The further a society drifts from the truth, the more it will hate those who speak it. ... In a time of deceit, telling the truth is a revolutionary act. George Orwell

Saturday, March 6, 2010

overvalued currency is government's fault

Dozent wrote:

Please note the fact that when currency is overvalued everything is expensive, is totally counter-intuitive. When the currency is very strong the imports should be cheap. Like the $30 microwaves. But it applies to so few products it is not even funny.

Exactly! That's what misled me too. It is very counter-intuitive! A simple minded false logic would dictate that a country with overvalued, too strong currency like Ireland in the 1980-ties and 90-ties, should have been flooded with cheap food and cheap industrial good from abroad.

The truth is that it does not work like that at all! The primary factor missing from the logic which in fact CAUSES the currency to REMAIN overvalued is the government! I did not understand it but it is the most important: - Irish government made possible for the Punt to REMAIN overvalued for so long, indefinitely because they simply blocked the cheap import through import and excise duties and siphoned off the excessive cash through punitive income tax!. Had Irish gov not done that everybody would have simply bought computers, would ate only imported food and the currency would have collapsed within 3 months!

Food was too expensive in Ireland because imports were heavily taxed and farmers had to recoup their overvalued labor costs with appropriate pricing, where as the consumers had no choice.

There is one manipulation necessary to drive a currency high above par value (for example pushing bond yields up) and there are other necessary conditions that must be manipulated by centralized government in order for the currency to remain overvalued rather than correcting immediately through trade imbalance. Actually Americans accomplished the second part (preventing overvalued dollar from collapsing) not by taxation and customs like the Irish gov (they couldn't tax outside of the US borders!) , but by managing to sustain the permanent trade imbalance - by balancing the real trade of goods and service with fake printed papers that the other countries like China treated as if these were real goods with value! (*)

Under normal free market system a poorer less developed and less industrialized country like Ireland (or Portugal - another prime victim of Dr. Salazar's monetary manipulation theory) could not have possibly maintained an overvalued currency at al! Irish Punt would have been worth not 2$ in the 80-ties, but 1$ and living expenses in Ireland would have been LOWER , not higher than in W.Germany! As it should have been, as it is in Poland right now. That's why Polish economy is not doing worse but better than German, French or Swedish in spite of the different levels of development.

Stan

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*) We know that the US$ will probably collapse only when the trade imbalance balance will rectify itself using real goods and services that real people really need in real life, that have real value priced on the real market! As long as China, Japan and EU buy US Bills and Bonds, the US$ will have to remain overvalued!

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