G-20 Systemic Indebtedness

Document Sample
G-20 Systemic Indebtedness Powered By Docstoc
					                                PDF version of http://www.davidbrown1801nsw.info/nakedmonetarist.htm

            Exchange Rate System, Deregulation, and Debt

                                             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).2 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.2a 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
                                                                                                          The float isolates the money supply
    national savings!

     A brief look at the impact of Central Banks, Floating Exchange Rate System, & Deregulation of Banking on an Economy    Page 1 of 10
                                PDF version of http://www.davidbrown1801nsw.info/nakedmonetarist.htm

                                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.

The Multi-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’s (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. 6 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, variable exchange rate system would allow domestic industries
   in Australia and other G-20 countries to be competitive and prosper!
                                                                            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
    Fig 2 – Germany and GIPS Countries Mirror Reverse                          cattle to Indonesia' to do very nicely and expand at
                Current Account Balances                                       the expense of the nation’s other productive
     (Wishful Thinking And The Road To Eurogeddon, The Opiinion Pages, NY
                            Times 7 Nov 2011 refers).                          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 float ….interferes with, and distorts, the
   the ‘Two-speed’ (diversion of wealth) effect of the float. Some believe that                demand and supply mechanism’ of an economy
   the GIPS countries are detrimental to the survival of the EMU, and that the                (causing it to go pear-shaped. See Fig 2 above).

   departure of one or more of them from the union can 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. They in turn would succumb and leave. As the EMU steadily shrunk, the currency exchange rate
    for Germany’s export goods would rise, and make their export and domestic industries less competitive. The ‘rust’
    contagion already evident in Germany’s industrial regions would spread. (Saving the Euro
    http://www.buoyanteconomies.com/SavingTheEuro.pdf refers) More recently, the growing concern about GIPS countries’ debts

   A brief look at the impact of Central Banks, Floating Exchange Rate System, & Deregulation of Banking on an Economy        Page 2 of 10
                                 PDF version of http://www.davidbrown1801nsw.info/nakedmonetarist.htm

        has been causing downward pressure on the euro exchange rate, and in the process making Germany’s exports
        more competitive. Thanks to the float, Germany’s prosperity is tied to survival of the EMU.

Growth of Debt and its Distortion of the Market
10. As indicated in earlier paragraphs, in adopting 'the float', 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, by going into debt.9 To stimulate their economies, the US, British, Australian & other G-20 governments
    deregulated their banking industries. This allowed their nation's expenditure to be no longer
    constrained by its income. Thus the banks in those countries 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.10 It is excess money, that has caused
    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’
    11. Deregulation of the banks has enabled most advanced G-20 countries such as US and Australia to 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 It is a corruption of the market mechanism that has imposed significant
        distortions on their economies. Those distortions include corresponding growths in the: current account
        deficit (see Fig 3 re Australian Example), persistent trade deficits (see Fig 7 below), inflation (see Fig 3a), and foreign
        debt.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           Fig. 3a Australian CPI (Inflation) & Monetary Pressure
                                deficit – 12                               ((Square root of change in Unendowed Money over change in GDP)
           per http://www.buoyanteconomies.com/AustCADMoney.htm                  - per http://www.buoyanteconomies.com/AustInflation.htm

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,

      A brief look at the impact of Central Banks, Floating Exchange Rate System, & Deregulation of Banking on an Economy   Page 3 of 10
                             PDF version of http://www.davidbrown1801nsw.info/nakedmonetarist.htm

    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
                  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
    to1975. 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

  A brief look at the impact of Central Banks, Floating Exchange Rate System, & Deregulation of Banking on an Economy   Page 4 of 10
                              PDF version of http://www.davidbrown1801nsw.info/nakedmonetarist.htm

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.         Selling off the Farm –
                                                                                                               Esau Complex
    Exporter’s incomes suffer as well, as their 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’. BHP and other companies postpone multi-billion dollar projects like Olympic Dam.

