Jamesian Philosophy Refreshed

As we discussed yesterday, if a nation's central bank lowers its interest rates, the usual expectation is that it will weaken its currency. Part of the reason why: it will set up a carry trade, in which profiteers will borrow money at its low rates, then exchange that currency for another currency, that issued by a higher-interest rate country, so these profiteers (I use the term without animus -- it simply means "those seeking a profit") can lend out for a higher rate than the one at which they are borrowing, pocketing the difference. This activity, given supply/demand principles predictably weakens the currency the profiteers are leaving and strengthens that into which they're moving. This brings us back to the mystery with which we began. Australia and New Zealand have both recently lowered interest rates. In each case, though, that has corresponded to a strengthening of the currency. Back in late May, you would have needed 1.39 Aussie dollars to buy a US do...

I'm not sure I understand this, or agree with Bloomberg's analysis, but I'll put it in here anyway. An Aug. 15th Bloomberg story, by Vincent Cignarella (portrayed above), starts with this: The central banks of Australia and New Zealand each recently lowered their benchmark interest rate. According to conventional wisdom, this should have weakened their respective currencies, giving their business a stimulative shot in the arm when functioning as exporters. But that didn't happen. Rather, the lowered interest rates resulted in ... stronger currencies. What's going on? If you don't understand why that result is counter-intuitive, you might want to take a step back, Consider a common FX trader's trick known as the "carry trade." The idea is: borrow money in the currency of a country where interest rates are low, then trade it for the currency of another country where interest rates are high, and lend the money out there. You're buying cred...

The European Union initiated its Emissions Trading Scheme in 2005. This was the first large-scale such trading scheme in the world. The idea was to reduce the greenhouse emissions of Europe’s industries in a market-rational manner, and to offer the rest of the world an example of how that is done. The ETS is also known as the cap-and-trade system. That phrase suggests the good news/bad news split for markets. Bad news: there are regulatory caps on the total amount of specified gases that may be released. Good news: any particular installation can buy allowances from others to cover otherwise prohibited emissions. As a basic matter of economic theory, these allowances should be traded toward their highest and best use, ensuring that the system over all is more efficient than any command and control approach to the problem could be. Does it work? And for whom? The system has in fact drawn imitation, in both New Zealand and in Australia. In the U.S., California has its own cap-a...