As we noted when we talked about Sri Lanka’s problems, you cannot have a shortage of foreign currency if you have a floating exchange rate. If the price can change then it will so that supply and demand balance out -- that's just how markets work.
There are other reasons why we might not want to allow people to try for a fixed exchange rate though. At least some of those other reasons being the effects of the other things that are then done to try to maintain that forex rate.
There’s the silliness of trying to curb bank profits in forex trading for example. Insisting that there can only be a Tk1 margin on a dollar means that fewer people will trade dollars. Less trading is going to mean fewer dollars of course – quite the opposite of what is being attempted in the first place. There’s also that more general shouting at banks about their profits from trading -- but if people make a profit trading then that shows that they’re providing something consumers value.
That's the only way you do make a profit in a market after all. We could even point to the demand that forex volatility reduce -- yet that change in price is the very thing which prevents there ever being a foreign exchange shortage. The entire management system here of the bureaucracy seems to be aiming at producing, not avoiding, those Sri Lankan problems.
But the really appalling example is what having a fixed foreign exchange rate does to economic freedom. For we've now bureaucrats demanding that import duties, tariffs, be raised in order to defend the foreign exchange rate. What’s worse is something that a lot don’t think about, but it is worse.
Now, agreed, I'm a journalist, a famously thirsty profession. So my views on the price and essentialness of beer are going to be different from those of the population of a largely Muslim, non-drinking nation. My views on spice, being British and fond of famously bland food, will also differ.
But then that’s exactly the point.
It is a fundamental axiom of welfare economics that we all have our own utility curves. That is, we all favour different things. Or even, our definition of “the good life” differs from that of our neighbour. That means that our definitions of what is an essential, what is a non-essential, good differs across people.
Yet here are bureaucrats, dēska jaki, defining what is essential, or not, for the entire nation in one fell swoop. Deliberately going out of their way to reduce that freedom and liberty to live our own lives by changing national prices to suit their own prejudices.
There’s also the fact that their list of non-essentials is insane -- and I'm not just talking about thirsty journalists. Cell-phones are an input into economic growth, they allow people to talk business and so increase growth when they’re more plentiful. So, does anyone else think that something that makes the future richer is a “non-essential”? So too refrigerators and air conditioning -- food doesn’t rot, people don’t melt -- or at least are able to keep working in the hot part of the year, the hot part of the day.
But, worse than all of this, is that the bureaucrats have taken to themselves this power to determine our lives in pursuit of something that shouldn’t be happening anyway -- having a fixed exchange rate. And it’s that which is the greatest loss stemming from bad economic policy. The flailing around, the idiocies that are perpetrated, that is done to try and defend that first bad decision.
In order to have a fixed exchange rate the suggestion is now that some fool in a suit should be allowed to decide how much your beer should cost. Better, by far, not to have the fixed exchange rate -- as we shouldn’t anyway.