                                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           … persistent attrition of the productive
    governments to reduce their debt do nothing towards resolving the systemic                         capacity…

                                                                             failure emanating from the float. 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
         Fig. 5 – Australian GDP per Capita per Quarter                      deficit.14
                     (per Buoyant Economies)

   A brief look at the impact of Central Banks, Floating Exchange Rate System, & Deregulation of Banking on an Economy   Page 5 of 10
                             PDF version of http://www.davidbrown1801nsw.info/nakedmonetarist.htm

Unsustainable Debt
20. As a nation’s spending in the present has swallowed up future earnings, its capacity to
    service the mounting foreign debt steadily diminishes (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)    Furthermore, the 'float's unrelenting erosion of Australia’s domestic
    industries will continue to wear away its capacity to repay its mounting debt.16                                 ‘capacity to service the
                                                                                                                    mounting foreign debt has
    Eventually Australia’s debt will be beyond its capacity to service, and like Greece, it                           steadily diminished’
    will be at the mercy of its creditors.§ 17

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

       Fig 7 - Australia’s Balance of Trade Jan 1971 to July 2012 -       per http://www.tradingeconomics.com/australia/balance-of-trade

    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 by Hancock Prospecting
    P/L. 17a Foreign earnings from expanding productivity of massive mining projects will incur additional
    upward pressure on the exchange rate, facilitate the flow of cheap imports, 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. Mining and carbon taxes will be the least of their worries.
    The consequent decline in exports will prompt a reduction in the exchange rate. The downward trend may be
    rapid and the precursor to severe conditions.
  A brief look at the impact of Central Banks, Floating Exchange Rate System, & Deregulation of Banking on an Economy        Page 6 of 10
                                PDF version of http://www.davidbrown1801nsw.info/nakedmonetarist.htm

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 Deficit, Current Account Deficit, 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
  A brief look at the impact of Central Banks, Floating Exchange Rate System, & Deregulation of Banking on an Economy            Page 7 of 10
                             PDF version of http://www.davidbrown1801nsw.info/nakedmonetarist.htm

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 shortcomings 16. The results are less than optimal, nevertheless
    those countries 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.
    Switzerland’s central bank, the SNB, also understands the need to look after its’ national interests and maintain
    a competitive currency. China has proved to be particularly successful as an economic manager in this regard.
    It has assiduously avoided adopting the float and the deregulation of banking. Though its’ fixed exchange rate
    system has no provision to optimise performance, China’s economy has grown rapidly 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 RBA.                                    (Paras 12 & 13 refer)
                                          Members of the RBA Board
                   Chairman: Glenn Stevens, Deputy Chairman: Philip Lowe, Martin Parkinson
                        PSM, John Akehurst, Jillian Broadbent AO, Roger Corbett AO, John
                                 Edwards, Heather Ridout, and Catherine Tanna

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 the US had got its act together. However, recent data pertaining to the
                            static state of US foreign reserve funds (para 6 refers), and the continuing high
                            unemployment, indicate that the Federal Reserve has made no effort to rectify matters,
      Quantitative Easing   except to depend on already failed strategies. QE3 announced 13 September is indicative of
    - Digging a deeper hole this. Therefore, it is increasingly likely that paragraph 22 still holds true.

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 giving rise to
    massive social costs in terms of physical and mental health, crime, civil unrest, and national security issues. It is
    little wonder that China has been so dismissive of the float’s peddlers.
28. It is clear that there needs to be a market-determined variable exchange rate system that excludes the distortions
    inherent in Friedman’s exchange rate 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. Why not OER?
                                                                                                                        John Griffiths
                                                                                                                        Originated 1
                                                                              9 Originated 21 April 2012 and revised 5 October 2012

  A brief look at the impact of Central Banks, Floating Exchange Rate System, & Deregulation of Banking on an Economy   Page 8 of 10
                                     PDF version of http://www.davidbrown1801nsw.info/nakedmonetarist.htm

 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
2. Australia adopted the float in 1983.
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).
   Treasurer Paul Keating was awarded ‘Finance Minister of the Year’ by Euromoney Magazine in 1984 on the strength of this and related policy implementation.
   See http://www.davidbrown1801nsw.info/LostStoryFound.html. 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. 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
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
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
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.
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 a prior entitlement to the economy’s productive capacity. (see endnote
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
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-
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'.

