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EYE-BALL Guru on – The Value of the A$ – Part II – another report from – ‘The Australian’s’ David Uren –

August 18, 2012


Latest GURU Posts:

Aug 15th:

The Value of the A$ – Part I – a report from ‘The Australian’s’ David Uren –

Aug 3rd:

Media Economic Commentary on June 2012 Retail Sales Figures – just naive …

Aug 2nd:

The Rise of the Australian $ – Finally someone from Academia Land agrees –

July 30th:

Greece – – Should they be allowed to leave the Eurozone –

July 27th:

Superannuation – a great big rip-off – Part III!!!

July 19th:

The “LIBOR” Scandal …Part III – Banks a conduit for crime and corruption!!!

July 14th:

Link to Part IIThe LIBOR Scandal … The Banks are in Trouble … again!!!

July 8th:

Link to Part IThe LIBOR Scandal … about to explode …

July 7th:

The “CARBON v CLIMATE CHANGE” Debate – Part I – OIL and its Contribution –

June 15th:

The GFC – the right of reply … the right to question …

June 8th:

A Global Economic Snapshot …

June 6th:

Treasurer SWAN just won Lotto …

May 29th:

Greek Investors re-engage in Equity Market …

May 28th:

An example of a Government truly concerned about Currency appreciation …

May 28th:

Greeks flip over Lagarde’s – ‘pay your taxes’ gibe …

May 24th:

The FACEBOOK (FB) Float:

April 29th:

Joe Hockey’s misfires on Welfare – he should be made to serve a lifetime on welfare existence …

Mar 14th:

US Bank Stress Tests – The Cover-Up and bullshit continues …

Feb 12th:

The Continuing Cost of the High Value A$ …

Dec 23rd 2011:

An Open Letter to German Chancellor ANGELA MERKEL
– None Better …

To see more GURU posts:

click here …

– The Value of the A$  – Part II –
– another report from –
– ‘The Australian’s’ David Uren –

| Author: EYE-BALL Guru |18th Aug 2012 |
Another story appeared in ‘The Australian’ today – [Aug 18th] – with the heading – ‘Treasury dismisses devaluing the dollar’.

The story again focused on the high A$ value but unlike Journalist’s Uren’s previous offering on this subject – he drew inspiration for the Treasury Department publication titled – Economic Roundup Issue 2, 2012.  This report had a section titled: ‘UNDERSTANDING THE APPRECIATION OF THE AUSTRALIAN DOLLAR AND ITS POLICY IMPLICATIONS – Phil Garton, Danial Gaudry, Rhett Wilcox’. 

This Treasury report can be downloaded using this link – [PDF File – 3mb] – and to read the above titled section go to page 39 of the report.

Firstly  – Uren’s article is reproduced below:

Treasury dismisses devaluing the dollar

| Author: David Uren, Economics Editor | Date: Aug 18th 2012 | Link to On-Line Story. |

SENIOR Treasury economists have warned any attempt by the Reserve Bank to force the value of the Australian dollar lower would likely fail and undermine economic stability.

They argue the Australian dollar is not over-valued in any case, given the strength of our economic performance and the fact that interest rates in most other parts of the advanced world are close to zero.

The Treasury paper, included in the latest edition of the Round-Up research journal, describes as “misplaced” the calls made by prominent economists, including former Reserve Bank directors Warwick McKibbin and Adrian Pagan, for the Reserve Bank to follow the example set by the Swiss central bank.

The Swiss National Bank has set a ceiling of 1.2 Swiss francs for every euro, declaring it will buy as many euros as it takes to keep the value below that level.

“As the current challenges faced by the Australian economy are quite different to those faced by the Swiss, there is no coherent reason for the RBA to follow the lead of the SNB and lower the value of the Australian dollar,” the paper says.

“Calls for Australia to shift away from its longstanding policy approach and take action directed at lowering the value of the Australian dollar are misplaced.

Rather than helping the economy, the available options are likely to be either ineffective or result in macro-economic instability.”

