A Quote by Milton Friedman
The problem is that, in a world of floating exchange rates, as Italy was before the euro, if one country is subjected to a shock which requires it to cut wages, it cannot do so with a modern kind of control and regulation system. It is much easier to do it by letting the exchange rate change. Only one price has to change, instead of many.
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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.
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.
That day the U.S. announced that the dollar would be devalued by 10 percent. By switching the yen to a floating exchange rate, the Japanese currency appreciated, and a sufficient realignment in exchange rates was realized. Joint intervention in gold sales to prevent a steep rise in the price of gold, however, was not undertaken. That was a mistake.
When financial sectors are small and capital is mobile, floating exchange rates spell massive currency volatility. When a lot of foreign capital flows in, a freely floating exchange rate rises sharply, wreaking havoc for domestic banks and exporters alike.
Italy may well be the main problem. It has benefited most from the euro by having been able to get the euro interest rate instead of what otherwise would have been its own. That would be much higher because Italy has been accumulating so much debt. In the past, Italy has inflated away its debt. The virtue of the euro is that Italy can't do it alone. A tight ECB policy wouldn't permit that to happen again.
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.
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.
There are so many currency exchange rate problems that people are buying gold as a safe haven. Right now, gold looks like a safe haven if international exchange rates break down.
Germany's problem, in part, is that it went into the euro at the wrong exchange rate that overvalued the deutsche mark.
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 cannot change the political system, we cannot change the economic system, we cannot change the social system, until the people control the land, and then we take it out of the hands of that sick minority that chooses to pervert the meaning and the intention of humanity.
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.
To be sure, the use of force by one party in a market transaction in order to improve his price was no invention of capitalism. Unequal exchange is an ancient practice. What was remarkable about capitalism as a historical system was the way in which this unequal exchange could be hidden; indeed, hidden so well that it is only after five hundred years of the operation of this mechanism that even the avowed opponents of the system have begun to unveil it systematically.
Liberal economists conceive of societies as black boxes connected by exchange rates; as long as exchange rates are correct, what goes on inside the black box is regarded as not very important.
The central banks cannot control interest rates. That's a mistake. They can control a particular rate, such as the Federal Funds rate, if they want to, but they can't control interest rates.
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.
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