RBA's Pear-Shaped Economy - a work in progress by gestiefeltbote

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Explains Reserve Bank of Australia's (RBA) role in the economic difficulties unfolding. Deals with the issues behind RBA's quixotic obsession with a 'strong' but uncompetitive Australian dollar; their indifference to the high exchange rate's impact on Australian industries & jobs; and their long running but ineffective battle with inflation

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                        RBA’s Pear-Shaped Economy
                                                          a work in progress

1.      The high exchange rate's threat to the competitiveness of the nation’s products;
                  the loss of industries and the jobs they represent;
                  the threat to national prosperity if exports are put at risk; and
                  a mounting current account deficit;
          are issues of concern that have often arisen in Australia over the last several decades. The
          concern is valid and the issues real. Those issues are also symptomatic of the growing
          economic chaos evident in other G-20 countries. Unfortunately, G-20 central banks, such as
          the Reserve Bank of Australia (RBA) have proved incapable of coming to grips with the
          economic realities that underlie these issues. An appraisal of the monetary systems that they
          uphold, i.e.: the floating exchange rate system; and deregulation of banking; and the distortions
          in the market created by those systems, offers insight into those economic realities.

Isolation of the Money Supply
2. The floating exchange rate system (also known as 'the float’), a market determined,
   variable exchange rate system, was adopted by Australia in 1983 (adopted in the US
   March 1973). It was designed by Milton Friedman to 'buffer' the disruptive effects of
   ‘external trade shocks’ on an economy. 1 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
   the economy’s money supply.
                                                                                                             The float isolates the money
3..- To ensure that the money supply does not change, the exchange rate rises and falls                   supply
     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!
                          4. Prior to adopting the float, money earned from exports added to national savings in the
                             form of accumulated foreign reserves.2 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 no matter how much is exported, they cannot add to Australia’s existing money
                             supply.3&3a That is, under the float, exports bring no additional wealth to the nation!
                             An alternative variable exchange rate system would allow exports to add wealth.

Two-speed or Pear-shaped Economy
5. 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 the Australian
   economy as export earnings. That drives up the exchange rate for the Australian dollar. A
   rising exchange rate inevitably makes imports cheaper than equivalent goods and services
   produced in Australia. This causes our domestic industries, and jobs associated with them, to
   be made uncompetitive and progressively squeezed out of existence. 4 The more Australia
   exports, the more it has to import. The more it imports, the more Australia undermines its
   domestic industries.5# 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 Australia’s domestic industries to be competitive and prosper!

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6. 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. Investment in capital equipment tends to reflect that trend. Australia’s export industries such as mining,
   wood chipping, and 'live cattle to Indonesia' to do well and expand at the expense of the nation’s other productive
   industries and jobs.6
7. 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 below illustrates the ‘Two Speed’ (diversion of wealth)                ‘the float ….interferes with, and distorts, the demand and supply
   effect of the float. Some believe that the GIPS countries are                mechanism’ of an economy (causing it to go pear-shaped. See Fig
   detrimental to the survival of the EMU, and that the departure of                                            1 below).
    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 domestic industries less competitive with imports. The ‘rust’ contagion already evident in Germany’s
    industrial regions would spread. (Saving the Euro http://www.buoyanteconomies.com/Saving theEuro.pdf refers). More recently, the
    growing concern about GIPS countries’ debts has been causing the 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. Similarly, Western Australia is dependent on the rest of Australia.

                            Fig 1 – 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).

Growth of Debt and its Distortion of the Market
8. As indicated in the opening paragraphs, in adopting 'the float', Australia denied itself the ability to stimulate its
   economic growth through the accumulation of foreign reserves (national savings) that can be earned by exports.
   The Australian currency released into the money supply in exchange for those accumulated foreign reserves had
   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.7 In 1984 and 1985, to stimulate its economy, the
   Australian government deregulated the nation's banking industry. This allowed the nation's
   expenditure to be no longer constrained by its income. 7a Thus the banks have been creating
   for which there is no prior entitlement (i.e. it is ‘unendowed’ or unentitled) to the nation’s productive capacity –
   Money that no-one worked for or saved.8 It is excess money that has caused demand to outstrip supply and
   further distort the market. As a result, Australians have increasingly spent future national earnings in the
   present. For the Banks, ‘things have never been so good’. RBA’s isolated foreign reserves holdings

