as interest on foreign debt must be balanced with foreign receipts from exports and investments (para 3 refers) is significant in respect of deregulation. It means that the excess demand for imports generated by 'deregulation' can only be financed by foreign debt; or by 'selling off the farm'. That is, by selling Australia's domestic capital assets such as mines, farms and other real estate to foreign corporations and other foreign entities.11 In effect, thanks to the RBA, Australians are trading their country piece by piece for consumables. 15. Demand in excess of national income due to deregulation contributes to Australia being a net importer of capital. However, additional inflow of capital can occur if a nation, such as Australia, is seen as a safe or an especially lucrative investment haven. As with exports, due to the isolation effect of the float, foreign investment cannot, and does not, add to the money supply. Capital inflow merely puts upward pressure on the exchange rate, and causes more domestic industries lose income as consumers increasingly divert their
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spending to foreign goods and services now made cheaper. Exporters incomes suffer as well, as their competitive edge is blunted, as in the case of BlueScope Steel in Australia. Some companies like QANTAS go offshore to escape Australias high cost economy. BHP and other companies postpone multi-billion dollar projects like Olympic Dam. 16. Whether a persistent high (and uncompetitive) exchange rate is a result of foreign investment, or the mining industry receiving foreign income for their ongoing exports, it costs the economy dearly. The longer it continues, the deeper countries like Australia will find itself sinking in the recession that it doesn't 'have to have'.

Government Debt 17. Also consequential and symptomatic of 'the float', is the problem world wide of the
growth in government debt. 'The float's persistent attrition of the productive capacity of countries such as the USA and the UK means that government revenue base cannot keep pace with government expenditure commitments to its populace. Australias position in this regard is much better than many others are, but diminishing GDP per capita since 2008 (Fig. 4 below) indicates that the Australian situation is deteriorating. Slowing growth of its revenue base makes a government persistent attrition of the productive increasingly vulnerable to having to fund its commitments with ever-expanding capacity budget deficits. Fig. 2 above shows the Australian Government recently having to respond to its revenue limitation with a fiscal deficit. Expenditure cuts and asset sales by various national governments to reduce their debt do nothing towards resolving the systemic failure emanating from the float. Likewise, Europes recent symptomatic solution of fiscal discipline on its members (the Fiscal Pact), and massive loan bailouts, stands to make no impression on the systemic illness that is bringing the EMU undone. Such measures will tend to make things worse. Australias horizontal fiscal equalisation union of its member state governments has provided an offset for the floats wealth transfer effect on their revenue bases - However, the fiscal redistribution does not compensate the economy as a whole for the attrition that the float steadily inflicts on it and government revenue generally. Fig 2 also reveals that contrary to the twin deficits theory, government budgets do not necessarily influence the current account deficit.12

Fig. 4 Australian GDP per Capita per Quarter (per Buoyant Economies)

Fig 5 - Australia: Unsustainable growth of debt per Buoyant Economies

Unsustainable Debt
18. As Australias spending in the present has swallowed up future earnings, its capacity to service the mounting foreign debt has steadily diminished (Fig. 5 above refers). After three decades of recurring and growing trade deficits, it seems now that Australia must increasingly generate trade surpluses to pay the interest on its foreign debt. (See 13 Fig. 6 below) Furthermore, the 'float's unrelenting erosion of Australias domestic industries will continue to wear away its capacity to repay its mounting debt.14 Eventually Australias debt will be beyond its capacity to service, and like Greece, it will be at the mercy of its creditors.15

capacity to service the mounting foreign debt has steadily diminished

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19. The two-speed (pear-shaped) effect will tend to accelerate this process. The more populated, and increasingly impoverished southeastern Australian states will progressively diminish Australias capacity for buying imports. Because exports are offset by imports, the exchange rate for the Australian dollar will, in response, rise to make imports cheaper and Australias exports less competitive e.g. iron ore mined in Western Australia by Hancock Prospecting P/L.15b Foreign earnings from expanding productivity of massive mining projects will incur additional upward pressure on the exchange rate, facilitate the flow of cheap imports, and erode mining profitability. In the event of diminished international demand for Chinas products that use Australian ore, the flow-on effect will put further downward pressure on ore production. Mining and carbon taxes will be the least of their worries. The consequent decline in exports will prompt a reduction in the exchange rate. The downward trend may be rapid and the precursor to severe conditions.

