gold-forum
08-12-2009, 03:25 PM
Overvalued currencies and floating exchange rates</B>
Unable to refute my arguments and still burning from my demolition job on his carbon tax paper John Humphreys (http://blog.libertarian.org.au/2009/05/21/the-hater-strikes-again) has once again resorted to slurs and lies in an effort to destroy my credibility, and in doing so he only discredited himself. Not only am I a "hater" I am also "senile "dishonest" "unbelievably stupid" and a "fool". Having set the tone with his Lenin-like tirade the charming Mr Humphreys then continued in his usual dishonest way, though he did begin by correctly quoting me as saying:
…an overvalued currency acts like a subsidy on imports and a tax on domestic production. Humphreys states this is not possible where floating exchange rates are the rule.
He then writes:
I never said this. Indeed, I directly said that the reserve bank could over-value the exchange rate by running a contractionary monetary policy. He is either grossly dishonest or unbelievably stupid. Or both.
But he did say it and no amount of abuse and dishonesty can conceal that fact. He and Davidson said it when they stated that over-valued exchange rates are not possible if countries are floating their currencies. But the fact remains that overvalued currencies do emerge on a floating exchange rate for the very simple fact that they have. I did nothing more than state what competent economists and currency traders already know. Furthermore, Humphreys and Davidson said that the reduction in manufacturing as a proportion of GDP was due to comparative advantage and that was it. End of discussion. They did not provide a shred of evidence to support their statement. Humphreys then went on to say that I used
Ricardo and Thornton to make the obvious point that government policy influences comparative advantage. Of course, nobody denied this. Presumably, Gerry thinks he has made a point. He hasn't.
More weaselling. Ricardo recognised that an industry's comparative advantage could be taxed away. This is precisely what an overvalued currency does and what I have been stressing has probably happened in Australia. Humphreys chose to ignore that fact. I used Thornton to show that the classical economists in general were aware of this process. This was done to refute Des Moore's 'argument' that my views are not part of the "traditional explanation", though he too provided no evidence to support his opinion. On top of that we had Sinclair Davidson writing that my Schumpeter quote did not support my argument, which was a shameles lie on his part.
Now I made it absolutely clear that I was focusing on monetary policy and the state of monetary thinking and not government policy. (I might add that I have yet to read anything by our right suggesting that monetary policy can destroy an industry's comparative advantage). Humphreys then said:
The point I made was quite different. I pointed out that you can't simultaneously have expansionary and contractionary monetary policy.
Of course you can't. This is like saying you can be an Austrian and a neoclassical economist at the same time. So where did I say this? The fact is, I never did and he knows it. But inventing quotes and attributing them to me in a pathetic effort to discredit me is, unfortunately, par for the course for Humphreys. (Do you recall your phony quote about Mises and Hayek, Mr Humphreys?)
Gerry complains that monetary policy is leading to inflation (expansionary monetary policy) and also to an overvalued exchange rate (contractionary monetary policy).
Another distortion. I made no such complaint and never have. Anyone who reads Brookesnews knows I have been stressing for some time that the Reserve has been running a very tight monetary policy. My complaint is that the Reserve's previous loose monetary policies were accompanied by an overvalued dollar. My second complaint is that our so-called rightwing refused to discuss this possibility. They still do.
It is clear from Humphreys criticism that he assumes that an overvalued exchange rate must always be the result of a "contractionary monetary policy". Not so. The 'dollar shortage' of the 1950s proves otherwise. This so-called shortage developed because European countries overvalued their currencies relative to the US dollar. (Milton Friedman, Dollars and Deficits, Prentice-Hall Inc., 1968) The same thing happened with the pound. These 'exchange rate problems' were in fact symptoms of monetary mismanagement.
When operating on a fixed exchange rate and you inflate faster than your trading parners you eventually run into current account problems. (Think of the flood of US dollars in the1960s that resulted in the US abandoning the fiction in 1971 that the dollar really was tied to gold). So where is the contradiction, Mr Humphreys? Unless he thinks these countries spent most of the 1950s shrinking their money stocks.
