Exchange rate distortions are at the very
core of the current global crisis. It is form them that everything else that is
wrong arises – worse even than the debacle that is global banking.
Floating exchange rates are meant to
reflect relative efficiency of the respective trading economies a weak and
inefficient economy will have a very low valued currency while an efficient
economy will have a high valued exchange rate.
There are two problems with this. It only works if everyone is playing by the
same rules and if there isn’t anyone gaming the system.
Unfortunately we have some economies that
have rigged fixed exchange rate mechanisms that tip the balance in their favour. We then rely on an infrastructure of global
finance to operate the system.
Unfortunately those who operate the system run it for their own benefit
when it needs to be run for the common interest of those who trade in goods.
Parties who trade internationally are using
a system of currency exchange that is run by parties who are not just betting
against them but who are actively interfering in with the demand for
money. These parties are doing an ENRON
but with money. They withhold money or
flood money into individual markets to drive the price up or down and then bet
on the consequences when they reverse their positions. The fact that 95% of all foreign currency
trades of the $NZ are for speculative purposes is illustration enough but when
the absolute scale of this activity is included it becomes clear how corrupt
this system is. The daily trade in NZ
currency is equal to half the country’s annual GDP. This is crippling our ability trade as it
imposes a huge cost to our export sector.
It is also sending us broke.
It is also how our Prime Minster got rich. He didn’t work hard, he didn’t create some
innovative product, he didn’t add value to any process; he was just a filter
feeder in a system run by filter feeders. His wealth he skimmed from those who were
working honestly in the field of international trade.
The deeper problem is the lack of a common
set of rules for managing currencies. The true villains at the core of the
current round of economic crisis are Germany and China. Each have set up relationships with client
states that contained an entrenched fixed currency imbalance in their
favour. The European Currency Union acts
as a subsidy on exports for Germany and tariff on imports while it acts the
other way around for all other countries in the EU.
Similarly China has had a pegged currency
against the dollar for the past several decades. Japan did the same thing for as long as it
could. These resulted in huge transfers
of wealth from the overvalued economy to the undervalued economy. Why the US and the rest of us have put up
with it for so long is truly surprising as it is such an obvious and damaging
yet simply rectified distortion.
As with all distortions when it does
resolve itself the rectification will be rapid and hugely disruptive. It will be like an overstretched rubber band
- it will either snap or snap back - either way it will be a rapid and violent
reaction.
