GLASS PYRAMID ‘EXCLUSIVE’ SEALED SECTION CONTENT
Updated: The RBA hold at the April meeting.
All this talk about the $AUS and how it needs to fall to ‘allow the economy to re-balance’ and that is why the RBA must cut rates today, misses an important point.
Even during the largest mining boom in our history when we were getting record prices for our mineral exports we were barely producing a trade surplus. As you might expect, a country that can barely produce a trade surplus during hay making season is going to watch the value of its currency plummet at the end of the season (i.e. mining boom).
The real story that few are yet talking about is WHY is the $AUS so high when our trade performance is about as pathetic as it has always been (and rapidly getting worse as the mining boom turns to bust) .
The answer is to look for what else we are selling that might be ‘bloating’ the value of the $AUS and making it hard for our domestic industries to export and compete against the resulting undervalued imports.
Top of the list are
1. IOUs sold to foreigners by our taxpayer guaranteed big 4 banks – we are talking about hundreds of billions of dollars. APRA is supposed to be watching this but in recent months our banks have again been flogging off IOUs to the wholesale markets at a rate of knots. All those IOU sales put upward pressure on the $AUS.
2. IOUs sold by the Federal and State government to foreigners – again we are talking about hundreds of billions. All those big fat deficits that the ALP and Joe Hockey have been minting are being funded by issuing Govt bonds and guess who is buying them – yep foreigners – by the wheel barrow load.
That is why our dollar is “holding up” – we are selling IOUs to off shore creditors at a massive rate.
And the cherry on the top is that we are selling our capital assets and land at a massive rate as well. Mr Robb thinks this is such a good idea he has been signing up the country to capital inflow facilitation agreements (FTA’s to the naive – Hi Judith) as fast as he can over the last 12 months (Japan, Korea, China etc etc).
Rather then cut interest rates towards zero, like Australia is a contestant in currency warrior amateur hour, and see mal-investment and asset price bubbles across the nation (while the wishful are hoping a macro-prudential chastity belt in the right places might offer some protection) the sensible solution is to restrict some of the transactions which are:
1. Inflating the value of the $AUS above what our trade performance warrants
2. Allowing the low target rate to translate into record low rates for residential lending.
It is a simple matter for APRA to direct the private banks as to their off shore borrowing practices and for the Federal Government to exercise some self-control when it comes to selling taxpayer guaranteed IOUs.
Of course we need to do this gradually as the debt junkie nation down under may not like cold turkey if the national credit card limit is wound down too quickly.
Those low interest rates that a lot of people, who should know better, think are great come at a very HIGH COST to the current and future generations of Australians.
It is about time the nation and its economists (or even a pollie or two) start thinking about those costs.