The real Value of the Australian $ …

April 2, 2011

Reference Material used:

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I am appalled at the non-existence of any debate about the impact of the rising $A value and its impact on our economy.

So much so that I can only call the economic management of out Nations natural resources borders on lunacy.

Neither lead Political party have talked about this in any mainstream public way – yet they posture and beat chests over raising $40 billion in a mining tax – and finding another $40 billion for the NBN and now the cost of the Carbon Tax at $860 a household – another $80-$100 billion to be found and paid for there on a yearly basis.

If any concerned exporter was worried about selling Australia‘s prime and sought after resources and rural produce – surely the question of the rising A$ value would be the singular most important issue they would want to ask the Government about.

The rising A$ v $US means $billions in lost revenues – it kills tourism – it impacts on retail when consumers go on line and buy offshore – it has untold impact on the Australian economy.  I would go to say that this single issue has the potential to wipe wealth from Australia like no other event – including the sharp impact of the GFC.

The A$ v US$ relationship:

The chart below shows a 28 year average of the A$ v US$ is A$.7336 to US$1 – at its current level of $1.0345 is some 41% above the mean average over the last 28 years – unfucken’ believable ….

$A v $US with Mean Averages

Export Revenues and Trading Partners:

What is the Governments response – ‘not our problem’ – what is the Oppositions response – ‘so what’ – and the Greens – ‘what the hell you talkin’ about’.

Surely there is reason to at least talk about what can be done to reduce the value of the US$ – it is not a simple discussion or debate – for example:

  • China – our largest importer has a currency pegged to the US$ – so as the US$ devalues against the A$ – Australian exporters receive $billions in reduced revenues for the same amount of product – Australian mining resources are being sold at fire sale prices when demand is at the highest level and the US$ price is also at its highest level ever.

Please see the chart below to see where are exports are going:

Exports by Destination

China:

China and now India have come to shop in Australia as if we were a ‘Crazy Clark’s‘ Discount store.  It is a global play by the Chinese and other Nations who have fixed their Currencies to the US$ and defy global G20 efforts to have these surging economies float their currencies.

The chart below shows the value of the Chinese Renminbi verses the A$ …

A$ v Chinese Renminbi

In real terms when China buys our resources or rural produce – they pay less than a third in A$ revenues to what they paid in 1983 – and it has been at those levels since 1993 when China devalued their currency.

This chart does show how China have responded to Global pressure in the last five odd years with a 10-12% revaluation of their currency in A$ terms – much less in US$ terms.

The stupidity of Australia’s economic managers – is in that they have no responded because they believe a ‘floating currency’ represents ‘open and free’ market will.  The Chinese do not operate under that assumption – their devaluation in 1993 proved a master stroke and their emergence as a power house Nation has all happened in that timeframe.

The West and developed world allowed it to happen initially because China’s GDP and poverty levels demanded they be allowed to build internal consumption and grow their import requirements – as a result – their external current account is the envy of every Nation in the world.

Japan:

On the flip side of this is the Japanese currency and what has happened to its economy in the same timeframe – China have overtaken Japan in GDP terms and sits second behind the USA.  It is only a matter of time before even the USA is toppled and bows to China’s economic miracle.  The chart below is the ¥en v A$ and shows the appreciation of the Japanese currency as opposed to the devaluations of the other Asian currencies.

Yen v A$

Volatility:

There is volatility in free floating currencies – so much so that there has been several documented cases where the markets have forced revaluations through speculation to over-valued currencies.  It also happens in under-valued free floating currencies – but never against fixed or pegged currencies.

Australia’s currency is over valued against a 30 year average by 40% – yet the Australian Government sees nothing wrong with this situation.  If that valuation is applied to the export component of the GDP number i.e. $$78 billion –

A$ export revenues ($Billions)

This translates to a revenue stream Australian exporters are forgoing calculated as 40% of this $78 billion = $31 billion a year in additional domestic revenues.  This is almost the cost of the NBN – or the Mining tax revenue the Government wants to fund its future Superannuation modifications etc.

The other big plus is that there is mammoth global speculation happening in the A$ on global markets – it is considered a ‘risk’ trade and is pegged to commodities – both mining and rural – and the high prices at which they are currently trading – this makes the currency subject to extreme volatility –

In the GFC the A$ fell from high A$.90c levels to just above A$.60c.  A 30% devaluation as speculators exited ‘risk’ currencies.  This happened in a matter of days and exporters had no chance to unwind hedges and take advantage of the devaluation.  The currency has risen ever since to the current lofty levels and if anybody was smart in the RBA and Treasury – they should be trying to convince the Government to devalue the currency by at least 20% to shake the speculators from the trees and return value to our export revenues.