I clearly said:
In such a world [non-gold standard] a loose monetary policy can go hand-in-hand with an over-valued currency. In other words, ours becomes a world of undervalued and overvalued currencies in a continuous state of flux and thus the tacit assumption that monetary policy cannot cause distortions because exchange rates are flexible does not hold.
Humphreys' response is to call this "incoherent". But what is incoherent about it? I simply stated that in a world of fiat moneys one will get overvalued and undervalued currencies and distortions. (James Meigs, Money Matters: Economics, Markets and Politics, Harper & Row, 1972, Michael A. Heilperin International Monetary Economics, Longman's, Green and Co., 1939). If he thinks otherwise, then he should tell us why. It ought to be obvious to even the most incompetent economist that a world of continuously changing money stocks must result in exchange rate instability. Humphreys then argued:
This is a non-answer. At any point in time a currency can only be overvalued (hurting exports) or undervalued (leading to inflation). It can't be both. Further, loose monetary policy leads to currency devaluation, not appreciation.
Actually there are three and not two positions for a currency "at any point in time", the third one being equilibrium. As an economist Humphreys should know that. Now, where in heavens name did I make the ridiculous argument that a currency could be simultaneously overvalued and undervalued? Nowhere, of course. This is another Humphreys' fiction.
As I have already pointed out, in a monetary world consisting entirely of paper moneys exchange rate instability will be the order of the day and a Mecca for speculators. (I am not stating that monetary forces are the sole cause of exchange rate instability, only that they are the principal cause). Therefore we should expect exchange rate instability, which is exactly what we have.
That a loose monetary policy is the road to devaluation is true. No where have I ever said otherwise, quite the opposite. A world of paper moneys is bound to be one in which all currencies are depreciating, but at different rates. No wonder loose monetary policies have gone hand-in-hand with overvalued currencies. Samuel Brittan of the Times made this very point (The Price of Economic Freedom: A Guide to Flexible Rates, London Macmillan and Co., 1970). And there is no way floating exchange rates can change this situation.
Humphreys is blowing smoke. Nowhere did he make the slightest attempt to refute my argument that overvalued currencies can emerge where floating exchange rates are the rule and that this situation would distort the pattern of production. In Dollars, manufacturing and free trade (http://www.brookesnews.com/062509mfrg.html) I provided plenty of sources that argued that some currencies are indeed overvalued. Humphreys ignored every one of them, as did Sinclair Davidson. Their fundamental argument being that exchange rate disquilibrium cannot persist under a floating rate regime – and to hell with any evidence to the contrary.
My argument is a straightforward one that mismanaged monetary policies are a continual source of disequilibrium that frustrates the intentions of the float. If it were otherwise there would be no currency spectulation. I think the recent financial crisis bears this out. Moreover, I am wrong then there cannot be any overvalued currencies. So allow me to direct readers' attention to the the latest issue of the Economists' Big Mac index (http://www.economist.com/daily/chartgallery/displayStory.cfm?story_id=14065333&source=features_box4) showing which of the world's currencies are overvalued and undervalued.
(This index has proved to be remarkably accurate even, so I have been told it started off as something of a joke).
John Williamson of the Institute for International Economics warned that the US dollar was seriously overvalued (3 June 2009). August last year Reuters reported Nobel Prize laureate Robert Mundell as saying that "the euro is currently overvalued." According to the current Big Mack Index the Euro is still overvalued. Kathy Lien, Director of Currency Research at FX360.com and GFT, reported that the Euro was still overvalued as was the US dollar. Goldman Sachs recently reported that the Japanese yen is the most overvalued currency in what it calls "The Group of Ten". Early this year Julian Callow, Barclays Capital top economist, expressed the opinion that an overvalued euro had "hollowed out" Europe's manufacturing base.
