SIR, If Brian Toohey is going to keep disparaging financial markets, it behoves him to at least attempt to understand the factors that influence them, and why.
To suggest that "it is not even clear why the Mexican peso suddenly plunged" (AFR, January 26) is to ignore the fact that, from around 2.9 per cent of GDP in 1980, the Mexican current account deficit has progressively increased to reach about 8 per cent of GDP.
If Toohey were advising a foreign investment fund, would he continue to advise investing in Mexico in such circumstances? The Mexican stand-off brings to mind a point that is very relevant to Australia, namely, that it is not necessary to have a net outflow of capital to cause a foreign currency crisis.
A country with a large current account deficit has to attract a continuing net inflow of foreign capital, which becomes increasingly difficult the higher the current account deficit becomes and the higher is the existing level of foreign liabilities.
In such circumstances, it is necessary to have macro-economic policies that prevent domestic spending levels running ahead of output for more than brief periods.
In Australia's case, the concern of "financial markets" is that the Government will not take budgetary action to ensure this.
Contrary to the suggestion by Barry Hughes (that "the bond (sic) market has no doubt what the Government should do -- create another recession as soon as possible"), financial markets are saying that, unless the Government undertakes the necessary budgetary action, short-term rates will inevitably rise to a level that risks (another) hard landing for Australia.
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