Hi Raf,

I agree that there are some issues with currencies responding to fundamentals – but I see this as a “symptom” of underlying issues, rather than something we try to mess around with directly.

Whenever a price is giving us poor information, we need to ask what sort of market failure we are seeing – I see a mix of institutional issues driving prices in funky directions, and I think any solution should be based on those issues rather than the currency per see.

Fixing currencies to try to solve it (which is my fear) is more than likely going to lead to worse outcomes

I think the problem is that exchange rates don’t respond to economic fundamentals. This is the point I was trying to make in the previous post (which I will return to when I’ve thought a bit more about it). 

This may be due to the difference in actual overall capital flows where “fundamentals” are ignored by allocation of risk and investment capital e.g. investors happy to fund deficits and chase high yields at the same time (often one and the same). So deficit countries are not able to rebalance as one might expect.

My experience and observation suggests that this started with EMU convergence as investors chased yield, created new derivative structures, increased leverage and started financialising the investment game. The last 10 years saw this go into warp speed as the real economy was ignored and investing started to resemble a video game.