Understanding the Float
This is a piece written by John Griffiths.
Most people don’t understand that our present ‘floating’ exchange rate system is designed to isolate our money supply, so that no money can leave or enter our economy. This is intended to protect our money supply from external disruptions.
The system requires foreign receipts from exports and investments to equal foreign payments for imports and other current items such as interest on foreign debt. Thus, money that might have come into our economy, and raised foreign reserves, is used up buying imports and meeting other foreign commitments. There is no opportunity under the ‘float’ to accumulate a surplus. There are no national savings generated from our international trade that can add to our money supply. There is no additional wealth.
The 'floating' exchange rate behaves like an indicator on a set of weighing scales. It rises and falls to ensure that the flow of currency in each direction is equal, so as not to add to the money supply.
Exporters’ requirement to be paid in Australian dollars drives up our exchange rate. A rising exchange rate inevitably makes imports cheaper than products produced in Australia. Our domestic industries and jobs associated with them are made uncompetitive and progressively squeezed out of existence.
The more we export, the more we must import. The more we import, the more we undermine our domestic industries.
The 'float' redistributes the nation’s wealth away from our domestic industries. Thus the export industries, such as mining, expand at the expense of other productive domestic industries and jobs. This is the so-called 'two speed economy' effect, which has often been extolled as a blessing.
Rather than carrying the rest of the country, thanks to the ‘float’, the mining industry’s impact on Australia’s economy is akin to a debilitating parasite.
Under the 'float', not only does Australia forgo the opportunity to earn national savings, we also allow the 'float' to progressively destroy our nation’s ability to be productive.
To enthuse about a strong demand for the Australian dollar, is like praising the ferocity of a fire as it consumes your home, with yourself in it.
When adopting the 'float', Australia denied itself the ability to stimulate its economic growth through export growth. Instead, it relies on credit growth to add to the money supply. The growth of bank credit enables us to spend future national earnings in the present.
It means that Australians have been buying more than they have produced and so imported more than they have exported. This has resulted in a corresponding growth in foreign debt.
The capacity to service the mounting debt has steadily diminished. Now we must generate trade surpluses to pay the interest on our international debt.
Also, the ‘float’s unrelenting erosion of Australia’s domestic industries impinges on our capacity to repay the debt. Eventually Australia’s debt will be beyond its capacity to service, and like Greece, it will be at the mercy of its creditors.
This situation is a consequence of government policy. Governments of other countries, such as Singapore and the Philippines, cognizant of their responsibilities, have successfully modified their 'float' to:
Increase national wealth;
Stimulate domestic industries and provide jobs; and
Reduce net foreign debt.
Our government blames its citizens for the debt; and calls on them to raise productivity.
The Growth of Debt and Loss of Income in America considers the relationship between bank credit, the exchange rate, foreign debt, slow economic growth and high unemployment.
Formula for the current account balance explains mathematically and diagrammatically how the monetary system has generated current account deficits and raise foreign debt in many countries. It also explains how other countries have been able to achieve balance of payments surpluses.
Last update: 13 July 2011