Friday, March 23, 2012

My letter to the Financial Times re: The Aussie's strength is not the problem

Subject: The Aussie's strength is not the problem
Date: Fri, 23 Mar 2012 18:26:41 -0400

Re: Boom in mineral wealth exploitation fails to mask Austrialia's problems

Dear Sirs:
Your sub headline about Australia's struggling mineral sector erroneously places the blame on the country's strong currency and the desire of its citizens to save. Currency exchange rates are determined by purchasing power parity. If the "Aussie" were weaker, then production factor prices would be higher, negating any temporary benefit for export industries. Furthermore, there is no basis for the discredited "paradox of savings" theory that lays the blame for a country's economic ailments on the consumers' desire to save. Savings is the necessary building block of capital formation, which increases worker productivity and leads to a higher standard of living. The accompanying chart showing the "Aussie's" rise against the US dollar since 2001 is an indictment of the Fed and not of the Australian central bank.

Patrick Barron

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