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 Fig. 2 Australia Bank credit, the current account, and fiscal          Fig. 2a Australian CPI (Inflation) & Monetary Pressure
  deficit - per http://www.buoyanteconomies.com/AustCADMoney.htm 12   (Square root of change in Unendowed Money over change in GDP)


9. Deregulation of the banks has enabled Australia and other G-20 countries 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.9 It is a corruption of the market mechanism that imposes significant distortions on a nation’s whole
   economy. Those distortions include a corresponding growths in the: current account deficit (see Fig. 2 above),
   persistent trade deficits (see Fig. 6 below), inflation (see Fig. 2a above), and foreign debt.10# The law
   discourages forgers because of this kind of damage to the economy that their unendowed money can produce.
   However, banks the do the very same thing with their ‘unendowed’ money!

Inflationary Madness
10. 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.
                                    10a. 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.

11. For its’ assault on inflation, RBA (indicative of other central banks) utilise 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, 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.17
    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 G-
                       20 central banks, RBA dismisses these victims of its 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.

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Declining Wages
12. 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 than 1.6% 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 3 above).
                                                                          Fig. 3 - Australia: Average Real Weekly Wages (Discounted by
    As minimum wages are regulated in Australia, Australian                                       CPI base 1989/90)
    workers did not experience the same dramatic reduction                  1973 US floated its currency, 1983 Australia floated its dollar.
    in wages as in the USA.’ Per Impact of the Floating Exchange Rate
    System on Employment and Growth.

Defensive Strategies
13. 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 the
    Australian dollar thus making Australian products even less competitive. Another approach is a ‘Buy Australian’
    campaign. Nor is this a panacea for addressing the attrition of our domestic industries by ‘the float’. The demand
    generated by such a campaign inevitably competes for the same supply of Australian dollars that exporters seek in
    exchange for their foreign currency earnings. This puts further upward pressure on the exchange rate for our
    dollar, and ironically makes imports more competitive.

Selling-off the Farm
14. '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 3 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 Australia's domestic capital assets such as mines, farms
     and other real estate to foreign corporations and other foreign entities.11 In effect, thanks to the RBA, Australians
     are trading their country piece by piece for consumables.

15. 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 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.
                                       16. Whether a persistent high (and uncompetitive) exchange rate is a result of foreign
                                          investment, or the mining industry receiving foreign income for their ongoing
                                          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'.
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Government Debt
17. 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 the 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. 4 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           … persistent attrition of the productive
    budget deficits. Fig. 2 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.
    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 2 also reveals that contrary to the twin deficits theory, government
    budgets do not necessarily influence the current account deficit.12

          Fig. 4 – Australian GDP per Capita per Quarter                Fig 5 - Australia: Unsustainable growth of debt – per Buoyant
                      (per Buoyant Economies)                                                     Economies

Unsustainable Debt
18. As Australia’s spending in the present has swallowed up future earnings, its capacity
    to service the mounting foreign debt has steadily diminished (Fig. 5 above 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. 6 below)    Furthermore, the 'float's unrelenting erosion of Australia’s domestic
    industries will continue to wear away its capacity to repay its mounting debt.14
                                                                                                           ‘capacity to service the mounting
    Eventually Australia’s debt will be beyond its capacity to service, and like Greece, it               foreign debt has steadily
    will be at the mercy of its creditors.§15                                                             diminished’

19. The two-speed (pear-shaped) effect will tend to accelerate this process. The more populated, and increasingly
    impoverished southeastern 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, in response, rise to make
    imports cheaper and Australia’s exports less competitive e.g. iron ore mined in Western Australia by Hancock
    Prospecting P/L.15b 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

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    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.