It takes time for currency effects to feed through. The damage was concealed during the global boom but the collapse in demand has exposed the vulnerabilities. We going to see a prolonged period of de-industrialisation. (Europe's industrial base may never recover from crisis, Ambrose Evans-Pritchard, Telegraph, 13 February 2009)
Ambrose Evans-Pritchard of the Telegraph made the same argument:
The high euro is hollowing out Europe's core industries. With a lag, this will be reflected in a slow rebuilding of America's industrial base. Note how EADS-Airbus is building plants in America. (The G20 has lost the plot, Ambrose Evans-Pritchard, Telegraph, 2 April 2009),
According to Humphreys these people must be "unbelievably stupid" for believing that a country can have a currency that is floating and overvalued at the same time. And he and Davidson must have particular contempt for those who believe an overvalued currency can eventually hollow out an economy. Whatever one thinks of the "hollowing out" concept one thing is crystal clear: I am absolutely correct in arguing that overvalued currencies do in fact exist.
All that Humphreys and Davidson had to do to prove their case was to show why it is impossible for overvalued currencies to exist where floating exchange rate regimes rule, regardless of monetary policy. They refused to even try. And no amount of straw men arguments and ad hominem attacks can conceal that fact.
As for Sinclair Davidson (who accuses me of using extravagant and violent lanugage) and Des Moore, all they need do is step forward and explain why I am wrong an they are right. What could be more simple than that? But maybe they won't debate the issue because they know they cannot prove their case. The reason is simple. A floating exchange rate is no substitute for a gold standard which is the only genuine market mechanism that can determine real exchange rates, which, as I have pointed out a number of times before, are ultimately determined by purchasing power parity. Therefore the absence of a gold standard ensures that currencies will continually deviate from these parities.
Humphreys tells us he is an economist. This is the same Humphreys who wrote:
FRB = fractional reserve banking. Basically, it involves people entering into voluntary contracts for how another person can use their money.
Some strange people (including Bird, and some Austrians) think it should be banned because it makes financial markets more volatile. They are correct that it makes financial markets more volatile, but it also gives huge benefits such as massive efficiency gains in the allocation of capital… which is the prime driver of economic growth.
But putting aside the consequentialist argument, FRB is "voluntary acts between consenting adults", and they only way to stop it would be by violating the non-aggression principle. May 24, 2009
To an Austrian this is a very dangerous line of thinking indeed and one that Mises and Hayek spent a great many years striving to expose as such. However, unlike Humphreys and Davidson I always act in good faith so rather than call Humphreys a "hater", "senile", "dishonest", "unbelievably stupid" and a "fool" I shall merely call on him to don his neo-classical hat and explain why Mises and Hayek are wrong and he is right. I can assure him that if he succeeds in defeating these Two Greats of the Austrian school he will earn the undying gratitude of every anti-Austrian in the economics profession.
Humphreys finished his masterpiece with this beauty:
Gerry thinks that we all laugh at him because he responded to my article on a carbon tax. To rehash this old issue — Gerry's point was that a carbon tax was bad for the economy. Of course, I have always said that a carbon tax would be bad for the economy, but that offsetting tax cuts would be good for the economy. I pointed out that if you increase one tax and decrease another tax then you get ambiguous results, depending on the nature of the tax swap. Gerry can't understand this.
The only figure of fun here is Humphreys. I made two extremely important points which were met with the usual barrage of abuse and lies from Humphreys:
1. A carbon tax is a direct tax on the capital structure, the result of which would be to shorten it and therefore cut living standards. Humphreys made no attempt to refute this argument.
2. My second point is that it is impossible for tax cuts to offset the destruction of capital that a carbon tax would wrought on the economy. (What Humphreys proposes would be like post-war German and Japanese governments trying to offset the destruction of their nations' capital stock with income tax cuts and just as absurd). Another point that Humphreys made no attempt to refute. This makes his idea of "a tax swap" all the more ridiculous. In addition, evidence from Spain and the UK is providing increasingly strong support for my argument. There is absolutely no support for his.
If anyone has a problem understanding this issue, it's Humphreys. My analysis was based entirely on the Austrian approach to money and capital. If Humphreys believes that Austrian theory is bunk then he should come out and say so instead of launching personal attacks.
