Exchange Rate System, Deregulation, and Debt

PDF version of http://www.davidbrown1801nsw.info/nakedmonetarist.htm

An insight into the impact of Central Banks, the Floating Exchange Rate System, & Deregulation of Banking on an Economy of 10

Exchange Rate System, Deregulation, and Debt

Misère Economies

Fig 1 – Debt to GDP ratios across country groups 1880-2009

1. The chart above is presented in IMF Working Paper WP/10/245 ‘A historical public debt database’. It reveals a noticeably persistent upward trend in debt levels of advanced G-20 countries from the year 1973 onwards. 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.”1

2. Significantly, it was in March of 1973, that President Richard Nixon announced that the United States had adopted

the floating exchange rate system (known as ‘the float). He did so, having coerced America’s major trading partners to follow suit. ‘Monetarist’ economists: Dr Arthur Burns, Chairman of the Board of Governors of the US Federal Reserve, and his protégé, Milton Friedman had assisted President Nixon in arriving at this world changing decision.2 Friedman was economics adviser to the President and had conceived the idea of ‘the float’ that is still, along with growing debt, a trend for advanced G-20 countries.

3. To begin to understand the implications of the Burns and Friedman monetarist advice that guided President Nixon,

and its correlation with the four decade debt trend for advanced G-20 countries illustrated above, requires a basic understanding of ‘the float'.

Isolation of the Money Supply 4. The float, a market-determined, variable exchange rate system, was intended to 'buffer' the disruptive effects of

‘external trade shocks’ on an economy.3 To do this the float isolates an economy’s 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 an economy’s money supply.

5..-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!

The float isolates the money supply



6. Prior to adopting the float, money earned from exports added to national savings in the form of accumulated foreign reserves.4 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 Friedman’s float - Incoming foreign money is spent on imports and other foreign commitments, and leaves the economy. Exporters are paid, but regardless of how much is exported, they cannot add to the existing money supply.5 &5a That is, under the float, exports bring no additional wealth to a nation! An alternative variable exchange rate system would allow exports to add wealth.

Two-speed or Pear-shaped Economy 7. 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 an economy, such as Australia’s6 (or the US, Britain, etc), as export earnings. That drives up the exchange rate for the domestic currency. A rising exchange rate for the Australian dollar inevitably makes imports cheaper than equivalent goods and services produced in Australia. This causes Australia’s domestic industries, and jobs associated with them, to be made uncompetitive and progressively squeezed out of existence.6a The more Australia exports, the more it has to import. The more Australia imports, the more it undermines its domestic industries.7# 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 market-determined variable exchange rate system would allow the domestic industries of these countries to be competitive and prosper.

Fig 2 – 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).

8. – 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 economy’s wealth away from domestic industries to exporters. Investments in capital (land, machinery, & buildings) reflect and accelerate that lopsided trend. Australia’s export industries such as mining, wood chipping, and 'live cattle to Indonesia' to do very nicely and expand at the expense of the nation’s other productive industries and jobs.8

9. A classic example of the diversion of wealth phenomenon is Western

Australia’s 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 Krugman’s diagram fig 2 illustrates the ‘Two-speed’ (diversion of wealth) effect of the float.

9a. Some believe that the GIPS countries are detrimental to the survival of the

EMU, and that the departure of one or more of them from the union can

‘the float ….interferes with, and distorts, the demand and

supply mechanism’ of an economy (causing it to go pear-shaped. See Fig 2 above).

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. As each member left the EMU, the currency exchange rate for Germany’s export goods would rise, and make their export and domestic industries less competitive.8a However, concerns



about GIPS countries’ massive debts has been causing downward pressure on the euro exchange rate, and in the process making Germany’s exports even more competitive. Thanks to the float, Germany’s prosperity is tied to survival of the EMU. Even so, eventually the recessionary distortion of the isolated monetary system must inevitably close in on Germany itself.

Growth of Debt and its Distortion of the Market 10. As indicated in earlier paragraphs, in adopting an isolated monetary system, many countries have denied

themselves the ability to stimulate their economic growth through the accumulation of foreign reserves (national savings) that can be earned by exports. The domestic currency released into the money supply in exchange for those accumulated foreign reserves had previously 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, lending, and debt9:

10a.When banks issue loans, they increase 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.9a Thus the banks have been creating money for which there is no prior entitlement (i.e. ‘unendowed’ or unentitled) to their nation’s productive capacity – Money that no-one worked for or saved.

