This comment was made at Macrobusiness (link may be locked – but there is a free trial available)
A fiat currency regime is not a WMD because it is easy for a country like Australia to defend itself from currency warriors by regulating the capital inflow transactions that the capital warrior uses.
A currency warrior can only hold down the value of their currency relative to other currencies like the Australian dollar if they export capital – i.e buy off-shore assets – real or financial.
The reason is simple – exporting capital is like buying something.
So if you want to sell a lot of goods (manufactured or otherwise) or services (i.e. create jobs in your country) to other countries without buying lots of goods or services (i.e create jobs in other countries) AND stop your currency appreciating you MUST be buying something – and that something are off-shore assets.
This is why the FTA agreements are not really about trade. They are really about allowing rapid and massive capital inflows to Australia by Currency Warriors. Notice the lift in the FIRB No Questions Asked barrier to $1B. Disappointing but not surprising that the LNP and Mr Robb in particular are continuing to sell out the nation with these predatory capital inflows agreements.
So the solution for a country who wants to stop a Currency Warrior from pushing down the relative value of their currency to make their goods and services cheaper (i.e. the things that produce jobs) is to STOP or severely limit capital imports that are at core simply the actions of a Currency Warrior trying to manipulate the relative value of their currency.
Does this mean ban ALL capital imports?
No – as capital inflows that clearly and directly increase the productive capacity of the Australian economy are a good thing.
Is it hard to pick the good from the bad?
No – the bad ones stand out like beacons. Here are some examples
1. Off shore borrowing by our banks for residential mortgages. These borrowing transactions are ready made for the currency warrior trying to export capital. We are talking about hundreds of billions of dollars.
2. Off shore sales of govt bonds – again – selling bonds off shore is like building a pipeline for a currency warefare to export capital. We are talking about hundreds of billions of dollars.
3. Purchasing the title to existing land with no serious plans to increase the productive capacity of that land – existing housing is a red hot example but much of the agricultural land is the same – do we seriously believe that we need Chinese, Japanese, British or even USA cowboys to show us to run a cattle farm or other agricultural ventures?
4. Purchasing the title to existing capital assets like industries, factories, distribution systems.
Sure we hear a lot how new ownership will bring lots of new ideas but that is mostly overstated. Generally, the off shore parties are buying nice cosy oligopolies or natural monopolies and the only management skill they are bringing is how to gouge customers more effectively.
Come on PFH007 – tell us about a good capital inflow
Aldi is a good example of productive investment, They have built hundreds of stores and introduced genuine competition. It is a shame that Aldi is the exception to the rule.
In summary, a state with the capacity to print money holds no WMD with regard to other countries unless the other country is brain dead like Australia.
A currency warrior relies on exporting capital and IF a country like Australia exercised some discretion and discernment over only allowing productive capital inflows the currency warrior would have to look elsewhere for a sucker.
That is a legitimate question – re mining CAPEX – as generally speaking investment in the development of mines is a lot more productive than much of what passed for ‘Oz investment’ over the last 30 years.
My position is that while productive too much mining investment in too shorter period is not in the national interest because of the lasting damage it causes to overall structure of the economy.
A short boom that causes a lot of damage over the mid to longer term.
Plus as we are starting to see right now, the mining industry are just as bad as everyone else at making wise investments that stack up. The industry (hello 3d1k) was talking about a 30 year boom as much as anyone.
The most sensible approach in my opinion is to regulate the rate of mining industry expansion during boom periods with as little picking of winners by government as possible. This is why I talk about tradeable export volume licences for mineral exports.
The government sets the volume limits for a period and then auctions off the rights to export those volumes. The rights are transferable and will find their way to the miners who most wants to export.
This allows the government to set the overall maximum rate of growth for future periods, earn income from the auction, and leave up to the miners to trade the licences to work out who is doing the exporting. States still get to charge their royalties.
A sovereign wealth fund approach is essentially a form of currency warfare. It is trying to have your cake and eat it. Dig up minerals but export the capital so your exchange rate is not affected.
I would be a hypocrite if I suggested that Australia seek to defend itself against currency warfare but then seek to do exactly that to other countries by exporting capital primarily to exert downward pressure on the $AUS relative to other currencies.
Plus as you point – handing large slabs of cash over to the management of sovereign wealth funds is likely to see a lot of dud investments.
Probably safer to leave minerals in the ground for future generations than convert them into bucks and kid ourselves that the current generation will not squander them.
Gunna, is pretty close to the mark when he notes that most of our mining companies are owned off shore and that is a pretty good reason why the mining industry and its shills will never talk frankly about what is in the national interest as their interest is to rip up the mineral assets and flog them off as fast as they can.
The Federal ALP ran into problems with mining because it did not confront the fundamental issue – which is that you can’t have a hi-speed mining sector expansion without causing damage to the overall structure of the economy. In any event they were not event talking about trying to neutralise the impact on the economy by exporting the additional capital generated.
They thought they could have their cake and eat it with a resource rent tax that was as much ‘rip rip wood chip’ as what the industry wanted to do. It might have worked had they been able to grab the cash and pump into a sovereign but it was just too easy for the miners (and the LNP) to paint it for what it was – a central government ‘no negotiation with the states’ grab for cash.