Gerard Jackson
Brookesnews (http://www.brookesnews.com/).com
More... (http://www.24hgold.com/english/contributor.aspx?rss=true&article=2256085060G10020&redirect=false&contributor=Gerard+Jackson)
Unable to refute my arguments and still burning from my demolition job on his carbon tax paper John Humphreys (http://blog.libertarian.org.au/2009/05/21/the-hater-strikes-again) has once again resorted to slurs and lies in an effort to destroy my credibility, and in doing so he only discredited himself. Not only am I a "hater" I am also "senile "dishonest" "unbelievably stupid" and a "fool". Having set the tone with his Lenin-like tirade the charming Mr Humphreys then continued in his usual dishonest way, though he did begin by correctly quoting me as saying:
…an overvalued currency acts like a subsidy on imports and a tax on domestic production. Humphreys states this is not possible where floating exchange rates are the rule.
He then writes:
I never said this. Indeed, I directly said that the reserve bank could over-value the exchange rate by running a contractionary monetary policy. He is either grossly dishonest or unbelievably stupid. Or both.
But he did say it and no amount of abuse and dishonesty can conceal that fact. He and Davidson said it when they stated that over-valued exchange rates are not possible if countries are floating their currencies. But the fact remains that overvalued currencies do emerge on a floating exchange rate for the very simple fact that they have. I did nothing more than state what competent economists and currency traders already know. Furthermore, Humphreys and Davidson said that the reduction in manufacturing as a proportion of GDP was due to comparative advantage and that was it. End of discussion. They did not provide a shred of evidence to support their statement. Humphreys then went on to say that I used
Ricardo and Thornton to make the obvious point that government policy influences comparative advantage. Of course, nobody denied this. Presumably, Gerry thinks he has made a point. He hasn't.
More weaselling. Ricardo recognised that an industry's comparative advantage could be taxed away. This is precisely what an overvalued currency does and what I have been stressing has probably happened in Australia. Humphreys chose to ignore that fact. I used Thornton to show that the classical economists in general were aware of this process. This was done to refute Des Moore's 'argument' that my views are not part of the "traditional explanation", though he too provided no evidence to support his opinion. On top of that we had Sinclair Davidson writing that my Schumpeter quote did not support my argument, which was a shameles lie on his part.
Now I made it absolutely clear that I was focusing on monetary policy and the state of monetary thinking and not government policy. (I might add that I have yet to read anything by our right suggesting that monetary policy can destroy an industry's comparative advantage). Humphreys then said:
The point I made was quite different. I pointed out that you can't simultaneously have expansionary and contractionary monetary policy.
Of course you can't. This is like saying you can be an Austrian and a neoclassical economist at the same time. So where did I say this? The fact is, I never did and he knows it. But inventing quotes and attributing them to me in a pathetic effort to discredit me is, unfortunately, par for the course for Humphreys. (Do you recall your phony quote about Mises and Hayek, Mr Humphreys?)
Gerry complains that monetary policy is leading to inflation (expansionary monetary policy) and also to an overvalued exchange rate (contractionary monetary policy).
Another distortion. I made no such complaint and never have. Anyone who reads Brookesnews knows I have been stressing for some time that the Reserve has been running a very tight monetary policy. My complaint is that the Reserve's previous loose monetary policies were accompanied by an overvalued dollar. My second complaint is that our so-called rightwing refused to discuss this possibility. They still do.
It is clear from Humphreys criticism that he assumes that an overvalued exchange rate must always be the result of a "contractionary monetary policy". Not so. The 'dollar shortage' of the 1950s proves otherwise. This so-called shortage developed because European countries overvalued their currencies relative to the US dollar. (Milton Friedman, Dollars and Deficits, Prentice-Hall Inc., 1968) The same thing happened with the pound. These 'exchange rate problems' were in fact symptoms of monetary mismanagement.
When operating on a fixed exchange rate and you inflate faster than your trading parners you eventually run into current account problems. (Think of the flood of US dollars in the1960s that resulted in the US abandoning the fiction in 1971 that the dollar really was tied to gold). So where is the contradiction, Mr Humphreys? Unless he thinks these countries spent most of the 1950s shrinking their money stocks.