10b.Since the early 1980’s, to stimulate their economies, the US, British, Australian & other G-20 governments have

deregulated their banking industries. That is, they relaxed the constraints on their banking industries’ money creation process. National expenditure was to be no longer constrained by income.9b Banks have been allowed to create more money, causing demand to outstrip supply, and further distort the market. As a result, the US, Britain, Australia etc. have increasingly spent future national earnings in the present. For the banks, ‘things have never been so good’.10

11. Deregulation of the banks has enabled most advanced G-20 countries such as US and Australia to increasingly

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.11 See Figures 3 and 8 for examples of the correlation between growth in bank lending and the growth in Current Account Deficits. This corruption of the market mechanism also imposes other significant distortions on a nation’s whole economy. Those distortions include corresponding growths in the persistent trade deficits (see Australian example Fig 7 below), and inflation (see Fig 3a).12# The law discourages forgers because of this kind of damage to the economy that their unendowed money can produce. However, the banks are doing the very same thing with their ‘unendowed money’!

.

Fig. 3 Australia Bank credit, the current account, and fiscal

deficit – 12 per http://www.buoyanteconomies.com/AustCADMoney.htm

Fig. 3a Australian CPI (Inflation) & Monetary Pressure ((Square root of change in Unendowed Money over change in GDP)

- per http://www.buoyanteconomies.com/AustInflation.htm12b 12. Uncomprehending or in disregard of these various systemic distortions, G-20 central banks worldwide are eager

supporters and facilitators of the deregulation and the float. Perhaps not surprising, given these instruments of monetary policy are designed to favor the profitability of banks, not benefit the economy as a whole.



12a. 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, RBA’s 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.

13. For its’ assault on inflation, RBA (indicative of other central banks) utilises 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, the 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.19 However, RBA’s advocacy on behalf of foreign suppliers is unnecessarily generous, given that it provides no benefit in controlling inflation. RBA’s irrational encouragement of high exchange rates also accentuates the two speed (transfer of wealth) distortion of the Australian economy. The consequent loss of

Misère !

Australian industries and jobs is not only an unnecessary and costly waste, it also undermines the nation’s productivity.17a Typical of other central banks, RBA dismisses these victims of their policies as being incompetent and inefficient. More obvious, especially to exporters, is the high exchange rate’s inflationary and anti-competitive impact on the price of Australian export products, and their component costs such as labour. RBA’s 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 - RBA’s unrelenting destruction of the economy’s productive capacity, taken to its not so logical long-term conclusion, will certainly eliminate inflation.

Declining Wages

14. 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 than1.6% 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 1960’s and 70’s. 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.4 below). 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. 4 - Australia: Average Real Weekly Wages (Discounted by CPI

base 1989/90) 1973 US floated its currency, 1983 Australia floated its dollar.

Defensive Strategies 15. 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 a nation’s currency thus making its products even less competitive. Another approach is a buy national product promotion such as ‘Buy Australian’ or ‘Buy British’ campaign. Nor is this a panacea for addressing the attrition of a nation’s domestic industries by the float. The demand generated by such a campaign inevitably competes for



the same supply of domestic currency that exporters seek in exchange for their foreign currency earnings. This puts further upward pressure on the exchange rate for the domestic currency, and ironically makes imports more competitive.

Selling-off the Farm 16. 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 5 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 the nations domestic capital assets such as mines, farms and other real estate to foreign corporations and other foreign entities.13 In effect, under the float, a nation can trade their country piece by piece for consumables.

17. 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 spending to foreign goods and services now made cheaper. Exporter’s incomes suffer as well, as their

Selling off the Farm – Esau Complex

competitive edge is blunted, as in the case of BlueScope Steel in Australia. Some companies like QANTAS go offshore to escape Australia’s ‘high cost economy’

18. Whether a persistent high (and uncompetitive) exchange rate is a result of foreign

investment, or the mining industry receiving foreign income for their 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 19. 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 UK means that government revenue base cannot keep pace with government expenditure commitments to its populace. Australia’s position in this regard is much better than many others are, but diminishing GDP per capita since 2008 (Fig.5 below) indicates that the Australian situation is deteriorating. Slowing growth of its revenue base makes a government increasingly vulnerable to having to fund its commitments with ever-expanding budget deficits. Fig. 3 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.

… persistent attrition of the productive capacity…

Likewise, Europe’s 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. Australia’s ‘horizontal fiscal equalisation union’ of its member state governments has provided an offset for the float’s ‘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 3 also reveals that contrary to the twin deficits theory, government budgets do not necessarily influence the current account deficit.14

Fig. 5 – Australian GDP per Capita per Quarter (per Buoyant Economies)



Unsustainable Debt 20. As a nation’s spending in the present has swallowed up future earnings, its capacity to

service the mounting foreign debt has steadily diminished (Fig.6 below re Australia 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 Fig. 7 below) 15 Furthermore, the 'float's unrelenting erosion of Australia’s domestic industries will continue to wear away its capacity to repay its mounting debt.16 Eventually Australia’s debt will be beyond its capacity to service, and like Greece, it will be at the mercy of its creditors.§ 17