Summary:

When the world has great demand for what we have to sell – and they are prepared to pay record prices – why would we let them buy it at a sale price because of the A$ value?

It is just plain stupid economic management – and those responsible  should be shunted to the never-never.  There will be cries about ‘floating’ currency and ‘free’ markets – well until China and other emerging Nations float their currencies and play by the same rules – why gift them all a free ride at the expense of our miners and farmers.  We should be looking to a time when these resources are exhausted – selling them at ‘fire-sale’ prices is dumbass and chronicly brainless.

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  1. Warwick
    April 3, 2011 at 12:08 am

    This does deserve much more popular debate. Australia has a serious case of the Dutch disease.

    Simplistically, we think high AUD means cheaper overseas holidays, more purchasing power in foreign countries.

    We totally overlook the fact that we are exporting jobs, then exporting capacity, then exporting whole industries to emerging and developing countries.

    This is where USA have got the last decade so wrong. Wal Mart exemplifies the case. Driving consumer prices down without regard for circular flow logics of Keynes, has seen many goods priced lower in real terms beyond just savings through technology breakthroughs. But the Wal Mart case study sees every stake holder except the share holder absolutely crucified. Where do the shoppers come from when there are no jobs? Where do the shoppers come from when the supply chain is all imported from low wage (slave wage) imports? It must come from the government sector. Might this explain why USA has public sector debt exceeding 14 trillion?
    Yes of course there are other contributions like very expensive unwinnable wars.

    Why would a free floating currency suit China? They have simply understood through yin/yang logics, why would they want a higher yuan (renminbi) so their population can start to be jetsetters. Their 1.3 billion population after just happy to receive their daily bread, and save and invest in modernisation and capacity.

    The consumer/market economy is a broken model, yet USA wants to continue espousing it’s singular virtue.

    The lack of dialogue between Beijing and Washington is frightening. Yet in Australia we can not send ships of our precious iron ore, black coal, LNG, alumina etc fast enough.

    As the Eye Ball said, why hasn’t our Government or Opposition or splinters like the Greens got onto it. When we have no tourist capacity, no manufacturing capacity, no education sector and so on left, we will be looking pretty low on natural resources as well.

    Is China hoarding natural resources?

    Simply why is there so many questions and not enough answers?

    Are we really that clever?

  2. April 3, 2011 at 7:00 am

    Hi Warwick – its been a while but as always – when it comes to sing a hammer – the nail ia always fairly struck –

    There are so many angles in which approach this debate – all with the same issue as the end question – why is China allowed to keep its currency low in direct contrast with its emergence as the economic saviour for all that Capitalism has come to represent –

    With a pegged currency – the China ownership of a $Trillion of America’s debt is not so hard – with an appreciating Renminbi (Yuan) capital losses would begin to appear on the books – and America’s ability to service that debt would begin to rise as well.

    When China devalued in 1993 – [see graph in post above] – do you think they had in mind that a devaluation was one way in which to gain a price edge on the rest of the World?

    The question comes to mind over the comment made by Australia’s Treasurer Paul Keating in the aftermath of the A$ being floated. We all remember the ‘banana Republic’ comment – it sent the A$ into freefall for a period and everybody wondered why the Australian Treasurer would make the comment he did.

    Perhaps an answer is at hand – perhaps he was trying to help the markets sell the A$ in a devaluation ploy to bost the Australian economy – if it was – it worked – Keating was that smart – the dildo’s running this Country – the RBA – and the Treasury would not think like this – it is far to radical a ploy – but then who does think like this – it cvan only be people who think outside the box and that my friends is not this Government or the previous – tey migt talk about the impact of the high A$ behind closed doors – but there has not been one public comment on any action plan to stop its advance …

    We are a little country – we have what the world wants – food and resources – why sell it cheap – where is it written that a Country cannot ‘devalue’ its currency?

    The EYE-BALL…

  3. Warwick
    April 3, 2011 at 8:00 am

    Beijing says on this point, that as an emerging third world country, they need to maintain their gearing. After all, their per capita GDP is tiny compared to that of the USA. [In 2007 USA was 21.9% of world’s GDP shared amongst 300m population while China was 10.4% of world’s GDP shared amongst 1.3 billion population (Source World Bank).] Which is citizens of the USA have incomes about 9 times the average Chinese citizen.

    Here the issue becomes dispersed, but is why dialogue between Beijing and Washington is simply non existent.
    Try to explain that 9 times income in terms of quality of life, compared to GDP.