Fig 6 - Australias Balance of Trade Jan 1971 to October 2012 - per

In the USA
20. Not unlike Australia, in respect of having incurred an ever-growing current account deficit and a corresponding domestic debt owed to banks, is the United States. But unlike Australia, the US is struggling with massive, crippling, fiscal debt (Fig. 7 below refers). The float has effectively gutted the United States economy. The US economy is now like an egg emptied of substance; just a shell of its former self. A fragile faith in the US dollar is all that has prevented the US economy from collapsing. ( refers)

Fig.7 - US Fiscal Deficit, Current Account Deficit, and Bank Lending - per Buoyant Economies

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21. Though adopting the float in December 1983, Australias first setback in consequence of the float occurred in 1973. President Richard Nixon caused the United States to adopt the float, and thus isolate its money supply in March of that year, having coerced Americas major trading partners to follow suit. Continuing constraints on bank lending (Banks having not yet been deregulated), and the elimination of the ability to accumulate foreign reserves as national savings through international trade, stymied the US (and its trading partners) capacity for economic expansion. A worldwide recession ensued that was to last some two years. As Fig 8 below indicates, the recession was already well on its way when on 18 October 1973, the OPEC oil embargo began because of Americas active support for Israel in the Yom Kippur war. The embargo lasted for 5 months and was undoubtedly the source of major difficulties and costs. Ironically, rather than buffer the float economies, the impact of the oil crisis was made worse by the float initiated recession, and the float mechanism itself. The recession having begun before the oil embargo, continued because the factors that had caused it were still in place. It was the precursor to the particularly unfortunate debt trend for advanced G-20 economies.

Fig 8 - The Recession of 197375 in the USA can be described as a U-shaped recession, because of its prolonged period of weak growth &contraction.[1] Percent Change From Preceding Period in Real Gross Domestic Product (annualized; seasonally adjusted); Average GDP growth 19472009 Source:US Bureau of Economic Analysis also see

Misre Economies

Fig 9 Debt to GDP ratios across country groups1880-2009 - IMF Working Paper WP/10/245 A historical public debt database

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22. The IMF chart above (Fig 9) shows that the turning point where debt to GDP starts to rise for G-20 countries is 1973, the year that the US floated its exchange rate. It reveals a noticeably persistent upward trend in debt levels of advanced G20 countries subsequent to 1973. Page 11 of the paper states that "by 1960 . . . the advanced G-20 economy average debt ratio declined to 50 percent of GDP. . .. Average advanced G-20 economy debt ratios trended down further through the early 1970s; however, debt began to accumulate starting in the mid-1970s, with the end of the Bretton Woods system of exchange rates and two oil price shocks. This upward trend continued until the current global financial crisis.15a

Solutions and Government Responsibility

23. The crisis induced by the isolated monetary system is looming in Australia, and elsewhere, is a consequence of government policy. Some countries, such as Singapore and the Philippines, cognizant of their responsibilities, have successfully modified their 'float' system to mitigate most of its various shortcomings16. The results are less than optimal, nevertheless those countries have: a. Increased their national wealth; b. Gained new domestic industries and jobs; and c. Reduced their debt and improved their economys capacity to service it. Switzerlands central bank, the SNB, also understands the need to look after its national interests and maintain a competitive currency. China has proved to be particularly successful as an economic manager in this regard. It has assiduously avoided adopting the float and the deregulation of banking. Though its fixed exchange rate system has no provision to optimise performance, Chinas economy has grown rapidly by accumulating savings earned from international trade. 24. In curious contrast, the Australian government chooses to blame its citizens for the mounting foreign debt. It calls on them to raise productivity! Australian citizens could respond to their governments request if they were not constrained by Australias central bank, the RBA.
Members of the RBA Board Chairman: Glenn Stevens, Deputy Chairman: Philip Lowe, Martin Parkinson PSM, John Akehurst, Jillian Broadbent AO, Roger Corbett AO, John Edwards, Heather Ridout, and Catherine Tanna

