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Strategies & Market Trends : Currencies and the Global Capital Markets
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To: Chip McVickar who wrote (427)8/20/1998 10:23:00 AM
From: Robert Douglas  Read Replies (1) of 3536
 
Chip,

Let me just add a word or two of my own on this debate between fixed (and its' variations) and floating currencies. Each, has its' plusses and minuses but I believe the critical factor is not whether a country has a fixed or floating currency, but rather the underlying economic policies of that country and whether they are sound or not.

Let me illustrate. Suppose country X tries to keep a fixed currency rate but underneath it is running inflationary monetary and fiscal policies that over time debase the currency. All they are doing is supporting the currency at an unnatural level. Eventually the gap between the level of the currency and its' true value grows large enough that speculators intervene and bring the two together. This is what we have seen in many Asian countries and Mexico that kept their currencies artificially high for years. The problem was not with the currency system, but with the awful economic policies that preceded the currency collapse.

Another problem with "fixed" rates is what to fix it to. Fixing it to the US dollar is fine unless the US starts to run bad economic policies or the dollar gets out of line because of market forces. Argentina is having a hard time since their currency is appreciating along with the dollar, making them less competitive. Fixing it to gold is not a panacea either as the US has discovered.

Blaming the currency is a lot like blaming the repo man when he knocks on your door. It isn't his fault but rather your bad spending habits that brought him to your home.

-Robert
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