Macrobusiness reported today that yields on Australian Government Bonds were sinking and therefore bond prices were rising. No surprise that a TGP operative immediately dropped the Kale and Quinoa pie that HoR packed in the lunch box and tapped away!

Who could be driving up demand for our Aussie Bonds?

Better hope that it is not off shore demand, from our currency manipulating trade rivals, as off shore demand will put upward pressure on the Australian Dollar.

When we depend on hot money capital inflows from the mercantilists for our low interest rates and high prices for government bonds, there is a price to be paid. Namely, an Australian dollar that is trading higher than our trade performance warrants.

Another way of putting that is the price of those low low interest rates and bond yields is an effective tariff on all Australian industry and workers – goods AND services.

Thank goodness we have all those houses and holes to rely on !

and following some typical supportive comments from flawse this

Double that “EXACTLY” with a cherry on top.

It is amazing how many otherwise sensible people do not understand that relying on capital inflows to maintain low interest rates (to drive demand for loans and thus the Debt Machine) puts upward pressure on the exchange rate and makes our goods and services less competitive.

The confusion is evident every day when people argue that the RBA should (or even worse suggest ‘does’) target the exchange rate with interest rate policy. The RBA do not and have never used interest rates to target the exchange rate as a primary objective.

The RBA are concerned with one thing – maintaining the Debt Machine (aka demand for loans) and they use interest rates to do that. They know that the only way they can keep the Debt Machine running is with lower and lower rates AND they know that the only way they can do that is by sucking in off shore capital AND they know that process puts upward pressure on the exchange rate.

Driving the economy with a Debt Machine driven by low rates enabled by capital inflows pushes up the exchange and puts an effective tariff on everything – goods and services – produced in Australia.

Any wonder we then run a massive trade deficit and see our industries unable to compete and shut down or sold off shore.

When the process is pushed to the end point and the supply off shore capital starts to slow (and/or rise in price) and then recedes (because even currency manipulators eventually get nervous about bad debts eventually) the exchange rate will start to fall and competitiveness will improve but at that point we have lost ownership of our productive industries, land and other capital assets and many other industries no longer exist (Ford, Holden etc). Plus the rates we are now paying for what credit continues to be extended will shoot up rapidly.

Creditor’s terms always harden when you can least afford it.

At that point the papers will be full of articles questioning how we could have been so stupid to believe that funding our lifestyle on hot money capital inflows would ever end well.

Additional note (H/T to AB for a great link to a recent RBA paper)

“….The vast majority of the post-crisis CGS issuance has been purchased by non-residents attracted to the Australian Government’s AAA credit rating and favourable level of yields relative to other highly rated sovereign issuers. The six-fold increase in non-residents’ holdings of CGS since late 2007 took non-residents’ ownership of the outstanding stock of CGS to just under 80 per cent in 2010, although this share has declined a little recently (Graph 6). The recent decline is not because of any net selling, but rather because buying has not quite kept pace with recent issuance..,”

Check out this graph from a recent RBA report and the percentage ownership by non-residents!  That orange line is reaching for the moon!

and re a suggestion that demand for Aussie Bonds was coming from China this

It could be from anywhere. All those countries engaging in the various forms of QE, by driving down interest rates across the rate horizon, are essentially encouraging capital exports to Australia.

They are all looking for some fool country to take their capital exports and we are champs in that regard led by Mr Robb with his programs for accelerated capital imports under each of the FTA’s he has signed up.

And he goes about telling everyone that the PRICE we are paying for selling a few more steaks and cheese is actually a WIN.

In a sense he is right as most gooses in the land down under reckon cheaper interest rates are a WIN no matter how big the price that is paid. Not that many of them appreciate that the cost of that super cheap super big mortgage (or super cheap Aussie Bond yield) is another nail in the coffin for another export or import competing business.

To read the original version of this comment in the original context at Macrobusiness.com.au click this link. (link maybe locked – but there is a free trial available).