So Im reading an interview of Mark Mobius where he says.
Say what? What exactly does that mean in laymans terms? How is one better than the other?
It seems to me that this anonymous author (cite?) seeks to eliminate all floating currency exchange rates and replace them with fixed, permanent rates. Even though this is GQ, I feel safe in saying this is a stupid idea. Floating exchange rates allow the free market to determine what the proper price of currency should be; fixed rates would not allow currency rates to adjust for growing differences in the economies of different countries. Imagine, for example, a situation of high inflation. Domestically, this inflating currency would buy less and less per unit, yet it would buy the same number of dollars (or other foreign currency). As the situation grew worse, everyone would want to sell the inflating currency for a stable foreign currency; there would be many sellers and few buyers–how can you maintain a fixed rate of exchange when everyone wants to sell and no one wants to buy? A system of floating exchange rates would devalue that currency against foreign ones, making the global economy more flexible and stable.
hmm… I don’t think so, elsewhere in the interview he is pro-floating currencies.
The context that the quote was taken from was an answer to why the thai currency fell. He (mobius) said that it was the central bank refusing to devalue the baht and that currency boards would resolve that.
the full interview is here: http://www.pbs.org/wgbh/commandingheights/hi/people/pe_name.html (the portion in question is near the end)
(you’ll have to scroll about 2/3 of the page down to find his name: Mike Mobius
Sorry, cant link directly to the interview cause its a pop-up window with no URL)
I’m not sure, but here is what I think he’s talking about.
A central bank has resources that they will commit to hold the line on a fixed exchange rate and it will work in the short term but is doomed in the longer run, it merely delays and increases the cost of the problem.
A board that fixes the exchange rate, to extent they can, will only stop currency exchanges that aren’t in the proportion set. They have no finance resources they can throw into it, so any adverse effects begin showing up immediately and the overall problems, whatever they might be, aren’t allowed to be pushed into the future at ever higher costs.
My mistake, you did give his name. The link, by the way, is http://www.pbs.org/wgbh/commandingheights/shared/minitext/int_markmobius.html#6. It sounds like his criticism of the central bank is its unsustainable manipulation of the currency–essentially trying to fix the price of the baht when all the other players in the market would otherwise see it devalued. Perhaps he means these “currency boards” to stay out entirely, and allow the currency to float wherever it might. Yet I don’t understand how that would be a fixed rate–he does say to “fix it against, another currency or against gold or whatever,” an idea to which I replied in my last post.
In the Twentieth Century, governments tended to delegate control over their currency to government-run central banks. These central banks often did a poor job. They grew the money supply too quickly, goosing their economies in the short run but causing ruinous inflation and loss of confidence in their currencies in the long run.
Large central banks such as those in the United States and the European Union now behave in a more responsible manner and have brought inflation under control. However, the problem remains acute for small, poor countries. Weak governments in such countries still face political pressure to allow (or force) their central banks to grow the money supply too quickly. The result is problems such as those which afflicted Thailand in the 1990’s.
The speaker suggests that a currency board provides a better mechanism for managing the supply of a national currency than a government-run central bank. This article explains more. The currency board holds reserves in a “reserve currency” which is usually the dollar, the pound, or the euro. It must by law exchange national currency for the reserve currency on demand, and can print no more of the national currency than it holds in the reserve currency. In the long run, inflation in the national currency will be no more than in the reserve currency (usually 1-3% per year) and the currency need never be subject to devaluation.