To start off with I have to admit I like Bernard Hickey. I like the fact he has got out there, written about New Zealand economic issues, and pushed to add an open debate type platform to the discussion regarding the New Zealand economy. As a result, I may have not been critical enough when I read his posts in the past – as I did not see this coming. In truth, the calls for exchange rate, trade, and capital controls is a massive step too far in what could well be the wrong direction. Let me talk about the points Hickey has raised:
Here is some sense talking from a central banker and trade representative from Brazil:
Senior Brazilian trade representative Mario Marconini from the Federation of Industries of Sao Paulo, says there’s a growing realisation from Brazilian businesses that trying to control the exchange rate is fruitless.
The long-term answer can only come from concerted international action to apply pressure on China to allow more flexibility in its exchange rate, Pundek says.
By removing China’s artificially low exchange rate, the massive trade imbalances created by that rate can be corrected.
This is point number one on our list of issues causing an imbalance (list at the bottom of this post). I am loath to blame China for the whole imbalance – after all they are artificially selling their own stuff cheaply by devaluing their dollar. However, currency pegging has to be seen as part of the PROBLEM in the current economic environment – not the solution!!
And on the idea of capital controls being fruitless, this becomes obviously when we look at one very simple fact – there has to be DEMAND for the capital for it to flow in. The fact people want to lend is only half the story, people inside the country have to be willing to borrow at the given interest rate. This is a little fact that seems to be continuously ignored pretty much everywhere …