Glass Pyramid Head of Research slipped a cold and flu tablet in one of the TGP operatives cup of bonox this morning. The result was a flurry of comments on the economic blog Macrobusiness.
When it comes to the exchange rate the article in the DomainFax is deeply confused but then there is a lot of that about.
The exchange rate reflects little more than our enthusiasm for flogging off claims on our future income or flogging off assets and the consequential impact of that on our trade performance.
Generally, people confuse the issue by talking about capital imports funding the trade deficit. The funding comes first.
The banks issue IOUs to foreigners and the govt facilitates the sale of assets off shore – that process puts upward pressure on the $AUS.
The higher $AUS then shapes our trade performance as imports are cheaper than they otherwise would be and exports more expensive.
So when DomainFax ponders the path of the $AUS as though it is some magical spirit they should be looking at some of the key determinants.
- The attitude of APRA and the RBA to the sale of IOUs off shore by our banks to support mortgage operations. All systems go.
- The attitude of Mr Robb and the govt to flogging off assets like land and industry – All systems go
- The enthusiams of our trading rivals to export capital to Australia and devalue their currencies by doing so – All systems go.
Whatever our exchange rate will be – the ALL SYSTEMS ARE GO attitudes above will ensure that it is much higher than our trade performance warrants.
In short our lifestyle will continue to be supported by eating our children’s future.
In democratic terms it is called giving the voters a soft option.
So keep that in mind if you applaud or support any of 1. 2 or 3 above.
I think the bar for idealism is being set a bit low if restricting at least some of the most unproductive capital inflows is a bridge too far.
Especially when we know that if enough pressure is applied even this govt will limit some of them – restricting foreigners buying existing homes IS a a restriction on unproductive capital inflows.
Placing some tighter limits on off shore borrowing by our banks, limiting off shore holdings of govt securities, limiting mere transfer of ownership of some key assets (land) are hardly ideals from never never land.
The point remains that if the exchange rate is the issue – trying to ‘manage’ it with interest rates while at the same time maintaining an open door policy on capital inflows that put upward pressure on the exchange is unlikely to be successful.
That is why the RBA have never said they are trying to control the exchange rate with interest rates.
They are using low interest rates to drive the Debt Machine and they accept that to do so they need hot money inflows and that means they ACCEPT that the price is a higher exchange rate than our trade performance warrants.
Which is why I keep making the point that using low interest rates (fueled by capital inflows) to drive a Debt Machine model forces UP the exchange rate and inevitably produces a houses and holes economy unless all that debt adds to the productive capacity of the economy and that is clearly not the case.
The only way to repair competitiveness is a lower exchange rate.
That is a simple exercise and requires direct action on some of the capital transactions and capital flows that drive it.
Trying to discourage capitals flows with lower and lower interest rates in a world of ZIRP when APRA and Mr Robb and Mr Hockey are laying out a red carpet for capital inflows that will push up the exchange rate is as we have seen over the last few years ineffectual.
Cutting rates to control the exchange rate while maintaining a capital open door policy that drives it up is counterproductive and that is putting it nicely.
I appreciate that placing some restrictions on unproductive capital inflows is considered outrageous in the neo-liberal holy scriptures but isn’t it about time that we started to question holy writ that has been screwing up the world economy for the last 35-40 years.