Last post on this topic (I hope).

You can't have it both ways.

You're wanting to peg the dollar the way the Chinese peg the yuan/RMB or Euro or Yap or unicorn horns. The Chinese can do that because they control the amount of currency that can leave the country and the exchange of yuan/RMB for hard currency.

if the saudis wanted to be paid in euro's they would get the pegged rate.

What does that mean? I am sending money (assuming it can leave the country), in dollars, to them for the oil. They "would get the pegged rate" from whom? If they wanted Euros, they would have asked for Euros. Lets say they do want Euros. For my $750M I could get 561M Euros on the open market today. You're proposing that my $750M buy 493M (-12%) Euros, from somewhere, thanks to the Boxley Plan peg. Why would I want to do that again? I wouldn't unless there was no choice.

A peg only works when there's something standing behind the currency that serves as the ultimate arbiter of its value. In the gold-standard days, it was the US government saying, "bring me 35 pieces of paper and I'll give you a shiny metal token". Now, the dollar is the only currency that can be used to buy Treasuries and invest in the US economy.

A peg doesn't work for a floating reserve currency. For the n-th time: The cat is out of the bag - we aren't going back to fixed exchange rates. "But we could..." No, we can't. There's not enough money to do so. Also, too: http://www.pkarchive...lobal/canada.html

Here's what the world looked like in 1960: Almost all countries had fixed exchange rates with their currencies pegged to the U.S. dollar. International movements of capital were sharply limited, partly by government regulations, partly by the memory of defaults and expropriations in the '30s. And most economists who thought about the international monetary system took it for granted, explicitly or implicitly, that this was the way things would continue to work for the foreseeable future.

But Canada was different. Controlling the movement of capital across that long border with the United States had never been practical; and U.S. investors felt less nervous about putting their money in Canada than anywhere else. Given those uncontrolled movements of capital, Canada could not fix its exchange rate without giving up all control over its own monetary policy. Unwilling to become a monetary ward of the Federal Reserve, from 1949 to 1962 Canada made the almost unique decision to let its currency float against the U.S. dollar. These days, high capital mobility and a fluctuating exchange rate are the norm, but in those days they seemed outrageous--or would have seemed outrageous, if anyone but the Canadians had been involved.

And so perhaps it was the Canadian case that led Mundell to ask, in one of his three most famous contributions, how monetary and fiscal policy would work in an economy in which capital flowed freely in and out in response to any difference between interest rates at home and abroad. His answer was that it depended on what that country did with the exchange rate. If the country insisted on keeping the value of its currency in terms of other nations' monies constant, monetary policy would become entirely impotent. Only by letting the exchange rate float would monetary policy regain its effectiveness.

Later Mundell would broaden this initial insight by proposing the concept of the "impossible trinity"; free capital movement, a fixed exchange rate, and an effective monetary policy. The point is that you can't have it all: A country must pick two out of three. It can fix its exchange rate without emasculating its central bank, but only by maintaining controls on capital flows (like China today); it can leave capital movement free but retain monetary autonomy, but only by letting the exchange rate fluctuate (like Britain--or Canada); or it can choose to leave capital free and stabilize the currency, but only by abandoning any ability to adjust interest rates to fight inflation or recession (like Argentina today, or for that matter most of Europe).

Prove me wrong. Give me some links.

I've had my say on this topic, I think.

Cheers,
Scott.

Post #332,975 by Another Scott 9/23/10 1:50:04 PM Reply	Last post on this topic (I hope). You can't have it both ways. You're wanting to peg the dollar the way the Chinese peg the yuan/RMB or Euro or Yap or unicorn horns. The Chinese can do that because they control the amount of currency that can leave the country and the exchange of yuan/RMB for hard currency. if the saudis wanted to be paid in euro's they would get the pegged rate. What does that mean? I am sending money (assuming it can leave the country), in dollars, to them for the oil. They "would get the pegged rate" from whom? If they wanted Euros, they would have asked for Euros. Lets say they do want Euros. For my $750M I could get 561M Euros on the open market today. You're proposing that my $750M buy 493M (-12%) Euros, from somewhere, thanks to the Boxley Plan peg. Why would I want to do that again? I wouldn't unless there was no choice. A peg only works when there's something standing behind the currency that serves as the ultimate arbiter of its value. In the gold-standard days, it was the US government saying, "bring me 35 pieces of paper and I'll give you a shiny metal token". Now, the dollar is the only currency that can be used to buy Treasuries and invest in the US economy. A peg doesn't work for a floating reserve currency. For the n-th time: The cat is out of the bag - we aren't going back to fixed exchange rates. "But we could..." No, we can't. There's not enough money to do so. Also, too: http://www.pkarchive...lobal/canada.html Here's what the world looked like in 1960: Almost all countries had fixed exchange rates with their currencies pegged to the U.S. dollar. International movements of capital were sharply limited, partly by government regulations, partly by the memory of defaults and expropriations in the '30s. And most economists who thought about the international monetary system took it for granted, explicitly or implicitly, that this was the way things would continue to work for the foreseeable future. But Canada was different. Controlling the movement of capital across that long border with the United States had never been practical; and U.S. investors felt less nervous about putting their money in Canada than anywhere else. Given those uncontrolled movements of capital, Canada could not fix its exchange rate without giving up all control over its own monetary policy. Unwilling to become a monetary ward of the Federal Reserve, from 1949 to 1962 Canada made the almost unique decision to let its currency float against the U.S. dollar. These days, high capital mobility and a fluctuating exchange rate are the norm, but in those days they seemed outrageous--or would have seemed outrageous, if anyone but the Canadians had been involved. And so perhaps it was the Canadian case that led Mundell to ask, in one of his three most famous contributions, how monetary and fiscal policy would work in an economy in which capital flowed freely in and out in response to any difference between interest rates at home and abroad. His answer was that it depended on what that country did with the exchange rate. If the country insisted on keeping the value of its currency in terms of other nations' monies constant, monetary policy would become entirely impotent. Only by letting the exchange rate float would monetary policy regain its effectiveness. Later Mundell would broaden this initial insight by proposing the concept of the "impossible trinity"; free capital movement, a fixed exchange rate, and an effective monetary policy. The point is that you can't have it all: A country must pick two out of three. It can fix its exchange rate without emasculating its central bank, but only by maintaining controls on capital flows (like China today); it can leave capital movement free but retain monetary autonomy, but only by letting the exchange rate fluctuate (like Britain--or Canada); or it can choose to leave capital free and stabilize the currency, but only by abandoning any ability to adjust interest rates to fight inflation or recession (like Argentina today, or for that matter most of Europe). Prove me wrong. Give me some links. I've had my say on this topic, I think. Cheers, Scott.
Post #332,979 by jake123 9/23/10 2:08:37 PM Reply	heh Mundell was born in my hometown.
Post #332,983 by Another Scott 9/23/10 2:20:31 PM Reply	It's nice that some are reading this thread closely ;-)

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