Monetary Independence

or

Excluding Prosperity from International Trade

1. Politicians and journalists in western countries often speak of the wealth that international trade can bring to their economy, as though a fixed exchange rate system were still in place. But it is a floating exchange rate system that is in operation. 2.--The floating exchange rate system (also known as the float), a market-determined, variable exchange rate system, was adopted by the US, UK, Germany, and other countries in 1973.1 It was designed to 'buffer' the disruptive effects of economic difficulties in other countries and regions that might flow on to the domestic economy.1b In order to achieve the buffer effect, the float isolates an economys money supply from external sources so that no money can leave or enter.1c 3..-To ensure that the money supply remains independent, the exchange rate rises and falls 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 foreign currency earnings to add to foreign reserves as national (or economic union) savings!

The float isolates the money supply

4. Prior to adopting the float, money earned from exports added to national savings in the form of accumulated foreign reserves.4 When converted to domestic currency those reserves added to the economys money supply; and they promoted growth in the domestic market, and the economy as a whole. 5. Not so, under the float - Incoming foreign money is spent on imports and other foreign commitments, and leaves the economy. Exporters are paid, but regardless of how much is exported, they cannot add to the economys money supply. That is, under the float, exports bring no additional wealth to an economy to fuel its growth. But a growth in exports does encourage more imports. The consequent diversion of domestic currency from domestic products to purchase imports is in effect, transferred to exporters.5b 6. In denying themselves the ability to accumulate foreign reserves through international trade, many countries greatly diminished their capacity for economic expansion. The only significant source of money available to stimulate the growth of their economies is from the growth of bank credit, i.e. lending and debt9 7. Thus, monetary independence guarantees the banking industry a pivotal role in an economy. The banks successful advocacy of isolation effect has proved a significant boon to them in terms of wealth and power. 9a 8. Also, central banks have drawn comfort from the fact that, thanks to the floats isolation effect, their administrative responsibilities have diminished, and their holdings of foreign reserves have been preserved.9b 9. Central banks and the banking industry they tend to represent, do not want to understand how the isolation the money supply prevents international trade from adding real wealth to an economy. Nor do they want to know the way that this monetary independence distorts the domestic market - Demand skews to favour imports as supply skews to focus on exports.9c In the process it erodes the economys productive sector.22 10. Governments and Central Banks in UK, USA, European Monetary Union, Australia, etc. have developed their economic policies in disregard of the reality of the floats isolation effect on their economies.22a As time passes; the recessionary consequences of debt dependency are becoming increasingly evident.22b 11. The persistent attrition of the productive capacity of those float economies has caused their government revenue base to steadily fall ever further behind government expenditure commitments. 12. Politicians and journalists have grounds for speaking critically of the wealth that is denied to an economy by the floats isolation effect; and thus the need for an alternative market variable exchange rate system. John Griffiths
9 Originated 22 February 2013 and updated 7 May 2013
http://www.davidbrown1801nsw.info/nakedmonetarist.htm refers

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Monetary Independence

Endnotes:
1. On nominating Dr Burns for Chairmanship of the Federal Reserve Board on 17 October 1969, President Nixon instructed him to ensure easy access to credit when he (Nixon) was running for re-election in 1972. This led to the substantial growth in bank credit and accelerated the depletion of Americas foreign currency reserves and gold reserves. With inflation at over 5%, on 15 August 1971, President Nixon responded to the decline of US gold reserves by ending US currency convertibility to gold, and floating the price of gold. However, this did not resolve the economic instability still arising from the growth of bank credit. Arthur Burns resolved the problem by supporting the adoption of Milton Friedmans proposal for a free floating exchange rate system. Other nations such as the UK and West Germany were convinced to follow suit. 1b.The concern was that disruptive effects or external shocks might have flowed on as shifts in terms of trade'. The possibility that such disruptive events might cause major inflation or deflation effects was the declared reason for Australia adopting the float in 1983. Banking Industry and the Reserve Bank both advocated adopting the floating exchange rate system. For them, (and indicative of other countries and central banks) monetary independence was perceived as mutually convenient in terms of simplifying administrative controls. The 'internationalisation of the Australian dollar' was also seen as offering 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 . 1c.Often described as monetary independence. The extent to which the float succeeds in its buffering role and benefits an economy is the subject of numerous academic papers. 4. Foreign reserves are the accumulated savings of foreign currencies and gold as a consequence of international trade. 5b.As exporters convert income from foreign earnings to domestic currency they drive up the exchange rate, and make imports cheaper and more competitive than equivalent domestic products. 9. The situation is suggestive of someone arranging with their employer to reduce their salary by the amount that they would normally save, because they preferred to borrow from a bank when they needed additional money. 9a.Banks are quite unlike Savings and Loans (S&L) organisations (including building societies & credit unions). S &L can only lend from the money that members deposit with them. They cannot alter the money supply. Bank credit however; is not limited by the money deposited by customers. When banks issue loans, they increase the amount of money deposited in the accounts of their customers. When borrowers repay their loans, they are reciprocating. But until a borrower has reciprocated, the banking system has, in effect, added to the money supply. Thus via their borrowers, they cause the economy to consume more than it has produced. Endnote 9b refers. 9b.The only way their reserves can vary is through speculative activity on the part of the central bank, usually with a view to influence the exchange rate up or down. See also 1b. 9c.Unrestrained bank lending has enabled G-20 countries like the US, Britain, and Australia to buy more than they produced. That is, it has caused them to import more than they have exported. This is reflected in such nations as a correlation between growth in bank lending and the growth in Current Account Deficits. 22. An export drive and an inflow of foreign capital tend to drive up the exchange rate and exacerbate this phenomenon. Also, unrestricted bank lending facilitates a growth in demand for cheap imported products. This systemic distortion of the market is the foundation for the Rustbelt and the two speed economy phenomena. In respect of the latter phenomenon, Germanys success as an exporting nation comes at the expense of lost prosperity for other members of the European Monetary Union (EMU). Inevitably, the recessionary distortion of the isolated monetary supply system will close in on Germany itself. Para 9a. http://www.davidbrown1801nsw.info/exchangeratederegdebt.pdf refers. 22a.Other counties such as China have avoided isolating their money supply, or modified the float to ameliorate its isolation affects. 22b. Initiatives to stimulate flagging economies such as Quantitative Easing (QE) have so far failed to halt let alone reverse any recessionary trend.

See:
Comment by Olafur Margeirsson of Exeter University UK and Iceland
http://icelandicecon.blogspot.com.au/2012/03/exports-imports-and-floating-krona.html

Formula for the Current Account Balance

http://www.buoyanteconomies.com/CAD_Formula.htm

UK Treasury Committee Evidence on Quantitative Easing

http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/writev/qe/m10.htm http://www.publications.parliament.uk/pa/cm201213/cmselect/cmtreasy/writev/qe/m19.htm

An economy dependent on debt for growth, as opposed to one that grows by accumulating savings from international trade, is on the way to recession and exploitation by the other.
email: Gestiefeltbote at gmail.com

Gestiefeltbote
http://www.davidbrown1801sw.info/isolatedmoneysupplyDe.pdf http://www.davidbrown1801nsw.info/nakedmonetarist.htm refers

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