A Quote by Mehdi Hasan
Let's start with the euro. What on earth were we thinking? How could anyone with the faintest grasp of economics have believed it was anything other than sheer insanity to yoke together diverse national economies such as Greece, Ireland, Germany and Finland under a single exchange rate and a single interest rate?
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A nation's exchange rate is the single most important price in its economy; it will influence the entire range of individual prices, imports and exports, and even the level of economic activity. So it is hard for any government to ignore large swings in its exchange rate.
We have believed for many years, much earlier than anyone else was talking about this issue, that it was in the interest of China to evolve to a more flexible exchange rate system.
Germany's problem, in part, is that it went into the euro at the wrong exchange rate that overvalued the deutsche mark.
Monetary policy is like juggling six balls... it is not 'interest rate up, interest rate down.' There is the exchange rate, there are long term yields, there are short term yields, there is credit growth.
If a country is an attractive place for foreigners to invest their funds, then that country will have a relatively high exchange rate. If it's an unattractive place, it will have a relatively low exchange rate. Those are the fundamentals that determine the exchange rate in a floating exchange rate system.
In the 20 years before Greece end up with the Euro, efforts to improve competitiveness through exchange rate and adjustments resulted only in temporary gains of competitiveness.
When they so-called 'target the interest rate', what they're doing is controlling the money supply via the interest rate. The interest rate is only an intermediary instrument.
The lesson for Asia is; if you have a central bank, have a floating exchange rate; if you want to have a fixed exchange rate, abolish your central bank and adopt a currency board instead. Either extreme; a fixed exchange rate through a currency board, but no central bank, or a central bank plus truly floating exchange rates; either of those is a tenable arrangement. But a pegged exchange rate with a central bank is a recipe for trouble.
Our tree is actually a tree of the short-term interest rate. The average direction in which the short-term interest rate moves depends on the level of the rate. When the rate is very high, that direction is downward; when the rate is very low, it is upward.
It is a fact that, if I single out Germany, our rate of growth is too low and we have very high unemployment.
A single currency entails a fixed interest rate, which means countries can't manage their own currency to suit their own needs. You need a variety of institutions to help nations for which the policies aren't well suited. Europe introduced the euro without providing those structures.
The IMF insisted that both Russia and Brazil maintain their currency at over-valued levels. Who are you protecting when you try to maintain that exchange rate by having high interest rates? You're protecting domestic and foreign firms that have gambled on the exchange rate. And who is paying the price? The small businesses that did not gamble [and no longer can afford loans], the workers who are going to be put out of jobs.
The discounting presumably is to be done for each period of time at that rate of interest which represents the alternative cost of employing capital in the occupation in question; that is, at the rate which the entrepreneur could obtain in other investments
The stability of the rate is the main issue and the Central Bank manages to ensure it one way or another. This was finally achieved after the Central Bank switched to a floating national currency exchange rate.
The U.S. berates China for its exchange rate policy, which Washington doesn't like. But one-sided pressure on China to change its exchange rate is misplaced.
E-mail is a modern Penny Post: the world is a single city with a single postal rate.
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