The paper also rejects calls made this week by non-government members of Julia Gillard’s manufacturing taskforce for Australia to follow Norway in establishing a sovereign wealth fund to channel resource wealth into offshore investments as a way of lowering the currency’s value.

Treasury says the reason Norway’s currency has not appreciated greatly is because it ran huge budget surpluses, not because of its wealth fund.

Australia would have had to have run budget surpluses of 4 per cent of gross domestic product for the past eight years to have achieved the same effect.

The paper says that while the economy is going well, there is no case for lowering the value of the exchange rate. If unemployment rates rose, the Reserve Bank would cut interest rates, and this would also bring the value of the Australian dollar down.

The study rejects the views of the International Monetary Fund and the OECD that the Australian dollar is over-valued, saying their methods are flawed or statistically unreliable.

Treasury argues that although interest rates are not high by Australian standards, they are high relative to the near-zero rates elsewhere in the world.

Commodity prices are still at historically high levels. Australia is seen as a low-risk country at a time when the number of such countries is dwindling.

“While the Australian dollar is now well above its post-float average, it appears to be at a level consistent with what might be expected, given the changes in its fundamental determinants,” the report says.

…read more on-line …


Uren paraphrases on several points made in the Treasury Report throughout his story.

One usage – see highlighted text in the story above – claims that commodity prices are still at ‘historically high levels’.  This has to be an error in timing from when the data was collected as compared with when the data was published.

The report has a date stamp – August 2012 – and given the CRB Index chart presented by Guru in his previous post on the A$, and off the back of another David Uren story – [see republished chart below] – this would seem to be a contentious statement. [Please click on Chart to enlarge in a new window.]

This chart clearly shows the global commodities index as having peaked at around the time of the GFC implosion in late 2008. Any recovery off the lows generated have been Fibonacci related as commented on in the previous post – linked here.

Mr Uren’s creditability into his research assumptions needs to be exposed. His  story on this Treasury report has to be reviewed in the context of the following:

  1. The report was complied by non-Treasury staff – the following appears as a footnote to the report:

“The authors are from Macroeconomic Policy Division, the Australian Treasury. This article has benefited from comments and suggestions provided by James Kelly, Shane Johnson and David Gruen. The views in this article are those of the authors and not necessarily those of the Australian Treasury.”

  1. This indicates that Treasury has some distance from the report and then one has to ask – why has Treasury published the report as a part of their own ‘Economic Roundup’. Surely – Treasury’s responsibility on the A$ value is secondary to Reserve Bank monetary policy.One has to read the section of the Report referred to to grasp how insignificant and out of date these authors are on their assessment of the impact of the high A$ policy.   When I read this I began to pull my hear out – these baboons who really think ‘inflation’ is the ‘evil-genie’ they do not want to let out of the bottle, deserve their place in 90’s history.In ten years time they will adjust their thinking in a global depression and on the brink of a cataclysmic type war and say – we got the ‘inflation’ targeting wrong.Just read some of this bullshit contained within the report hereto:

    The economic role of the exchange rate: (page – 41-42)

    In an open economy, the exchange rate is a key economy-wide relative price that helps to maintain equilibrium across both the financial and real sides of the economy. The exchange rate — along with other variables such as interest rates, output and prices — adjusts to simultaneously equate demand and supply in the foreign exchange market,
    other financial markets, and goods and services markets.

    Most importantly, movements in the nominal exchange rate play a critical role in allowing the real economy to adjust to shocks while limiting the impacts on macroeconomic stability. As the currency normally appreciates (depreciates) in response to shocks that have a stimulatory (contractionary) impact on the economy, the exchange rate functions as an automatic stabiliser that helps keep the economy growing at a rate consistent with its non-inflationary level of capacity utilisation (full employment).

    For instance, a shock that boosts demand for Australian goods requires domestic prices to rise relative to foreign prices (that is, a real exchange rate appreciation) unless there is substantial spare capacity in the economy.[2] This brings demand and supply into line by shifting spending from domestic to foreign goods and by promoting increased supply of domestic goods. Similarly, a shock that reduces demand for Australian goods will require a real depreciation.

