Agreed. I think the most important lesson is that training in economics is not sufficient to qualify as an expert on financial markets.

Joseph, economists have a lot to learn from traders

I dispute that. Alcohol is far more important.

jc, you dirty carry-trader. Don’t you respect the basic laws of economics?

At the suggestion of Mark Hill, and to show what a magnanimous chap I am, Gerry is invited to write anything free-market and coherent and we will publish it here at the ALS blog. I’ve always said that I will treat him with respect once he learns to treat others with respect. That is an open offer.

You’re opening yourself to a charge of indirect discrimination.

If he does show up be sure to keep comments open.

(And you shouldn’t insult Yobbo by likening him to those economic vandals on the waterfront.)

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I think we may just be using slightly different language to say pretty much the same thing. With regards to investing in a foreign country people are concerned with the nominal return for that currency, and the exchange rate will represent the difference in inflation expectations between the two currencies, and then people will adjust for the inflation that they face.

The inflation differential adjustment happens via the exchange rate, which is one reason why lower interest rates (expected to lead to higher inflation) causes lower exchange rates.

Australia may be one of the freest, however it’s policies actually dissuade capital formation in the manufacturing sector.

Don’t forget it was only about a decade ago when someone finally took a wrench to the yobbos on the water front.

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I’m not sure portfolios do chase real rates of return, as I think there is an argument to be made they are really chasing nominal returns. The results of a portfolio is never measured against the real rate; in fact I’ve seen it like that even for very long term rates of return.

Also, when talking about comparative advantage you have to consider what other countries are doing. I don’t think it’s fair to say that most other countries have pursued libertarian tax & monetary policies (I know you didn’t claim this). By some accounts Australia has one of the freest economies in the world.

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Of course energy impacts more people than alcohol, but that is a different issue. The “capital” complaint is that tax undermines capital. True enough… but that’s true of lots of taxes. A second (perhaps more important) complaint is that a carbon tax will drive up the price of energy. True enough (as I have always said), but then so does the GST. And the fuel tax drives up the price of fuel, which is another vital input into production.

This debate isn’t about whether a carbon tax is bad for the economy. I’ve said that approximately 814.6 times. But it is not some new-fandangled, super-special, extra-evil tax. It’s bad. But Gerry is getting carried away.

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Portfolios chase real rates of return, but you have a point that sometimes people make financial mistakes because they mistake inflation for a real change. But those mistakes don’t last for long, and there is little evidence that they have dominated in any period of Australian history.

The empirical link between the govt increasing interest rates and exchange rate going up, and vice-versa, is strong. And this is understood in Austrian economics where they predict that inflationary monetary policy will lead to a currency collapse.