    It is much more convoluted than goods like caviar or champagne being more expensive than rice and tofu, but that is a good start. It ends up in more efficient allocation of resources, where you might try to get your head around, Built space is 10 times more valuable in America than Oceania, and when you exclude Australia, the factor endownment tends to highlight scale. Roads and Railways and ports and so on, plus CBD, and other built environment is a very large piece of this GDP variance.

    So move on to Westfield or any other mega mall. What is their real value to society?

    Their stock valuation is based on retail turnover. $2 Chinese manufactures being sold for $50 or a %100.

    Who is fooling who? Yes we need the grocers to supply us milk bread etc, but why do we want the Nike to tell us “Just do It” or Coca cola to tell us “Coke is Life”

    As I said earlier, this detente between USA and China is frightening. Why does Washington say it has all the answers and continue forcing its will on others. That is not the America ideals of the forefathers.

  4. April 3, 2011 at 8:50 am

    Hi again Warwick,

    The reload is warranted – transposing this debate to ’employment costs’ and cheap labour Nations having manufacturing industries and the like – all transferred abroad because of this Labour cost can be deemed a human exploitation –

    Yet – if India and China are prepared to exploit their own population as a cheap labour force – why should the West not take advantage –

    It then goes deeper – do India – China and the like – know that by exploiting the cheap labour they can supply to the World – and with no real intent to improve the base living conditions across all demographics from the capital inflows and export trade revenues and surplus that will result – how can the importing Nations tell the exporting Nation to lift its currency value – or better improve and distribute the wealth being generated across the Nation –

    Is this not what happened in the Arab world over OIL – and African Dictatorships over resources – the West was responsible for allowing these Dictators to assume the insane personal wealth they now control – their Nations populations did not see improved living standards – granted Dubai and a few other exceptions do exist –

    So where will India and China sit in 20-30 years – will they be the only work force prepared to do meaningless work – or will it be that they be the Kings and the West’s labour market be forced into slave labour as a result of the Debt funding provided by these emerging economies … and all spent like a credit card binge by what historians say ‘is the most intelligent geneation in history’ … come on – this is basic history repeating itself yet again and the Chinese are masters of the inter-generational plan –

    The EYE-BALL …

  5. April 3, 2011 at 10:28 am

    You’re looking at half the equation. You also have to look at your nation’s imports as compared to its exports, both in dollar figures and in types of import vs. export.

    What your primary industries from a GDP and employment perspective are also key to determining whether a high or low currency valuation is better.

  6. April 3, 2011 at 11:03 am

    Hi Jonolan,
    Thanks for the contribution – in a free market economy – strength of imports and exports determine currency levels – China and India don’t play the free market game and have not done so for a very long time –

    The West who promote the free market system are slowly sinking to economic oblivion with debt and interest on the debt crippling their economies – it is a sinking ship – leaking everywhere – the weak US$ should have made the US competitive but it can’t drag itself from its own made quicksand – Japan went the other way and allowed their currency to appreciate over the last 30 years – 20 of which have seen 0% interest rates and 0% growth since the 87 crash – they cannot stimulate their economy internally – the answer is not one nor the other –

    It’s about having all currencies playing on a level playing field – cheap currency encourages investment and diversification – expensive currency makes it cheaper to import goods and materialistic product – the cost to produce those exports is the heart of the debate – keeping the labour cheap serves the interests of the Nations providing their exploited populace – but does it suit the population and their living standards – not in Africa and not in the Arab world – with the exceptions previously commented on –

    It’s a relative issue and the West has been generous in allowing China to build its reserves over the last 20 odd years – it’s time to extract a concession to allow the rest of the world a chance to recover – China has the foot on the throat of the West – both economically and financially – the price they are continuing to extract is too high given the GFC aftermath and what the future holds for the next 5-10 years for the debt ridden Nations …

  7. April 3, 2011 at 12:45 pm

    Hi all –

    To add further to the discussion – Tim Geithner and Benanke have spent much time and effort trying to cojoule China to ease the restrictions on the pegged currency debate –

    Clinton summed it up when she made a comment about this subject – ‘how do you tell your Bankers how to lend their money or run their economy’.

    In reality – why would China give up that they have acheived and risk the ongoing economic advantage they hold over the rest of the world? Would we – or would America – and given how the West treated China in the history journals – why the fuck should they?

    Of course the end game then becomes who will China sell their exports to – the trinket market will be all closed up –

    To quote a friends comment in a previous post [Warwick] – we export real commodities – and then we import the ‘trinket’ commodity that lasts a day and is then thrown away and never used again – the ‘made in China’ symbol is about cheap and doesn’t last – presents you give some child etc … this is what the debate comes down to … turning iorn ore into steel and coal into energy to run the factories to produce the goods with the cheapest labour – currency is the conduit through which it flows …

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