Tag Archives: foreign exchange

Queenslander! This Is Why You Are A Complete Idiot If You Don’t Vote KAP Today

24 Mar

Following is possibly the best, most needed column written by a mainstream journalist that I have read in 2012.

Read it all.

And then, remember that only one (1) politician and political party in the entire nation has pledged to do anything about it.

While all the rest have declared that they will do nothing.

From The Australian (reproduced in full, my bold emphasis added):

DISCUSSION surrounding the importance of the mining tax to government revenue streams is a red herring, a distraction from the biggest issue facing policymakers, arising partly out of the commodities boom, partly out of the global economic downturn.

That issue is the high Australian dollar and its impact on the economy. This is Australia’s most pressing dilemma: prosperity butting up against industries under pressure, and the challenge of a multi-speed economy.

The notion of the two-speed economy suggests a fast lane and a slow lane. But evidence this week from retailer David Jones and ongoing problems with domestic industries removed from the mining boom makes the slow lane look more like oncoming traffic.

There are many problems with Labor’s mining tax, including the concept behind the tax itself. But we should not let the debate distract from how domestic industries, including manufacturing and tourism, are able to cope with a high dollar. The government needs to give serious attention to what, if anything, can be done to put downward pressure on the dollar, albeit while being wary of too much market interference.

Currencies do not trade in a vacuum. Our dollar is trading against currencies such as the US dollar, the euro and the British pound, where their value is being deliberately distorted downwards (by printing money) to stimulate economic growth and inflate state debt away.

The debate over the mining tax is a red herring because even if Treasury is right, it still will reap only between $3 billion to $4bn each year for government coffers. That’s in its watered-down form, representing less than 1 per cent of annual government revenue. And the miners say on their figures they expect to pay far less tax anyway. It is hardly the panacea for structural deficits caused by too much spending on middle-class welfare, for example.

If we continue to toss money into domestic industries in a piecemeal fashion because they are struggling with a high dollar (such as the $275 million handout to Holden announced on Thursday), mining tax revenue will quickly evaporate.

The Holden handout was poor public policy if ever I have seen it. What makes Holden worthier than services industries across the land – especially in the tourism sector – which are struggling to attract clientele?

Labor likes to compare the number of Australians employed in the (often unionised) manufacturing sector to the (increasingly deunionised) resources sector. But what about the services industry? It employs more Australians than any other sector and the tourism component is its most important sub-grouping.

How the government can justify propping up an industry with no track record of innovation and no proven edge in a competitive global market is beyond me.

Unfortunately the intense nature of the partisan debate in this country makes it very hard for the main parties to float ideas (especially innovative ones) without being lampooned by their opponents. This is a bipartisan criticism, and with the demise of the Australian Democrats we don’t have a centrist third force in Australian politics capable of positing new mainstream ideas either.

In the months to come, politicians and policy leaders on all sides are going to be forced to debate what, if anything, can be done to address the fallout from the high dollar. While it may help keep a lid on petrol prices, and imported flat-screen TVs are cheaper than ever, the consumer upsides to cheaper imports matter little when domestic industries employing most Australians become uncompetitive, costing people their jobs. A cheaper holiday to Europe is relevant only when you still have a job.

Perhaps the two easiest ways downward pressure can be put on the dollar are for governments to borrow less and interest rates to be lowered. Both make the dollar more expensive when countries such as the US and Britain are printing money to stimulate their economies, free of the fear that doing so will jack up rates.

Government borrowing less is something the opposition has long been calling for, such as winding up the still ongoing stimulus spending from the global financial crisis.

A government borrowing $100m a day is distorting the price of the Australian dollar. It is already a disproportionately traded currency (the fifth most traded in the world) courtesy of our resources sector, meaning that in currency terms it gets treated like a proxy for commodities trading. With the boom expected to last for the foreseeable future, the dollar is set to remain high unless steps are taken to keep it down.

Lowering interest rates is a decision for the Reserve Bank of Australia. It is worried that dropping rates would put too much pressure on inflation. But West Australian Treasurer Christian Porter, for one, thinks the time has come for the RBA to act, despite the booming sectors in his home state and in Queensland. He told me higher interest rates in this country were attracting too much overseas capital looking for a good return, thus pushing the dollar north.

The Australian economy is not built for a currency trading at between $US1.05 and $US1.10. And large chunks of the economy right now are not able to operate profitably with interest costs of 7 per cent to 12 per cent. If you believe in the free market, the myriad more off-beat ideas to take the heat out of the dollar may seem more than a little unappealing; for example, removing the float altogether, capping the dollar, using superannuation incentives to push investments abroad, printing money or the Reserve Bank buying up overseas currencies. Many of these possible mechanisms for halting the dollar’s climb create their own unintended consequences, such as pushing up inflation, regulatory complications and regressive micro-economic policy, just for starters.

Capping (or “pegging”) the Aussie dollar is the preferred solution frequently advocated by your humble blogger. That is what Switzerland has done, when faced with exactly the same problem – “hot money” from international currency speculators pushing up the Swiss Franc, wiping out local industry. And China has a pegged currency too.

Manipulating the currency market is complicated and requires serious thought before doing so. Nevertheless, the time is upon us to think outside the square about our high dollar, and lift the importance of the debate about what, if anything, can be done ahead of the high-profile partisan fights we see now over the mining tax and the carbon tax.

This truly is the great debate our nation has to have.

Peter van Onselen is right.

And only Katter’s Australian Party has pledged to act on the AUD.

Even if that means disbanding the RBA, or taking away their “independence”, if they refuse to cooperate.

Vote 1 KAP.