I clearly said:
In such a world [non-gold standard] a loose monetary policy can go hand-in-hand with an over-valued currency. In other words, ours becomes a world of undervalued and overvalued currencies in a continuous state of flux and thus the tacit assumption that monetary policy cannot cause distortions because exchange rates are flexible does not hold.
Humphreys' response is to call this "incoherent". But what is incoherent about it? I simply stated that in a world of fiat moneys one will get overvalued and undervalued currencies and distortions. (James Meigs, Money Matters: Economics, Markets and Politics, Harper & Row, 1972, Michael A. Heilperin International Monetary Economics, Longman's, Green and Co., 1939). If he thinks otherwise, then he should tell us why. It ought to be obvious to even the most incompetent economist that a world of continuously changing money stocks must result in exchange rate instability. Humphreys then argued:
This is a non-answer. At any point in time a currency can only be overvalued (hurting exports) or undervalued (leading to inflation). It can't be both. Further, loose monetary policy leads to currency devaluation, not appreciation.
Actually there are three and not two positions for a currency "at any point in time", the third one being equilibrium. As an economist Humphreys should know that. Now, where in heavens name did I make the ridiculous argument that a currency could be simultaneously overvalued and undervalued? Nowhere, of course. This is another Humphreys' fiction.
As I have already pointed out, in a monetary world consisting entirely of paper moneys exchange rate instability will be the order of the day and a Mecca for speculators. (I am not stating that monetary forces are the sole cause of exchange rate instability, only that they are the principal cause). Therefore we should expect exchange rate instability, which is exactly what we have.
That a loose monetary policy is the road to devaluation is true. No where have I ever said otherwise, quite the opposite. A world of paper moneys is bound to be one in which all currencies are depreciating, but at different rates. No wonder loose monetary policies have gone hand-in-hand with overvalued currencies. Samuel Brittan of the Times made this very point (The Price of Economic Freedom: A Guide to Flexible Rates, London Macmillan and Co., 1970). And there is no way floating exchange rates can change this situation.
Humphreys is blowing smoke. Nowhere did he make the slightest attempt to refute my argument that overvalued currencies can emerge where floating exchange rates are the rule and that this situation would distort the pattern of production. In Dollars, manufacturing and free trade (http://www.brookesnews.com/062509mfrg.html) I provided plenty of sources that argued that some currencies are indeed overvalued. Humphreys ignored every one of them, as did Sinclair Davidson. Their fundamental argument being that exchange rate disquilibrium cannot persist under a floating rate regime – and to hell with any evidence to the contrary.
My argument is a straightforward one that mismanaged monetary policies are a continual source of disequilibrium that frustrates the intentions of the float. If it were otherwise there would be no currency spectulation. I think the recent financial crisis bears this out. Moreover, I am wrong then there cannot be any overvalued currencies. So allow me to direct readers' attention to the the latest issue of the Economists' Big Mac index (http://www.economist.com/daily/chartgallery/displayStory.cfm?story_id=14065333&source=features_box4) showing which of the world's currencies are overvalued and undervalued.
(This index has proved to be remarkably accurate even, so I have been told it started off as something of a joke).
John Williamson of the Institute for International Economics warned that the US dollar was seriously overvalued (3 June 2009). August last year Reuters reported Nobel Prize laureate Robert Mundell as saying that "the euro is currently overvalued." According to the current Big Mack Index the Euro is still overvalued. Kathy Lien, Director of Currency Research at FX360.com and GFT, reported that the Euro was still overvalued as was the US dollar. Goldman Sachs recently reported that the Japanese yen is the most overvalued currency in what it calls "The Group of Ten". Early this year Julian Callow, Barclays Capital top economist, expressed the opinion that an overvalued euro had "hollowed out" Europe's manufacturing base.
