This article cross-posted from Lighthouse Securities, with kind permission of Greg McKenna. You can follow Greg on Twitter, and at MacroBusiness where he blogs as “Deus Forex Machina”.
Let me ask you a question.
Do you care if the Aussie Dollar heads toward 1.20 or 1.25 in the next 12 to 18 months as Australia’s alternative Treasurer Joe Hockey said the other day.
In the Sydney Morning Herald Mr Hockey was quoted as saying,
”it is not inconceivable for the Australian dollar to reach $US1.25 over the next 12 to 18 months”
I agree, it is not inconceivable that the Aussie heads to these levels not seen since the 1970′s its a low probability I think that one that has enough serious implications that we need to have a planned response for industry from government.
So I was encouraged that the SMH also reported Mr Hockey said,
It is time to carefully consider what a comparatively high Australian dollar means for key sectors of our economy.
Big tick Joe! Or at least I thought there was a big tick but then I saw that he also said,
In a warning to those in the Coalition advocating protectionism, Mr Hockey said it would not be propping up unsustainable industries.
While it was worth providing help to those industries facing short-to-medium-term pressures, such as the high dollar, industries which are proving unsustainable over the longer term for many reasons would not be saved.
While they could be eligible for such assistance as retraining or relocating workers, ”we should not, however, be in the business of propping up industries that for many reasons do not have a sustainable future in Australia”, he said.
He said the ”brutal truth” was that managers and consumers, not government, would determine the fate of individual businesses
Theoretically and politically I have probably always been to the right of centre, as I age and since I’ve become a dad I find myself moving to the left on social issues but in general I’d normally agree with the sentiment of what Mr hockey is saying above.
Certainly I welcome the fact that he is thinking about my oft mooted plan to assist companies and industries that are being buffeted by the high dollar and in general why would you prop up other industries that are on the way out. Its my typewriter/iPad analogy I’ve used a few times now.
But what bothers me about the political class in Australia at the moment is that they take acceptable and plausible theoretical constructs and write them into stone as laws.
Take the Budget surplus at any cost pact between the two parties as an example – at a time of massive structural change in the economy, structural change that has the RBA on the back foot in managing this sports car/draft horse economy there may be, probably is a need for some support in some parts of the economy.
But no we can’t do that – Swanny and Hockey are too busy leading the war cry each morning.
SURPLUS, SURPLUS, SURPLUS, Oi, Oi, Oi.
Even if the Treasury Secretary Martin Parkinson says they are going to be “only wafer thin”
And so it is with the Aussie Dollar’s strength – we know its high because the central banks of Russia, Brazil, China and others are buying and have bought lots of Aussie. We know its high because in a moribund economic global outlook even a print of 0.4% GDP growth seems still ok. We know the Aussie Dollar is high because our interest rates are high and we know that unless or until China slows and lets their currency float the Aussie Dollar remains its proxy.
So nothing is going to be done it seems as RBA Deputy Governor Lowe pointed out the other day. Bloomberg quoted him the other day saying they are watching things,
“It is possible for exchange rates to overshoot,” Lowe said in his prepared remarks. “While the evidence of the past 30 years is that movements in the exchange rate have been an important stabilizing force for the Australian economy, the unusual nature of the current forces means that we need to watch things closely.”
But I’ve always got the sense they are glad the Aussie is as high as it is cause it reduces the pressure to smash households even further with interest rate increases. I think Lowe makes this point below,
“On the evidence to date, something like the current combination of exchange rates and interest rates appears to be what is needed to maintain overall macroeconomic stability,” Lowe told the AIG, whose members include manufacturers hurt by the currency. “The high exchange rate and the high interest rates relative to the rest of the world are both being driven by the fact that Australia is a major beneficiary of the change in world relative prices.”
Indeed Deputy Governor Lowe feels the Aussie is not misaligned fundamentally
“It’s difficult to make a strong case that the exchange rate is fundamentally misaligned,” Lowe said in response to a question from the audience after a speech today in Sydney, citing the nation’s solid economy. “That makes the hurdle for intervention quite high.”
