People buying imports and planning a holiday overseas love a high Aussie dollar as they have greater spending power.
However, people who have lost their jobs or businesses as a high Aussie dollar made imports cheaper and made it harder to compete in foreign markets are not so keen on a “mighty” high Aussie dollar.
So how do we resolve the happiness of consumers v the happiness of Australian workers and business, bearing in mind that at different times of the week most people are both consumers and workers/business owners?
And how is this important to the issue of whether or not Australia becomes a Banana Republic?
So what is the appropriate level of the $AUD? Do we get to choose?
The appropriate level of the $AUD is the level that reflects our trade performance.
If we produce lots of things that the world wants to buy the demand for the $AUD will rise and it will rise in value, if we don’t produce things the world wants to buy, the demand for the $AUD will fall and it will fall in value.
If our trade performance is good we deserve a higher $AUD but if our trade performance is bad the $AUD will reflect that by trading at a lower level.
Okay so what is the problem with the current level of the $AUD?
The problem is that the $AUD does not reflect our trade performance and has not reflected it for years.
At the moment the value of the $AUD is inflated by another set of transactions with the rest of the world and these transactions are not very healthy at all.
Those transactions are like living on a diet of week old cold pizza, sugar and fizzy alcho-pops.
The worst of these transaction are:
- Borrowing money from foreigners and using that money to speculate/have a punt on residential housing asset prices and spending the rest on shopping.
- The government borrowing money from foreigners and spending it mostly on …shopping
- Selling off income producing assets to foreigners and spending it on ….shopping.
These transactions are unproductive capital inflows because they do not add to the productive capacity of the economy.
Worst of all they cause the value of the $AUD to rise (selling foreigners IOUs that our children will pay and blowing the money on punting on asset prices and shopping is a very unhealthy kind of ‘export’ industry)
An $AUD bloated by taking on unproductive foreign debt is stupid
Borrowing money to increase your productive capacity or the productive capacity of your economy is often a good thing. New factories, new infrastructure, new inventions etc.
Borrowing money to bid up the price of existing assets and to go shopping (especially buying from overseas) is super dumb. That is what Banana Republics do.
Sadly when it comes to borrowing from foreigners Australia has been acting like a Banana Republic.
The thing about Banana Republics is that they feel really rich while they are clocking up the foreign debt at low interest rates and then suddenly very poor when they find that their lenders start jacking up the prices of their loans to the Banana Republic.
And if you think we can just default on our foreign debts if it all becomes too hard go talk to Greece or Cambodia.
Going shopping offshore and punting on asset prices with foreign debt the way Australia has done over the last twenty years is classic Banana Republic behavior.
So how do we fix the problem?
Very easily but it must be done gradually as a rapid change or “detox” is likely to be very painful.
The solution is to slowly unwind the classic Banana Republic transactions:
1. Direct APRA (the bank regulator) to direct the Australian banks to wind down borrowing offshore for residential mortgage operations.
Requiring the Australian banks to start relying on Australian savers to support residential mortgages operations is fundamental.
At the moment the Australian Banks have borrowed HUNDREDS of BILLIONS from foreigners to support mortgage operations and that puts significant ongoing upward pressure on the $AUD (and is a major reason why house prices have gone through the roof).
Reducing our drug-like dependence on cheap foreign capital for Australian housing must be done gradually (it may take 10 years) but it is essential to achieving an $AUD that reflects our trade performance and not the willingness of international debt peddlers to accept our IOUs.
2. Strictly limit the sale of government securities to foreigners.
A complete ban is not necessary but a massive reduction in the holdings of Australian government securities by foreign parties is essential.
When the Australian Government sells a bond to a foreigner, the foreigner does not send $AUD from a vault in London. They buy $AUD that already exist in the Australian banking system and use those to buy the Australian Government bond.
All selling of government bonds to foreigners does is push up the $AUD.
Plus there is a very good reason for requiring the Australian Government to sell most of its bonds to Australian citizens. If Australians don’t want to buy them (or will only buy at a higher yield than foreigners) that sends a pretty clear message to the government about its bond selling activities.
Another good reason is that strictly speaking the Australian Government does not even need to sell a bond to a foreigner OR an Australian citizen, but that is a story for another day.
3. Do not sell assets to foreigners unless they demonstrate they will increase the productivity capacity of those assets.
Currently, assets can be sold to foreigners without any clear demonstration or commitment by the new foreign owner to increase the productive capacity of the asset.
Foreign buyers of assets should provide clear commitments and plans explaining how they intend to increase the productive capacity of the assets they wish to buy.
If they fail to deliver they should be required to sell the assets to an Australian buyer.
No foreigner – either offshore or temporary resident in Australia should be permitted to buy existing Australian housing – no ifs or buts. They should be limited to newly constructed housing they paid to have built and be required to rent it out if they are not going to live in it themselves. This is a standard and sensible rule by most countries around the globe.
Australia is displaying all the classic signs of becoming a Banana Republic.
The first sign is living much “richer” than your trade performance should allow.
The second sign is a massive and growing level of private (banking sector) and public (govt bond sales) foreign debt. Don’t swallow the nonsense that most of the debt is owed by ‘private’ parties who can make informed adult decisions. Our banking system has an implicit taxpayer guarantee so if lots of those “private” parties have been taking a punt on asset prices and they blow themselves up – their debts will quickly become public debts as Mr Morrison swings in on a rope to save his banking mates.
The third sign is using foreign debt for non-productive purposes like bidding up the price of existing assets and spending the borrowed money on consumption / shopping especially overseas shopping (imports).
The fix to the problem is simple and gradual.
Slowly restrict and eliminate the key transactions set out above that are leading us to Banana Republic land.
If your local member of parliament claims to be concerned about Australia’s future ask them what they are going to do about the transactions that are turning us into a Banana Republic.