It takes time for currency effects to feed through. The damage was concealed during the global boom but the collapse in demand has exposed the vulnerabilities. We going to see a prolonged period of de-industrialisation. (Europe's industrial base may never recover from crisis, Ambrose Evans-Pritchard, Telegraph, 13 February 2009)
Ambrose Evans-Pritchard of the Telegraph made the same argument:
The high euro is hollowing out Europe's core industries. With a lag, this will be reflected in a slow rebuilding of America's industrial base. Note how EADS-Airbus is building plants in America. (The G20 has lost the plot, Ambrose Evans-Pritchard, Telegraph, 2 April 2009),
According to Humphreys these people must be "unbelievably stupid" for believing that a country can have a currency that is floating and overvalued at the same time. And he and Davidson must have particular contempt for those who believe an overvalued currency can eventually hollow out an economy. Whatever one thinks of the "hollowing out" concept one thing is crystal clear: I am absolutely correct in arguing that overvalued currencies do in fact exist.
All that Humphreys and Davidson had to do to prove their case was to show why it is impossible for overvalued currencies to exist where floating exchange rate regimes rule, regardless of monetary policy. They refused to even try. And no amount of straw men arguments and ad hominem attacks can conceal that fact.
As for Sinclair Davidson (who accuses me of using extravagant and violent lanugage) and Des Moore, all they need do is step forward and explain why I am wrong an they are right. What could be more simple than that? But maybe they won't debate the issue because they know they cannot prove their case. The reason is simple. A floating exchange rate is no substitute for a gold standard which is the only genuine market mechanism that can determine real exchange rates, which, as I have pointed out a number of times before, are ultimately determined by purchasing power parity. Therefore the absence of a gold standard ensures that currencies will continually deviate from these parities.
Humphreys tells us he is an economist. This is the same Humphreys who wrote:
FRB = fractional reserve banking. Basically, it involves people entering into voluntary contracts for how another person can use their money.
Some strange people (including Bird, and some Austrians) think it should be banned because it makes financial markets more volatile. They are correct that it makes financial markets more volatile, but it also gives huge benefits such as massive efficiency gains in the allocation of capital… which is the prime driver of economic growth.
But putting aside the consequentialist argument, FRB is "voluntary acts between consenting adults", and they only way to stop it would be by violating the non-aggression principle. May 24, 2009
To an Austrian this is a very dangerous line of thinking indeed and one that Mises and Hayek spent a great many years striving to expose as such. However, unlike Humphreys and Davidson I always act in good faith so rather than call Humphreys a "hater", "senile", "dishonest", "unbelievably stupid" and a "fool" I shall merely call on him to don his neo-classical hat and explain why Mises and Hayek are wrong and he is right. I can assure him that if he succeeds in defeating these Two Greats of the Austrian school he will earn the undying gratitude of every anti-Austrian in the economics profession.
Humphreys finished his masterpiece with this beauty:
Gerry thinks that we all laugh at him because he responded to my article on a carbon tax. To rehash this old issue — Gerry's point was that a carbon tax was bad for the economy. Of course, I have always said that a carbon tax would be bad for the economy, but that offsetting tax cuts would be good for the economy. I pointed out that if you increase one tax and decrease another tax then you get ambiguous results, depending on the nature of the tax swap. Gerry can't understand this.
The only figure of fun here is Humphreys. I made two extremely important points which were met with the usual barrage of abuse and lies from Humphreys:
1. A carbon tax is a direct tax on the capital structure, the result of which would be to shorten it and therefore cut living standards. Humphreys made no attempt to refute this argument.
2. My second point is that it is impossible for tax cuts to offset the destruction of capital that a carbon tax would wrought on the economy. (What Humphreys proposes would be like post-war German and Japanese governments trying to offset the destruction of their nations' capital stock with income tax cuts and just as absurd). Another point that Humphreys made no attempt to refute. This makes his idea of "a tax swap" all the more ridiculous. In addition, evidence from Spain and the UK is providing increasingly strong support for my argument. There is absolutely no support for his.
If anyone has a problem understanding this issue, it's Humphreys. My analysis was based entirely on the Austrian approach to money and capital. If Humphreys believes that Austrian theory is bunk then he should come out and say so instead of launching personal attacks.
Gerard Jackson
Brookesnews (http://www.brookesnews.com/).com
More... (http://www.24hgold.com/english/contributor.aspx?rss=true&article=2256085060G10020&redirect=false&contributor=Gerard+Jackson)