But part of this argument I think is flawed and circular. The price of our commodity exports is largely denominated in US Dollars and the US is actively engaged in a policy of making the Greenback as weak as possible without cause it to crash. And they are succeeding in using this to increase exports as a total percentage of GDP, quite a few percentage points over the past few years.
So while they win, commodities are pushed higher in price than underlying demand warrants because the USD is weak and we just suck it up and continue the experiment all the while knowing that other nations are deliberately manipulating their currencies to their own best interests.
I even saw an article in the Atlantic last weekend arguing that currency wars are good . The author argues that beggar-thy-neighbour policies are good,
Rather than cooperating, countries are fighting over trade. But in this case, some fighting is good, and more fighting is better. Countries that lose exports want to get them back. And the best way to do that is to devalue their own currencies too. This, of course, causes more countries to lose exports. They also want to get their exports back, so they also push down their currencies. It’s devaluation all the way down. All thanks to economic peer pressure.
Nobody wins if everyone does it. But for those who are happy with their theoretical purity that seems to pervade Australia economic thinking its a death spiral for currency exposed industries.
At a time of massive structural change where, as Bill Evans said yesterday, the mining boom is simply eye watering but the rest of the economy is under intense pressure I would like to think that we wont be trying to pick winners but we might find some money to ensure that we at least give ourselves and our industry a chance for survival.
It is clear to me that the push back from the policy making and political class on this topic of the Aussie Dollar’s strength is such that they recognise there is an issue but it is also clear they are trying to manage the issue rather than deal with it.
We are a small open economy with a currency that trades far too much for our relevance in the global economy and thus there is little we can do to halt its strength. We just dont have the fire power unless we want to print lots and lots of Aussie Dollars.
So it’s not easy but it would be good if as Joe Hockey said we consider carefully what the impact is going to be on our industry, on our jobs and on the fabric of our society in the years ahead.
You’re probably sick of hearing this from me but I think at a time of structural change it is important we talk about the structure of the change and the structure that in the end results from the change. now, ex-ante not in the future, ex-poste.
Have a great day.
Gregory McKenna
Disclaimer: The views expressed in the above article are the author’s own. They should not be interpreted as reflecting any views held by Senator Barnaby Joyce or The Nationals.
Barnaby Is Right 
Personally, I don’t know what this obsession with the ‘strength’ of the AUD is. Remember you are talking about the AUD v USD here, what’s to say Russia, Brazil & China are not looking to remove themselves from the USD orbit? Where would we be then, pegging to a rapidly depreciating USD?
For all my dislike of the central bank & its irredeemable debt, I actually think the RBA has been doing a reasonable job of late in maintaining some stability in the AUD, which is after all, its own obligation. Yes it’s a credit bubble but a baby compared to the USD, Euro, Yen, Pound….. the real problem is as I was trying to point out yesterday, the monopoly of the government of the issuance of ‘money’. According to the law, you accept it in payment of debt or go jump in the river. That the government is passing dud cheques to you, is of no concern to them.
And a heads up TBI, this ‘Deus Forex Machina’ was the person who, before the Macrobusinessians more or less banned me from commenting, flat out denied that the AUD was the obligation of its issuer, the RBA, while making the same ‘weak dollar’ argument. I don’t see how someone who doesn’t have a grasp of the most fundamental point of finance can have a credible argument.
Devaluation is the road to penury. It is after all, exactly what’s been happening for decades. It is the cause of the problem, not a solution & the government is in the drivers seat.
Understand your argument JMD. What is your solution? More importantly, is it remotely achievable, given the prevailing paradigm?
