Thomas Palley really does come up with some beauties.

The current global exchange rate system is a sub-optimal arrangement. There are many theoretical reasons explaining why foreign exchange markets are prone to mis-pricing, and the empirical evidence shows exchange rates persistently depart from their warranted fundamental levels. Moreover, the system permits strategic manipulation so that some countries (particularly in East Asia) actively intervene to undervalue their currencies. That has made for a lop-sided world in which half play by free market rules and half are neo-mercantilist, creating threatening tensions.

OK, right, agreed even. Current exchange rates are influenced by governments and this leads to imbalances. Sure.

Beyond such realignment, there is need for systemic reform to avoid recurring misalignments. That suggests a system of managed exchange rates for major currencies in which countries cooperatively set exchange rates.

So we should give more power to governments to influence exchange rates and this won\’t lead to imbalances.


4 thoughts on “Mindboggling”

  1. I don’t see why there is such a fuss made over exchange rates. If a country undervalues their currency they are subsidizing foreign consumers. If a country overvalues their currency they are subsidizing importers. In both cases the country loses.

  2. Some of the chumps in the comments are hilarious in a funny-scary way – I am expecting the first “means of production” to appear soon.

    The Asian crisis was caused by fake exchange rates. The ERM was caused by trying to keep a fake exchange rate.

    The only place I know with a sensible peg is Hong Kong, and that is because the banks keep a USD for every 7.75 (is it?) Honkie printed stuffed in their vaults, so even that is not a peg, but possibly HKDs used as a proxy.

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