At 08:25 AM 10/23/98 -Jim Devine wrote: >right! trade issues only affect exchange rates in the long run (several >years) via purchasing power parity -- or via speculator expectations. It's >trading in assets that's crucial in the short run, not trading in goods and >services. (BTW, this is the basis for arguments against a purely-floating >exchange rate system, a la Milton Friedman.) The problem with this statement is that so-called long-run tendencies (like purchasing power parity) aren't likely to turn up unless short-run forces (real-world trading in acutal historical time) are somehow driving things in the right direction. Efficient market types try desperately to put a good face on foreign exchange markets by claiming that everything will make sense in the long run. All real-world evidence contradicts this. I find it most helpful to regard the exchange rate as a purely speculative variable --hanging by it's bootstraps. Sometimes speculation is stabilizing, moving to correct obvious problems of over- and under-valuation. This is what efficient market boosters would have us believe. Korea, Indonesia, Mexico, et al, were victims of nothing more than way-overdue market "corrections" to long-run equilibrium. Then again, sometimes speculation is distabilizing. I would say the won, rupiah, baht, ruble, peso all fell victim to destabilizing speculators. The Clinton administration is, just now, arranging a tax-financed, $30b pay-off to keep destabilizing speculators from bringing down the real. How much easier (and cheaper) to just control currency trading. Ellen Frank