RBA chooses to allow Australian banks to exchange Australian dollars that have no prior claim to the nations productivity (i.e. unendowed money) for foreign currency. (paras 8 to 11 refer). RBA encourages the banks to lend those unendowed dollars, backed by foreign loans, to Australians so that they may buy more foreign goods made cheap by a high exchange rate And add to the nations indebtedness. The consequent loss of many Australian industries and jobs says much about RBAs stewardship. 25. Recently, it had seemed the US was about to leave Australia behind in recognising and taking action to address the systemic disaster that confronts them. President Barack Obama's speech of Tuesday, 6 December 2011, in Osawatomie, Kansas, suggested this. He drew attention to American banks (and ultimately the US Federal Reserves) culpability for much of the US economic woes. A small improvement in employment figures after 6 Dec 2011, indications by the Federal Reserve on 29 Feb 2012 that another quantitative easing monetary stimulus (QE3) was Quantitative Easing - Digging a deeper hole not imminent, and their anticipation of low and steady inflation; also pointed to the possibility that the US had got its act together. QE3 announced 13 September 2012 made nonsense of this. The improvement in US fiscal deficit and employment figures,18and the availability of massive shale oil reserves, has generated belief that the US decent into recession has finished. The only obstacle to recovery perceived by such hopefuls is the political confrontation at the top of the fiscal cliff. However; the US current account deficit continues to grow, and loom large in the background.

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26. Whether it is the US, Australia, Britain, Iceland, the European Monetary Union, or countries within that union, such as Greece, Friedmans float has taken its toll. Aside from the volatility and instability associated with it, the float progressively erodes the ability of domestic industries to compete against imports; it destroys those industries, and the jobs that go with them; and it prevents exports contributing to economic growth. In tandem with unsustainable debt that the deregulation of the banking industry facilitates, the future faced under the float, instead of prosperity, is inevitably one of massive recession and grinding poverty A vulnerable situation with considerable potential for giving rise to serious national security issues. It is little wonder that China has been so dismissive of the floats peddlers.

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27. It is clear that there needs to be a market-determined variable exchange rate system that excludes the distortions inherent in an isolated monetary system and associated deregulation of the banking industry. One such system is the Optimum Exchange Rate (OER) System. This system allows exports to add wealth to the economy and facilitate growth. The OER also enables incentives to be provided for the market to manage the exchange rate to achieve economic objectives such as full employment, and low inflation. Why not OER? John Griffiths
Originated July 2011 last updated 27 January 2013
The above observations include my attempt to summarise the problem that is the subject of research presented by Leigh Harkness of Buoyant Economies in various papers available at:- Contact: Gestiefeltbote at

