“higher the countries interest rates, stronger it's currency became as investors sought greater returns from yields.” Doesn’t a higher yield imply greater risk/uncertainty – sovereign, political, economic, fiscal?
Yes that was the way things were before this crisis...
“countries that cut the interest rates should be rewarded with higher exchange rates.” Tough if your an exporter. What about interest rate parity? What about forwards – how would these be valued?
This is something that needs further discussion and hence the article in FT. The way things are for any country in recession with inflation going higher, cutting of interest rates will not solve the problems. It is will require a positive action by global economies. Otherwise it will be the same - US sneeze and other catches cold. Take example of BRIC. None of these catches cold when US sneeze.
Asian crisis of 90's was a classic example. That dragged down the whole world into a recession, and Japan had to deflate the economy. Now things are different - BRIC are sitting on a massive foreign currency reserves, and there are more direct links with currencies and exchange rates.
Strauss-Kahn, etc. So the Euro-Socialists can strengthen their grip over the capitalist system, and the US Republicans resort to socialist practises when capitalism falters (as does the UK). And the tax-payer is sold down the river.
Well the tax payer HAS been sold down the river. The rescue package for NR is Taxdpayers money. Is it not amazing that a problem of US has been exported here in UK and then a rescue package is coming directly from our pockets. Would we like to do this again?
As Paul says, the markets will decide.
Well when left to markets to decide - What happened? You can't leave everything to markets. Today’s announcement for direct action by BOE is one such action that must be in place. And FED is already investigating the 'Banks' embroiled in mortgage landings. Free Market Economy can work - but to an extent.
But the US will still need to finance its massive budget/trade deficits. Can’t hope to sell it’s bonds unless it compensates by higher rates/lower prices. But then we come up against the problems of the first paragraph.
The point of the matter is that I do not want to be part of a US mess as a Tax Payer. If they create the mess then they pay for it. Not me. Not Europeans. After all no one here will foot a bill to cure a mess created in China for example.
But if there is a global rescue plan in case any major economy grinds to halt then it is something that needs to be explored further.
IMF has spent its entire existence telling developing world to devalue their currency to qualify for a loan. Now things are different.
Perhaps they should start telling US and UK to do the same when their economies stagnate. I wonder if UK and UK would even listen!
