$AUD: Strength is our weakness

There have been a lot of frothy comments over the last few days about the employment statistics and how they indicate that the Australian economy is ‘rebalancing’ and adjusting to the post mining boom world.

Don’t be fooled – things are still crook and we have a long, long way to go.

Possibly the best indicator of just how crook things are is the exchange rate.

“How so?”  you say

“It is still nice and high”.

If the prices for our largest exports are tumbling that means that our trade partners need to acquire much fewer $AUD to acquire them. And it is not just iron ore and commodities. We are pumping out very ugly trade deficits month after month.  Put simply – the demand for the $AUD as a result of our trade performance is weak and getting worse.

Clearly export volumes are not filling the price decline gap.

The value of a currency of a country with our rapidly deteriorating trade performance should be falling fast but it is not and THAT is a problem.

So why is it not falling? Why is it not reflecting the wind going out of our sails?

Pretty simple. Our trading partners are (and have been since the GFC) working their butts off to stop it falling AND our political schmucks in Canberra – on both sides – are standing by letting them or actually applauding the process.

Mercantalism (where a country protects its industry and jobs by exporting capital and holding down its exchange rate) takes two to tango and both Mr Robb and Ms Wong are simply begging for mercantalist dance partners instead of telling them to take a hike – it is truly pathetic.

The idea that we can resist this economic warfare with near ZIRP interest rate policy has been revealed as a grand delusion – a target rate at 2%, a goat choking stonker of a trade deficit every month and the currency is still floating at 73 cents.

Don’t forget that our trade partners/rivals are already toying with NIRP and that will drive even more unproductive hot money in our direction to pump up the $AUD.

Nothing less than direct action to wind down the unproductive capital inflows will be effective to defend our economy from the deliberate direct and indirect attacks by the central banks and governments of our trade partners/rivals.

I appreciate that letting go of the neo-liberal purity myths regarding capital flows is difficult but we must do it. There is simply no reason for any further delay in taking action on the big three.

  1. Massive wholesale offshore borrowing from foreign lenders for residential mortgage operations.
  2. Mere transfers off shore of asset ownership (aka selling off industry, ports, land and other assets.
  3. Off shore sales of govt securities and other claims on our future income which are spent on consumption and not productive investment.

We are talking about hundreds of billions of dollars – in total – of upward pressure on our exchange rate and NONE of it is productive. By that I mean adds to the productive capacity of our economy.

Taking action will immediately start the process of adjustment where our exchange rate begins to reflect our trade performance.  Fortunately we can manage the adjustment by the speed at which we ‘regulate’ the big three.

For example:

APRA can direct the banks to wind down offshore borrowing to support residential mortgage operations to zero over a number of years

The FIRB can restrict more transfers of asset ownership off shore unless clear evidence is produced of how that transfer will increase the productive capacity of the Australian economy (reliance on neo-liberal belief assurances is not good enough)

The govt can restrict bonds sales to registered local owners – no nominees.

If we do not fix the adjustment mechanism now we are simply making the future pain much much worse.

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).

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