Thursday, March 18, 2004

The Elastic Limit of X-Rate Productivity

BonoboLand ? Germany's 'Great Depression'

"And another one hits the elastic limit of floating exchange rate productivity. ...When will the world start Learning? The world is up against the Samuelson, Friedman, Mundell floating exchange limit."

Daniel asked, "Would you mind unpacking this comment for me? What's the floating exchange rate limit and how is it linked to productivity?"

I am planning a post for next week that should set the groundwork for explaining my comment. For now I can give you maybe enough to have some understinding of my thoughts. Much of what I deal with is completely new economic theory outside the traditional subject's history. Many years ago I came to the conclusion that currency law was the most crucial law of all the laws and theories of nations and economics. As Aristotle said, "When a nation loses control of its currency, it matters not who makes the laws." Nothing could be more true. Floating exchanges is loss of currency control - plain and simple. The foundations for my productivity of exchange rates is based on my own theory of global aggregate credit productivity. If you look at all global aggregate public debt you must realise that all public debt is a private profit. My problem with this is the blind markets of tax havens, derivatives, and other speculation as to the direction and dates of the short and long positions, and how much actually ends up in the tax havens. There is no way to truly know these numbers or to really ever know them fully, as to know the forward positions and expiration dates of speculators would open the system to tremendous new speculative pressures, therefore I try to reverse engineer the entire global capitalist system from what major national, corporate, and global figures are available, and estimate the rest by mathematical ratios.

As you might expect this is a massive undertaking, however it is not without merit. By doing the above I have been able empirically and semi-mathematically to arrive at a deeper understanding of global aggregate credit productivity which easily translates to exchange rate productivity, due to increased currency and trade costs - trade costs reduce for consumers on the one hand, but on the other increase through hidden tax haven hoarding. Credit is most productive when nations exchange rates are in true equilibrium, although the condition seldom exists today, as it did under the Bretton Woods System. Just as an example, if all nations were in perfect ppp equilibrium and stayed in said equilibrium, no nation would experience speculation against its currency, and only minor speculation/arbitrage against its products, commodities, services, etc., which could skip the tax man into the tax havens as is today's reality. Under the existing system the nation states are more in debt to the corporate virtual state of tax havens than any other nation or nations. {The Euro-dollar system, which used to produce its figures, held over $5trillion - a known amount in some tax havens in 1993.} This situation creates the non-productivity of credit and transfers into exchange rate non-productivity, as exchanges widen ever further yearly. Now the explanation to this is highly complex, but I will give you a general synopsis of why it is caused by floating exchanges.

In case you haven't come across it on Bonobo I'll repost what could be a clearer explanation:

"Globalism is dead" - Now, to explain what my cryptic remark was about. Many nations are already rejecting the classical school's "Washington Elite Consensus" of liberalized markets and free trade. This has been an ongoing historical event since Malaysia told the IMF what to do with its policies and went its own way. Now we have Brazil's Lula wrecking the FTAA talks in Miami, and still others rebelling in secret or public. There are many other failures of the "Elite Consensus" from the MAI treaty to recent rejections of CAFTA by some nations. The people and nations lining up against the "one liberalization shoe size fits all" of the IMF, World Bank and WTO is expanding rapidly. Economists, historians, and social philosophers like John Ralston Saul {Saul} are mounting a global attack against the post `73 insanity of classical economics and their beliefs in anti-Keynesianism, disguised as a pseudo-post Keynesianism and neo-conservatism. The truth of the matter is the classical school believes in three unprovable axiomatic math models - the neutrality of money - equilibrium - and corporate wages, prices, and profits. The two I am most concerned with here are the neutrality of money and equilibrium. Dr. Paul Davidson {Paul} has done the definitive critique of classical economics in these areas and I and many others agree. The historical evidence is mounting against the classical schools and the books and articles being published is overwhelmingly a massive critique of market liberalization and its failures. {ie., floating exchanges}

Here's a further excerpt pieced together:

`Without a full understanding of the functioning of forward markets, all discussion of exchange rate policy must remain seriously deficient.' Egon Sohmen

... 13.`When there are many nations with steady depreciating and appreciating currencies, bankers have plenty of short and long opportunities to cover their forward commitments in other nations - until debt entropy...' {and hide profits in tax havens}

... Of the above quotes #13 is the one I wish to draw more attention to - how banks and other financial interests cover forward contract/derivative costs. U.S. law states that all long and short positions must balance at the end of each business day, as do many nations' laws. The trouble is even though these transactions may be in balance nationally they can be massively out of balance internationally. Herein lies one of the origins of the problem. Most all parties involved can, do and will book their long positions in strong currency nations, and most all their short positions in weak currency nations, thus pushing exchange rates further and further out of equilibrium the longer we have been and are on a floating standard, as mentioned above in the quotes. This disequalibrium, in turn, through the major shocks we've witnessed since Mexico, in the`90's, have added tremendously to overall capitalist system costs, and in turn creating overproduction and global deflationary pressures - real and feared. One of the flaws we must throw away, as Keynes also did and Paul Davidson does, is the classical school's misguided belief in the neutrality of money. The truth is obvious in the above that money is not neutral. It is often long term destructive through floating exchange's ever increasing disequalibrium and its associated increasing costs. Central bankers can only play a very crude market maker in such a massively imbalanced system. They often have to take great losses or pawn these losses off on their unsuspecting taxpayers. From the above you may be able to see why Japan is in such a deflationary quandry. The speculative realities between the lesser nations and the developed nations continues to push Japan's and others currency high/low when it needs to go low/high, yet the global currency competition situation and specualtion is now at such a critical stage nothing works as should - nor will it under the continuation of the classical school's other often deluded ideas of floating exchanges and never existing free markets.

The limit of exchange rate productivity exists when nations can no longer productively service their debt obligations without severe national austerity, deflation, or outright defaults and depressions, which only adds further to the existing problem. Too many nations have already crossed this line thus throwing the burden of uncollectible debts on other nations and their creditors, further increasing global deflationary forces. If we continue to worship ever widening costly floating exchanges the world will enter a global depression. I see no way for floating exchanges to truly rebalance and solve its massive debt/deflation problem, as shown above by the fact that the longer we stick with floating exchanges the wider they fluctuate - reducing, through debt and speculation increases, the productivity of global aggregate credit and debt. The only answer, as I have already posted on Bonobo in the Global Finance section, is complete structural reform in the form of exchange clearing, either external or internal. This is simply a system of narrower bands of true ppp exchange rate realities - laws must be written to slowly arrive at a general equilibrium over a number of years. I don't know exactly how much the system can handle and be productive, maybe 10% to 20% either side of a true ppp exchange rate system. That would be 40% total. I do know it is not productive at 300% exchange rate variance as Japan's history of market collapse and debt/liquidity trap is clear evidence of exchange rate non-productivity - and now we have China, one of the lowest ppp currencies, with from 500% on the coast to 1500% inland verses Euroland - one of the highest ppp currency areas. These are deffinitely unworkable ppp exchange rate realities, pushing the world up against the limit of exchange rate productivity, through ever mounting unrepayable outsourcing debt and deflation, globally. Germany, in this post by Edward, is an excellent example, with projected GDP decrease for a forseeable future - not good. ...Link

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