          Fig 6 - Australia’s Balance of Trade Jan 1971 to July 2012 - per http://www.tradingeconomics.com/australia/balance-of-trade

In the USA
20. 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. 7 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.7 - US Fiscal Deficit, Current Account Deficit, and Bank Lending - per Buoyant Economies

21. Though adopting the float in December 1983, Australia’s first setback in consequence of ‘the float’ occurred in
    1973. President Richard Nixon caused the United States to adopt the floating exchange rate system in March of
    that year, having coerced America’s major trading partners to follow suit. Continuing constraints on bank lending
    (Banks having not yet been deregulated), and the elimination of the ability to accumulate foreign reserves as
    national savings through international trade, stymied the US (and its trading partners) capacity for economic
    expansion. A worldwide recession ensued that was to last some two years. As Fig 8 below 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

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    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.

   Fig 8 - The Recession of 1973–75 in the USA can be 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

22. The IMF chart below (Fig 9) shows that the turning point where debt to GDP starts to rise for G-20 countries is
    1973, the year that the US floated its exchange rate. It reveals a noticeably persistent upward trend in debt levels of
    advanced G20 countries subsequent to 1973. 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.”15a

              Fig 9 – Debt to GDP ratios across country groups1880-2009 - IMF Working Paper WP/10/245 ‘A historical public debt database’

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Solutions and Government Responsibility
23. 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.
24. 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 10 & 11 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

25. 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 4 refers) and the continuing high unemployment,
    indicate that the Federal Reserve has made no effort to rectify matters except to depend on
    already failed strategies. QE3 announced 13 September is indicative of this. Therefore, it is       Quantitative Easing
    increasingly likely that paragraph 20 still holds true.                                           - Digging a deeper hole

26. Whether it is the US, Australia, Britain, Iceland, the European Monetary Union, or countries within that union, such
    as Greece, the float has taken its toll. It is evident the issues that have concerned Australians for several decades
    are in fact symptomatic of the float. 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.

27. 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

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                                                                                                      Originated July 2011 last updated 5 October 2012

  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. Australia’s central bank.
1a. The Floating Exchange Rate System concept was a creation of Milton Friedman, who became an economic adviser to US President Richard Nixon.
   ‘External shocks’ and ‘shifts in terms of trade' described as being ‘disruptive’ that might cause major inflation or deflation effects. (See footnote 10 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 3).
   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
2. Foreign reserves are the accumulated savings of foreign currencies and gold as in consequence of international trade.
3. 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 1)
3a. 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.
4. 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
5# 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.
6. Government exchange rate policy has caused the failure of many productive Australian industries - Web page 'The Demise of Australian Industry' lists some of
6.# 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
7. The adoption of the 'float' placed the banking industry in a pivotal position within the economy, and increased its potential for income.. (see footnote 1). 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.
7a.’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
8. 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 footnote 1). In contrast, the money S&L lend has a prior entitlement to the economy’s productive capacity. (footnote 7)
9. 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.) --
10.# Correlating growths in Australia's Bank Credit, Current Account Deficit, and inflation see graphs and explanations at http://www.buoyanteconomies.com/ .
10a. 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
10b “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
11.Further to the explanation in footnote 9, 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-
12.There 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 CAD'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'.
12A. 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.

An insight into the impact of Central Banks, the Floating Exchange Rate System, & Deregulation of Banking on an Economy                               Page 9 of 10
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13.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.
14-Diminished capacity to service debt is also suggested by the formula GDP = C+ I + G – Cr as Cr grows. (see footnote 12). But if Cr slows so will the economy.
15. 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 1 refer) is perhaps a question that the Commonwealth Auditor should investigate?
15a. (Paras 43 and 44 http://www.buoyanteconomies.com/Impact%20of%20floating%20exchange%20rate%20Debt.htm also refer.)
15b see Hancock Prospecting P/L at http://www.hancockprospecting.com.au .
16.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.
17. 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.
17a. 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.
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американская экономика, система плавающих валютных курсов, дерегулирование банковского дела, инфляция, рецессия, Две скорости или груши
эномики, Система экономики, Система плавающих валютных курсов с interfers и искажает, рынок, Последняя статья "Спасение Евро»
                               Comment by Olafur Margeirsson of Exeter University UK and Iceland

                                                      Optimum Exchange Rate (OER) System

                                              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)

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

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