of thumb that has appeared this year, but was entirely absent last year, is the one which relates movements in the australian dollar to movements in the euro. the good thing is that these trends and rules of thumb do not continue indefinitely, and the further the exchange rate departs from fundamentals, the more likely it is that some unforeseen event will come along to jolt the rate into a new direction. the third conventional explanation gives prominence to australia ’ s external position - the current account deficit and the accumulation of foreign debt and other liabilities. this explanation emerges whenever the australian dollar is falling, and then goes into hibernation whenever it is rising. the problem with this explanation is that our external position has been relatively stable over the past decade or more, and so it is difficult to use it as the explanation for an event that only occurred as recently as this year. over the past decade, the current account deficit has cycled around an average of about 4½ % of gdp, and our foreign debt has stayed a little over 40 % of gdp. it is true that total external liabilities to gdp has risen, but against this, the ratio of debt servicing to exports has halved over the past decade, and the current account deficit itself has been declining during the period of the falling australian dollar. i think it is very difficult to make the case that our external position has recently deteriorated, or that it is the explanation for the falling australian dollar in 2000. while i am generally sceptical that this year ’ s events can be explained by a sudden focus on trends in the current account position, it may be more promising to think about developments from the perspective of capital flows. if, for one reason or another, investors found australia a relatively less attractive destination for their funds, compared with some other destination - eg the united states - we would expect that this will have implications for the exchange rate. some will want to assert that this occurred because people suddenly focused on australia ’ s current account, but this seems unsatisfactory because the recipient of the flows - the united states - is seeing its current account deficit expand to unprecedented size. in fact, as a share of gdp, australia ’ s current account deficit is well on the way to being smaller than its us counterpart, yet the us dollar has been rising, and the australian dollar falling. so to make sense of what has been happening, it is necessary to think in terms of capital flows being driven by changes in

##7 countries, but have been mostly of an “ oral ” kind in recent years, despite some evidence of success in arresting unsustainable or unwarranted trends, such as the appreciation of the dollar in the mid - 1980s, the appreciation of the yen in 1995 or the depreciation of the euro in 2000. also the much - hyped “ reform of the international financial architecture ” ( ifa ), launched by the g7 countries after the asian - russian crisis of the 1990s, turned out to be focused essentially on the need to strengthen financial systems in emerging market countries, mostly through the adoption of a series of standards and codes of good conduct. the plan drew criticism from a high level task force, set up by the council on foreign relations and led by morris goldstein, 4 for not addressing more fundamental issues, like the moral hazard implied by imf sponsored bail - outs or the overlapping of roles of the imf and the world bank in crisis management and resolution. a minority of that task force, including fred bergsten and paul volcker, criticized the plan for ignoring the question of reforming the world ’ s exchange rate regime, an omission that they equated to “ watching hamlet without the prince of denmark ”. in the end the ifa reform obliged the imf to invest a large amount of resources in a financial sector assessment program ( fsap ) which produced reports, highly valuable but not widely read, on almost all its member countries, but with the significant omission of the united states and china. another main objective of the reform, that of closing loopholes in the financial regulatory regime, again forced the imf to concentrate mostly on the activity of offshore financial centres based in exotic islands, rather than on hedge funds and other unregulated financial market participants of greater systemic relevance. at a conference on “ reforming the imf for the 21st century ”, 5 organized in 2006 by this institute, the mandate of the fund, its governance and resources, were thoroughly reviewed by an impressive range of academics and officials, including the managing director of the fund. in that context it was recalled that financial sector supervision had led to “ a mission creep ” in the imf, diverting resources from its key institutional task of conducting surveillance on macroeconomic and exchange rate policies of member countries. this concern way bluntly underlined by a senior us treasury official, claiming that the imf had been “ asleep at the wheel of its most fundamental responsibility