   A brief look at the impact of Central Banks, Floating Exchange Rate System, & Deregulation of Banking on an Economy                           Page 9 of 10
                                     PDF version of http://www.davidbrown1801nsw.info/nakedmonetarist.htm

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.
                                                                                  ... the borrower is the slave of the lender.'                          Proverbs 22.7.

                          Comment by Olafur Margeirsson of Exeter University UK and Iceland

                                              Optimum Monetary Configuration (OMC) System
Australia’s, lost industries, competitiveness of Australian products, when did, Australia, adopt, the float, floating exchange rate system, since the float, Lost Story
found, since adopting, labor’s lost story, disadvantage, disadvantages advantage, advantages, benefit, benefits, floating exchange rate system, systemic, lost
industries, competitiveness, Australian products, when did, adopt, the float, floating exchange rate system, since the float, Lost Story found, adopting, labor’s lost
story, disadvantage, disadvantages, advantage, advantages, benefit, benefits, floating exchange rate system, systemic, systemic problem, fixed exchange rate
system, fixed, exchange, policy exchange, exchange rate, system, optimum exchange rate system, competition, domestic, domestic debt, fiscal, fiscal debt, fiscal
deficit, policy, paul, keating, paul keating, 1983, treasurer, 1983, Keating, banana republic, keating’s banana republic, recession, recession we had to have, paul
keating, recession, banana republic, banana, republic, After Words, after words, after, words, book, book of paul, 1973, Unfinished Business, unfinished,
business, labor party, Labor Party, labor, party, paul keating working nation, working, nation, prime minister, paul keating, Keating, not lost for words, not, lost,
euromoney, finance minister, of the year, finance, minister, finance minister, of the, year, the world's greatest Treasurer, world's greatest treasurer, greatest,
wayne swan, greatest Treasurer, world's, Wayne Swan, Canberra Times, canberra, times, optimum, labor's, labor, lost its way, way, story, fundamentals,
fundamental, floating exchange rate system, floating, exchange, rate, system, systemic, problem, fixed, exchange rate, optimum exchange rate system,
competition, domestic, domestic debt, fiscal, fiscal debt, debt, two speed, three speed, economy, multi-speed economy, multispeed economy, three speed, twin
deficit, theory, isolates, money supply, money, supply, isolates economy, economy, EU, eu, Rust Belt, rust belt, US, us, European, fiscal union, economy, Western
UK, United Kingdom, Britain, Europe, European Union, failure, Greece, Germany, GIPS, PIGS, countries, competition, free market, free, market, foreign
investment, foreign, investment, system, domestic industries, employment, exports, cheap imports, cheap, 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
ers и искажает, рынок, Последняя статья "Спасение Евро»
                                        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.

                                                                          (Gestiefelte Bote)

   A brief look at the impact of Central Banks, Floating Exchange Rate System, & Deregulation of Banking on an Economy                             Page 10 of 10
 path to recession and exploitation by the other.

                                                                          (Gestiefelte Bote)

   A brief look at the impact of Central Banks, Floating Exchange Rate System, & Deregulation of Banking on an Economy                             Page 10 of 10
the impact of Central Banks, Floating Exchange Rate System, & Deregulation of Banking on an Economy                             Page 10 of 10

Description: Presents facts and evidence towards explaining persistent upward trend in debt levels of advanced G-20 countries since March 1973, and the loss of domestic industries in those countries. Draws on IMF, Australian, US data. Explains the dynamics of the multi-speed (or pear-shaped) economy, with its isolated money supply, and its implications, especially for Germany.