End Notes:
1. Australias central bank. 1a. The Floating Exchange Rate System concept was a creation of Milton Friedman, who became an economic adviser to US President Richard Nixon. External shocks and shifts in terms of trade' described as being disruptive that might cause major inflation or deflation effects. (See footnote 10 regarding inflation post 'float'.). This was the declared purpose and benefit for Australia adopting the float in 1983. Banking Industry and the Reserve Bank both advocated adopting the floating exchange rate system. For them, aside from being perceived as mutually convenient in terms of simplifying administrative controls, the 'internationalisation of the Australian dollar' seemed to offer aspects that were seen as desirable. 'A Generation of an Internationalised Australian Dollar', Ric Battellino, Michael Plumb, RBA, address Seoul Korea, March 2009. . (see footnote 3). Treasurer Paul Keating was awarded Finance Minister of the Year by Euromoney Magazine in 1984 on the strength of this and related policy implementation. See 2. Foreign reserves are the accumulated savings of foreign currencies and gold as in consequence of international trade. 3. Under the previous (fixed) exchange rate system, exporters earned additional income for their economy. That income raised the money supply by raising foreign reserves, that is, national savings. Those savings added to national wealth and economic growth. However, there were other aspects about this system that made it unattractive to banking industry and the Reserve Bank of Australia (RBA), and made them willing to opt for what they thought was a better exchange rate system. (see footnote 1) 3a. While trading does not add to foreign reserves, it does not stop a central bank from adding to the money supply by speculating in the money market for specific purposes. Under the float, sufficient foreign reserves are kept for day to day and longer term administrative requirements (including accommodate the RBAs need to speculate in currency and influence the exchange rate) the but with no intention to accumulate beyond that. 4. Impact of the Floating Exchange Rate System on Employment and Growth at refers. Also, lost industries and jobs translate into lost revenue. 5# Blanchard O and GM Milesi-Ferretti (2011), (Why) Should Current Account Balances be Reduced?, IMF Staff Discussion Note 11/03. Olivier Blanchard and Gian Maria Milesi-Ferretti provide a concise summary of the global imbalance argument in a recent IMF paper.] They describe the difference between good and bad current account deficits. Bad current account deficits are those which result from domestic distortions or excessive fiscal positions. Good ones are those which do not have such causes.' per Guy Debelle, Assistant Governor (Financial Markets) RBA Address at ADBI/UniSA Workshop on Growth and Integration in Asia Adelaide 8 July 2011. 'Leigh Harkness on the RBA CAD perspective' article and succeeding comments on 'Macrobusiness' discussion website of 11 August 2011 also expands on this. 6. Government exchange rate policy has caused the failure of many productive Australian industries - Web page 'The Demise of Australian Industry' lists some of those. 6.# More recently, reference has been made to Australia having a three-speed economy, with the state of Victoria and the Australian Capital Territory sitting in middle place due to retail industry and housing finance. Nevertheless, it is still symptomatic of the floats mechanism that facilitates the redistribution of an economys (isolated) money supply, and foreshadows a looming crisis 7. The adoption of the 'float' placed the banking industry in a pivotal position within the economy, and increased its potential for income.. (see footnote 1). Banks are quite unlike Savings and Loans (S&L) organisations. S & L organisations like building societies and credit unions can only lend from the money that members deposit with them. They cannot alter the money supply. Bank credit is not limited to the money that customers lodge with them as deposits. 7a. Leigh Harkness 14 Jan 2013. See 7 above re creation of money by banks as opposed to S& L organisations. 7b.Treasurer Paul Keating deregulated the system by. (b) granting 40 new foreign exchange licences in June 1984; and (c) granting 16 banking licences to 16 foreign banks in February 1985. Australian Banking History - by Trevor Sykes, Senior Writer, The Australian Financial Review 8. Growth of commercial bank credit due to deregulation whereby the nation's expenditure is greater than its income can be expressed logically as E = Y + Cr, where: E is national expenditure; Y is national income; and Cr is the growth of commercial bank credit. Conversely Y = E - Cr. Para 34 by Leigh Harkness at Impact of the Floating Exchange Rate System on Debt refers. Deregulation was in effect a license for the banking industry 'to print money' (un-entitled money) and guaranteed their profitability. (see footnote 1). In contrast, the money S&L lend has a prior entitlement to the economys productive capacity. (footnote 7) 9. Buying more than we produce by importing more that we export in consequence of 'deregulation' can logically be expressed as M - X = Cr (Cr = Commercial Bank Credit) as explained in paras 32 39 by Leigh Harkness at as M - X = Cr or M = X + Cr (or Cr = M-X.) --