‘capacity to service the mounting foreign debt has

steadily diminished’

Fig 6 - Australia: Unsustainable growth of debt – per Buoyant Economies

Fig 7 - Australia’s Balance of Trade Jan 1971 to October 2012 - per Trading Economics http://www.tradingeconomics.com

21. The two-speed (pear-shaped) effect will tend to accelerate this process. The more populated, and increasingly

impoverished eastern Australian states will progressively diminish Australia’s capacity for buying imports. Because exports are offset by imports, the exchange rate for the Australian dollar will, rise to make imports cheaper and Australia’s exports less competitive e.g. iron ore mined in Western Australia. For miners it is but one-half of a double blow. Foreign earnings from expanding productivity of massive mining projects will incur additional upward pressure on the exchange rate and erode mining profitability. In the event of diminished international demand for China’s products that use Australian ore, the flow-on effect will put further downward pressure on ore production, and profitability. Mining and carbon taxes will be the least of their worries.



In the USA 22. 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. 8 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. ( http://www.buoyanteconomies.com/DebtIncome.htm refers )

Fig 8 - US Fiscal, Current Account, and Bank Lending - per Buoyant Economies

Fig 9 - The Recession of 1973–75 in the USA. 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 1947–2009

Source: US Bureau of Economic Analysis Also see http://en.wikipedia.org/wiki/1973%E2%80%9375_recession 23. When the US adopted the float in March 1973, they like Australia (which adopted the float in 1983) eliminated the

ability to accumulate foreign reserves as national savings through international trade. This factor in conjunction with continuing constraints on bank lending (Banks having not yet been deregulated) stymied the US (and its trading partners) capacity for economic expansion. A worldwide recession ensued that was to last some two years. As Fig 9 above indicates, the recession was already well on its way when on 18 October 1973, the OPEC oil embargo began because of America’s 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.



Solutions and Government Responsibility 24. The float-induced crisis that 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: They have:

a. Increased their national wealth; b. Gained new domestic industries and jobs; and c. Reduced their debt and improved their economy’s capacity to service it.

China has proved to be even more successful as an economic manager. It has assiduously avoided adopting the float and the deregulation of banking. Though China’s fixed exchange rate system is unable to optimise its economy’s performance, its economy has grown by accumulating savings earned from international trade.

25. 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 government’s request if they were not constrained by Australia’s central bank, the RBA. RBA chooses to allow its nations banks to exchange Australian dollars that have no prior claim to the nation’s productivity (i.e. unendowed money) for foreign currency. (paras 10 to 13 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 nation’s indebtedness.

26. 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 Reserve’s) 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 not imminent, and their anticipation of ‘low and steady inflation’; also pointed to the possibility that

Quantitative Easing

- Digging a deeper hole

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,20and 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.

27. Whether it is the US, Australia, Britain, Iceland, the European Monetary Union, or countries within

that union, such as Greece, Friedman’s 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 float’s peddlers. Misère !

28. It is clear that there needs to be a market-determined variable exchange rate system that excludes the distortions inherent in Friedman’s 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.

John Griffiths Originated 1

9 Originated 21 April 2012 and revised 14 March 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:-http://www.buoyanteconomies.com/

Contact: Gestiefeltbote at gmail.com End Notes: 1 Paras 43 and 44 http://www.buoyanteconomies.com/Impact%20of%20floating%20exchange%20rate%20Debt.htm also refer 2a. On nominating Dr Burns for Chairmanship of the Federal Reserve Board on 17 October 1969, President Nixon instructed him to ensure easy access to credit

when he (Nixon) was running for re-election in 1972. This led to the substantial growth in bank credit and accelerated the depletion of America’s foreign reserves, including gold reserves. With inflation at over 5%, on 15 August 1971, President Nixon responded to the decline of US gold reserves by ending US currency convertibility to gold, and ‘floating’ the price of gold. However, this did not resolve the economic instability still arising from the growth of bank credit. Arthur Burns resolved the problem by supporting the adoption of Milton Friedman’s proposal for a ‘free floating’ exchange rate system.

3. ‘External shocks’ and ‘shifts in terms of trade' described as being ‘disruptive’ that might cause major inflation or deflation effects. (See footnote 12 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. http://www.bis.org/repofficepubl/arpresearch200903.11.pdf . (see footnote 5). Prior to the float in 1983, Australia’s currency exchange rate was fixed but maintained at parity relative to the US dollar.

4. Foreign reserves are the accumulated savings of foreign currencies and gold as in consequence of international trade. 5. 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 3)

5a. 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 RBA’s need to speculate in currency and influence the exchange rate) the but with no intention to accumulate beyond that.

