Hey all you fundamental freaks, (like me)…
I just read a very interesting article. But, what I really think is interesting is what one person thought of it and his comments on the issue.
Current account deficit crisis creeping up on UK can no longer be ignored | Business | The Guardian
After you read the article, go down all the way to the bottom of the comment section, there is a guy named
neilwilson. Read his comment. I think THAT is interesting.
I would have to agree with him than the author of the article.
Do you???
Edit…
Well, I guess it’s hard to find this guys comment. So, here it is.
neilwilson
31 March 2014 6:29am
Recommend
3
Back in the 1960s, a deficit of 1% of national output would have been seen as dangerously high. A 3% deficit would have had investors heading for the exits, prompting a run on sterling.
That’s because Sterling was convertible via the Bretton Woods system in the 60s.
It isn’t now.
So you’re comparing apples and pears.
You’d think the attitudes that caused the IMF debacle of the 1970s would have died out by now as thinking has evolved on the subject.
But apparently not. They are alive and well and being rolled out every week as the next great thing we need to worry about that will never happen.
As usual the writer forgets to look at the issue from the other side. If the UK isn’t buying these exports, who will? And what happens to the exporters economy if the UK stops buying the exports?
The answer is that it will take a very large hit, lots of people will lose their jobs and there will be political consequences in that export-led nation.
For there to be a fall in Sterling there has to be a rise in every other currency on the planet.
So what do we see happen when an exporter’s currency rises? We see their financial system intervene to create the appropriate amount of ‘liquidity’ to allow the exports to continue.
So when the Yen rises against the US dollar, the Japanese intervene, buy up the spare US dollars and bury them, which brings the Yen back down.
When the Swiss Franc rises against the Euro, the Swiss purchase the spare Euro and bring the Franc back down.
And the Chinese buy everything to keep the Yuan in line with what their exporters require.
Under a free floating rate system, any ‘imbalance’ would be eliminated by market forces between the currencies. The fact that there has been no such elimination tells you that the system is actually in balance.
If you are worrying about the trade balance in a free floating system, then you have a belief that there is an imbalance when the market is telling you that there isn’t.
And therefore the matter is one of religion, not science.
Exporters need to export. And as anybody who does business knows, you make it as easy as possible for your customers to buy your stuff.