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10.# Correlating growths in Australia's Bank Credit, Current Account Deficit, and inflation see graphs and explanations at . 10a. RBA, International Market Operations 4. The Exchange Rate and Monetary Policy 26 May 2012 refers 10b In this graph, the value of the CPI for December 1987 has been set as the base date for measuring the price pressure from monetary sources. The values of the price pressure are calculated using only the money supply (unendowed money) and the real GDP as published by the ABS. The definition of money is the same as used for calculating the current account deficit. The formula used to model the change in the CPI is the square root of the change in the unendowed money supply (currency and bank credit) over the change in the real gross domestic product. 11.Further to the explanation in footnote 9, financing of excess demand for imports generated by 'deregulation' can be express as M - X = Cr =K [Cr= Bank Credit and K (capital) = additional foreign debt plus the additional amount of the 'farm' sold.] as explained in paras 3239 by Leigh Harkness at as M - X = Cr = K or M = X + Cr = X + K. Australia's foreign debt and foreign investment at dangerous levels - "Between 1983, when the dollar was floated, and today, Australia's net foreign investment has doubled from 27% of GDP to 58%. At the same time our net foreign debt has risen from 14% of GDP to 39%. Media Release, | Spokesperson: Bob Brown, Monday 10th May 1999,12:00am 12.There are quite a number of national governments world wide with diverse budget priorities but simultaneously experiencing fiscal deficit difficulties. Other difficulties in common for the countries of those governments, such as significant CAD's, massive debts owed to banks, and collapse of domestic industries, strongly suggests correlation rather than a mere coincidence of their circumstances, and points to a systemic problem in common, or systemic link. The futility of' expenditure cuts and asset sales by governments' is also reflected in the GDP formula when substituting M = X + Cr (and M= X+ K) from footnote 11 (see paragraph 7) into GDP = C+ I + G +[X-M], giving GDP = C+ I + G +[X - (X + Cr)] = C+ I + G +[X - X Cr], which reveals that GDP = C+ I + G Cr (and GDP= C+ I + G K ) . -A world wide, steadily growing 'Cr = M-X' indicates a debilitating systemic problem that must ultimately impact on GDP and 'G'. 12A. In the case of Greece, the float has led to an additional but more direct casual link between Fiscal Deficit and Current Account Deficit, than a diminishing GDP. Rather than run down its international reserves, Greece has been able to keep them practically unchanged. Instead, Greece has used the EU rescue package and the Eurosystem loans to increase domestic credit (i.e. debt). Starting in 2008, the sharp increase in domestic credit provided by the Greek central bank mirrors the cumulative Greek liabilities to the Eurosystem that resulted largely from the Eurosystem loans. GREECE: THE SUDDEN STOP THAT WASNT, by Aaron Tornell Frank Westermann, 28 September 2011. See 13.That is, receipts from a trade surplus (the difference when exports exceed imports) pay for interest on debt - para 3 refers. The nature of the float dictates that exports must inevitably be balanced by payments for imports and other current items such as interest on foreign debt. Thus, any trade surpluses, and recurring ones especially, that arise in the float environment are a pointer to a mounting foreign debt problem. The impact on Australias trade of the US floating its exchange rate in 1973 and US deregulation of banking in 1980-82 is evident in Fig 5. 9 September 1973 to 7 December 1983, the Australian dollar was pegged to the US dollar. 14-Diminished capacity to service debt is also suggested by the formula GDP = C+ I + G Cr as Cr grows. (see footnote 12). But if Cr slows so will the economy. 15. Pyramid Economy? - This collapse is a logical outcome from open-ended credit creation. The concept of adding wealth to an economy through deregulation of the banking industry is as flawed as any pyramid scheme - It is inherently unsustainable! Also, it is highly improbably that those initially promoting and profiting from the deregulation scheme ever gave serious consideration for the ultimate outcome for other participants in the economy. ---Cost Benefit Analysis This unsustainable debt, along with forgone national savings; lost industries; lost jobs; and the lost productivity the latter two represent; are massive costs incurred by Australia due to the 'float' since its implementation. These are costs that continue to mount up due to the steady aggressive nature of the systemic failure. Whether the sum of these huge costs to the nation are a reasonable trade in exchange for the uncertain and ad hoc benefit attributed to the 'float' i.e. 'protect an economy from external disruptions''(para 2 & footnote 1 refer) is perhaps a question that the Commonwealth Auditor should investigate? 15a. (Paras 43 and 44 also refer.) 15b see Hancock Prospecting P/L at . 16.The Philippines have addressed the matter of national savings to achieve these benefits but have yet to adopt an effective competitive exchange rate policy. Philippines Commercial bank credit and the current account deficit page Buoyant Economies website refers. 17. Paragraphs 14 & 15 also refer. RBA failure to intervene is consistent with this strategy. See Formula for the Current Account Balance paper at for models that explain how growth in the quantity of money determines the current account balance. It explains mathematically and graphically how current account deficits are caused when additional money is created which finances national expenditure in excess of national income (production). The paper includes a model that explains what is happening in the case of economies such as the Philippines that significantly increase their foreign reserves. 17a. RBA International Market Operations, 4. The Exchange Rate and Monetary Policy - Since the early 1990s, monetary policy has been conducted under an inflation targeting framework. The inflation target has replaced the exchange rate as the nominal anchor in the economy. monetary policy no longer targets any particular level of the exchange rate. . In addition to counterbalancing the influence of external shocks, .the other important role of the exchange rate in the transmission mechanism has been in its influence on inflation. Under the fixed exchange rate regimes, the Australian economy directly imported the inflation rate of the country (or group of trading partners) to which the exchange rate was pegged. With the floating of the exchange rate, this was no longer the case. Instead, movements in the exchange rate itself became a direct influence on inflation. 26 May 2012 refers. 18. Probably as a consequence of the recent more competitive exchange rate for the US dollar. '...

the borrower is the slave of the lender.' Proverbs 22.7.


A Strategy for Monetary and Financial Stability in the United Kingdom

Comment by Olafur Margeirsson of Exeter University UK and Iceland

An economy dependent on debt for growth, as opposed to one that grows by accumulating savings from international trade, is on the path to recession and exploitation by the other

Page 10 of 10

An insight into the impact of Central Banks, the Floating Exchange Rate System, & Deregulation of Banking on an Economy