UPDATE:

The excellent Tim Colebatch in today’s The Age (my bold added):

THE high dollar is ravaging the competitiveness of Australian business. Global consulting firm KPMG reports that Australia has become the second most expensive place to do business among the major economies, behind Japan.

In its survey of global business costs, Competitive Alternatives, KPMG finds that since 2010, costs have risen more in Australia than in any other country. Most of that is due to the sharp rise of the Australian dollar against the US dollar, which has pushed up costs in every area.

Read it all.

Put on your thinking KAP.

And vote with your head.

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Our Banks Racing Towards A “Bigger Armageddon”

27 Jun

Many economists and commentators are focussed on the ongoing debt crises affecting the USA, UK, Europe, Japan, and indeed, virtually the entire globe.

But David Bloom of HSBC Foreign Exchange suggests that there is “a bigger Armageddon out there”.

And the latest RBA data shows that our banks are racing headlong into it.

From CNBC:

Investors are afraid of “Armageddon” in foreign exchange markets due to concerns beyond the Greek debt crisis and sluggish US growth, David Bloom global head of foreign exchange at HSBC told CNBC Thursday.

Bloom described the Greek sovereign debt crisis as “yesterday’s news” for foreign exchange markets, adding fresh worries were spooking investors following Federal Reserve chairman Ben Bernanke’s downgrade of US economic growth prospects for the year and his silence over further fiscal stimulus measures.

“Today’s news is will (the US) do (Quantitative Easing) and then is the UK falling apart? This is the problem that we’ve got… this is the problem that I’ve got with currencies, there’s no doubt about it that (the euro zone) is trying to cause a delay and people honestly believe in their hearts that at some stage they’re going to have to take a haircut on Greece, but is there a bigger Armageddon out there?” Bloom asked.

He added that in addition to persistent worries over the Greek crisis and the US economy, China was a fresh cause for concern.

“We’ve got the possibility of QE in the UK, there’s massive change in growth numbers in the US and now people are starting to worry about China,” he explained.

“You saw PMI numbers showing some weakness and actually Chinese interbank interest rates are going up quite substantially, so people are starting to get quite worried,” he added.

An “Armageddon” in foreign exchange markets – indeed, even just a serious bout of volatility – would spell doom for Australia’s banking system. And in turn, for our economy, given that our Government has guaranteed our banks using taxpayers future earnings as collateral.

There are a number of reasons why a forex “Armageddon” poses a critical threat to our banks.  Perhaps the primary one, is their staggeringly large exposure to Foreign Exchange and Interest Rate derivatives.

Derivatives are the exotic financial instruments at the very heart of the GFC.

Back in 2003, the world’s most well-known investor, Warren Buffet, famously called derivatives “a mega-catastrophic risk”, “financial weapons of mass destruction”, and a “time bomb”.

In essence, the type of derivatives held Off-Balance Sheet by our banks, are financial instruments used for “hedging” and betting on the direction of Interest rates, and Foreign Exchange rates. A large or unanticipated change in those rates, and our banks stand to lose.

And lose big time.

According to the RBA, our banks hold a combined $3.98 Trillion in Foreign Exchange derivatives. And a whopping $11.68 Trillion in Interest Rate derivatives.

To put that in some perspective, it is almost 15 times more than the value of Australia’s entire annual GDP:

Click to enlarge

In May ( “Tick Tick Tick – Aussie Banks’ $15 Trillion Time Bomb” ) we saw that Australia’s banks held almost $15 Trillion in Off-Balance Sheet “Business” (mostly derivatives) at December 2010.

The latest RBA figures are out, current to March 2011.

In just 3 months from December to March, our banks’ exposure to Off-Balance Sheet derivatives “Business” has blown out by a whopping $1.99 Trillion, to a new all-time record total of $16.83 Trillion.  That’s the biggest 3-month increase in our banks’ history.

By comparison, at March 2011 the banks have “only” $2.68 Trillion in On-Balance Sheet Assets. That’s an increase of “only” $19.9 Billion. In the same 3 months, their Off-Balance Sheet derivatives exposure blew out by 100 times that much ($1.99 Trillion):

Click to enlarge

You may be wondering how the banks could possibly manage to increase their “Assets” by $19.9 Billion in just 3 months. The answer? 96.4% of that increase ($19.19 Billion) is in new Residential loans.  That’s right – your loan is considered the bank’s “Asset”. Which really means, you are their asset.  Your signature on that loan document means they literally “own” you, your daily sweat and toil, for the next 30 years.

Now, does this suggest to you that our banks are becoming even more reckless? That near-parabolic rise in the chart of their derivatives exposure is approaching what looks just like the classic “blow off” phase of every trading bubble.

Certainly there is clear evidence of their becoming even more reckless when it comes to mortgage lending standards.  We saw this in data released just a couple of weeks ago – “Fresh Evidence Our Banks In ‘Race To The Bottom’ Means You Can Kiss Your Super Goodbye” (a must-read).

This is a classic sign of the near-end of a Ponzi scheme, a sign that was also seen near the end of the real estate bubbles that blew up in the USA, UK, Ireland, and Europe. The last mad rush by greedy banksters to rake in profits, before the bubble bursts.

And their losses are “socialised” by the government, on to the backs of the next X generations of taxpayers.

Now that we have learned that “Our Banking System Operates With Zero Reserves”, that Fitch Ratings considers “Australian Banks Most Vulnerable To Europe’s Debt Crisis”, and that our banks have just taken on an all-time record $1.99 Trillion in additional derivatives exposure in just 3 months, this new warning about “a bigger Armageddon” in foreign exchange markets should be considered another clear harbinger of an epic disaster to come Down Under.

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