6. 2. Australia adopted the float in 1983. 6a. Impact of the Floating Exchange Rate System on Employment and Growth at

http://www.buoyanteconomies.com/Impact%20of%20floating%20exchange%20rate%20Growth.htm refers. Also, lost industries and jobs translate into lost revenue.

7# 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.

8. Government exchange rate policy has caused the failure of many productive Australian industries - Web page 'The Demise of Australian Industry' lists some of those.

8.#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 float’s mechanism that facilitates the redistribution of an economy’s (isolated) money supply, and foreshadows a looming crisis

8a.Saving the Euro http://www.buoyanteconomies.com/SavingTheEuro.pdf refers 9. The adoption of the 'float' placed the banking industry in a pivotal position within the economy, and increased its potential for income.. (see footnote 5). 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.

9a. Leigh Harkness 14 Jan 2013. See 9 above re creation of money by banks as opposed to S& L organisations 9b.’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 10. 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 endnote 3). In contrast, the money S&L lends has prior entitlement to the economy’s productive capacity. (see endnote 9)

11 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 para’s 32 – 39 by Leigh Harkness at http://www.buoyanteconomies.com/Impact%20of%20floating%20exchange%20rate%20Debt.htm as M - X = Cr or M = X + Cr (or Cr = M-X.) --

12.# Correlating growths in Australia's Bank Credit, Current Account Deficit, and inflation see graphs and explanations at http://www.buoyanteconomies.com/ . 12a. RBA, International Market Operations http://www.rba.gov.au/mkt-operations/intl-mkt-oper.html 4. The Exchange Rate and Monetary Policy 26 May 2012

refers 12b “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.” http://www.buoyanteconomies.com/AustInflation.htm

13. Further to the explanation in footnote 11, 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 para’s 32–39 by Leigh Harkness at http://www.buoyanteconomies.com/Impact%20of%20floating%20exchange%20rate%20Debt.htm 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 http://bob-brown.greensmps.org.au/content/media-release/australias-foreign-debt-and-foreign-investment-dangerous-levels

14. T here 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 C.A.D'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'.

14A. 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 WASN’T, by Aaron Tornell Frank Westermann, 28 September 2011. See http://www.voxeu.org/index.php?q=node/7033.

15. 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 Australia’s 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.

16. Diminished capacity to service debt is also suggested by the formula GDP = C+ I + G – Cr as Cr grows. (see footnote 14). But if Cr slows so will the economy. 17. 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 3 refer) is perhaps a question that the Commonwealth Auditor should investigate?

17aSee Hancock Prospecting P/L at http://www.hancockprospecting.com.au . 18.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 http://www.buoyanteconomies.com/ refers. 19. Paragraphs 14 & 15 also refer. RBA failure to intervene is consistent with this strategy. See Formula for the Current Account Balance paper at

http://www.buoyanteconomies.com/CAD_Formula.htm 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.

19a. 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. http://www.rba.gov.au/mkt-operations/intl-mkt-oper.html 26 May 2012 refers.

20. 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.

See: A Strategy for Monetary and Financial Stability in the United Kingdom

http://www.buoyanteconomies.com/UKFinancialMonetaryStability.htm

Comment by Olafur Margeirsson of Exeter University UK and Iceland http://icelandicecon.blogspot.com.au/2012/03/exports-imports-and-floating-krona.html

mining, exports, unsustainable, debt, boom, recession, incompetence, ineptitude, systemic failure, failure, RBA, Reserve Bank of Australia, rba’s, uncompetitive, denial, Working nation, working, nation, Business, unfinished, business, President Barack Obama's speech , OPEC oil embargo, President Richard Nixon, America’s major trading partners, a worldwide recession, impact, of the, Floating Exchange Rate System & Deregulation, on competition, impact of the, Floating Exchange Rate System , Impact of Deregulation on competition, sound fundamentals, economy’s fundamentals, GDP, per capita, expenditure cuts, asset sales, britain’s, uk’s, us, usa, america’s, debt, growing debt, economy, recession, qantas, diagnosis, forecast, prognosis, financial crisis, crisis, global, policy, resources boom, minerals, mineral wealth, resources, unstable, instability, gestiefelte Bote, gestiefeltte, Bote, Pilbara, Gina, Rinehart, gina, rinehart, hancock prospecting, security, insecurity, austerity, measure, competitive, dollar, pound, currency, competitive, exchange rate system, competitive currency, imf, policies,Австралийская экономика, американская экономика, система плавающих валютных курсов, дерегулирование банковского дела, инфляция, рецессия, Две скорости или груши экономики, Система экономики, Система лавающих валютных ку рсов с interfers и искажает, рынок, Последняя статья 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.

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Exchange Rate System, Deregulation, and Debt

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