I’m continuing to raise this issue of relative AUD strength, and arguing for intervention on FX, for a number of reasons:
(1) Because most Aussies are largely oblivious to the entire subject area of “money” / “currency” – talking about it helps bring it to prominence, and hopefully will prompt more people to think, question, research, and perhaps come to a similar level of understanding as yourself;
(2) IMHO, the sad reality is that the core, fundamental change/s needed (per your argument) are unlikely to happen, unless pressed upon us by the same folks who control things now (ie, no better an outcome); and thus
(3) I think it pragmatic to discuss bandaid solutions that may just allow Australia to have some industries that are fundamental to national sovereignty and self-determination still existing (and in Australian ownership/control), at the denouement of the global macroeconomic processes that are presently at work.
There’s no solution. Ultimately the edifice of bad debt will crumble.
In the meantime though, I’d prefer a relatively stable AUD than an AUD rapidly depreciating with the USD. The idea that the AUD is ‘strong’ because it is appreciating against the USD is a fallacy.
As I understand it, the AUD has been appreciating relative to most (all?) of the major traded currencies. Or flip side same coin, the majors all being devalued versus ours. Whichever way one chooses to view it, and irrespective of ideological opposition (which I share) to shafting savers by joining the devaluation wars, IMHO the reality is that refusing to act (join in) means that when a collapse comes, there will be few if any vital industries left in Oz that are necessary for rebuilding. Including loss of the necessary knowledge and skills. It pains me to argue for devaluation, but I see doing so as the lesser evil.
I think it is just as plausible the dollar could be back to 0.60. If Europe tanks, the US dollar will spike and countries that currently hold Aussie Dollars will drop it like its hot.
The Australian dollar is seen as a luxury item, something to invest in when the good times are rolling along. However as soon as the whiff of panic sets in the market, the aussie dollars gets ditched.
However, under a steady as she goes projection yes 1.25 is definetly on the cards. Will people care? Probably not in fact most will simply see it as an ven cheaper trip to Bali.
“..countries that currently hold Aussie Dollars will drop it like its hot.”
Yep. Just like late 2008. My concern is the damage being done while we wait for the inevitable. Hence my interest (no pun intended) in intervention.
Couldn’t agree more BI.
Once a company/industry goes broke, it’s pretty much gone forever…
If we ever want to have any form of industrial capacity in this country, other than farming and mining, then we might just have to get off our high horse and find some short term fixes to the problem of having a dollar which, IMHO, is way overvalued.
Leaving interest rates substantially higher that most of the Western World is making us a plaything of the international carry trade. Great for a cheap trip to Bali, but not good for our longer term prospects.
And yes, I know lowering rates will punish savers and lead to an element of mal-investment,
but what other choices do we have. Trade barriers and sanctions?? We signed GATT, didn’t we? (maybe we could UN-Sign it??)
Paul Keating said something about a “level playing field” a long time ago. As if anyone cares about Australia playing the game “with a straight bat”. (strangely reminiscent of the Carbon Dioxide Tax/scam/farce).
But maybe all these problems could be solved by a sound form on money..
I see the RBA as too hawkish on rates.
Recall not long ago the Rudd Govt was still stimulating exactly at the time the RBA was raising rates to dampen things – insane.
Check out their board now, two people with links to Woolworths.
How many reps are there from our resource companies ?
The ann yesterday of a trade deficit will hopefully put pressure on our Kanga$
Sooner it gets sub US$ the better. Sooner Stevens goes the better.
http://workers.labor.net.au/features/201212/c_historicalfeature_zeeb.html
Industry policy is an untouchable idea in Australia. The two major political parties seem happy to let market fundamentalists dominate, except when it comes to very particular constituencies (eg the Productivity Commission itself, as it and its predecessors should surely have been wound up by now if the economic principles they espouse were applied to themselves).
It was not ever thus. Protection (the term protection is used by the fundamentalists as a way to taint the notion of industry policy) was used to get any sort of capability of manufacturing in Australia. C J Dennis, in the days when Protection v Free Trade was the major political division in Australia, wrote a very perceptive story of what happens when the free traders get their way in the Glugs of Gosh when warehouses lined the shore for all the imports. The dominance of Melbourne manufacturing made sure industry did get protection.
http://workers.labor.net.au/features/200212/c_historicalfeature_zeeb.html