    Under a flexible exchange rate regime, where monetary policy targets low inflation, these relative price movements occur mainly through the nominal exchange rate. This is closely linked to the operation of monetary policy, as the exchange rate tends to appreciate (depreciate) when domestic interest rates rise (fall) relative to foreign interest rates. When the economy is strong (weak), monetary policy will be tighter (easier) than normal and the exchange rate will generally rise above (fall below) its medium-term level.

    If the nominal exchange rate is prevented from moving, the required real appreciation (depreciation) will instead occur through domestic prices and wages rising (falling) relative to foreign prices and wages. While exchange rate volatility can be costly, it is less costly for relative price adjustments to occur through the nominal exchange rate,
    for two main reasons.

    • First, higher inflation has economic costs. Greater uncertainty about future prices hampers longer-term decision-making and leads to higher real interest rates as lenders demand a premium for inflation risk. As interest income is taxed on a nominal basis, higher inflation also discourages saving by considerably reducing the real after-tax rate of return.
    • Second, real depreciation through price and wage deflation can normally be achieved only through an extended period of economic weakness and high unemployment. This problem is illustrated by the severe recessions currently being experienced in the peripheral economies within the euro area, which cannot achieve the real depreciation they need through the nominal exchange rate.

    Chart 1 confirms that the floating exchange rate has served as an automatic stabiliser for the Australian economy. The AUD has generally been high (low) relative to trend when domestic demand (gross national expenditure) has been relatively strong (weak). These cyclical variations suggest that it may be desirable for the exchange rate to be above or below its medium-term equilibrium at any time.[3]

    [2]Unless otherwise stated, impacts on the exchange rate are discussed on the assumption that other things are unchanged, including in the rest of the world. A shock with identical effects on Australia and our trading partners would not affect the exchange rate. Hence, the exchange rate only helps adjustment to shocks that are ‘asymmetric’.

    [3]The role of the exchange rate in equilibrium is discussed at greater length in Garton (2012).

    Comment on the chart as it appears in the report – I have extensive charting experience as a trader over some 30+ years.

    The Chart 1 referred to in the above text – is pure econometric in nature and design – it is not real in the real world post GFC. Nothing that was applicable in the explosive markets between 1970-2008 where every Western Nation grew their economies based on sovereign debt and consumer credit card usage – has relevance anymore.

    To exemplify this – look at a history of the US Stock Market – [DJIA] – since the 70’s and then look at the US debt growth in the same timeframe … [again, please click on images to enlarge in a new window.]

    These charts work together to point to the political and economic failings of the past 40 years – which had as an end resulted the 2008 GFC.

    The Western World is largely bankrupt – by the good graces of China’s demand for our resources,  Australia escaped the worst of the carnage.  At least that was the story in 2009 when the A$ dipped from almost parity to A$0.60c against the US$.  [Again see Chart below to see A$vUS$ – click to enlarge.]

    In that immediate period after the A$ fell off a cliff, that was the time to act on the A$ and peg it to the US$ in some form.  Australia would be almost a A$trillion dollars better off if we had of done so in the time since.

    We would be like China – with domestic demand and consumption so robust that the RBA could claim that Inflation was a problem and they needed to keep interest rates high – they would have had plausible reasons for doing so – but not based on what has happened since.

    The truth is they didn’t … idiots like Treasurer Swan and his Opposition counterpart Joe Hockey – two almighty dumbfu_ks when it comes to economic policy and understanding – believed that Australia escaped the ravages of the GFC.

    They will be long gone when Australia slides into a deep recession with all domestic industry grounding to a halt because the high A$ makes us too expensive for the rest of the World. Our slide into the EuroZone woes has already begun.  We just haven’t realised it yet.

    And then a Treasury report like this comes out in support of the high A$ policy, and a Financial Journalist like David Uren offers up his above published story.

    Meek and mild … more like he does not understand what it is that he does not understand.

    Have your say where it counts: – contact your Local Federal Representative via the links below and let them know how you feel about this, or any other topic that you feel strongly about – or you can just post a comment below and let off some steam.

    The EYE-BALL Guru …

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