How will the US dollar crashing affect Australia? Any thoughts?
Reserve Bank of Australia cuts its target rate by 1%, the largest cut in 16 years!
That should let you know. I think the Australian dollar is toast. The only way the Reserve Bank can force interest rates down in the face of a 'credit crunch' is to flood the economy with its funny money i.e. government credit. Pure Keynesian claptrap.
The Australian dollar is the liability of the Reserve Bank, it is already collateralised by worthless bankers paper i.e. bank bills, mortgage backed securities etc and 'foreign exchange', probably US dollars and US treasury securities, this latest adventure will just devalue it further.
Get ready for petrol at $2+ a litre! Then again, I could be wrong.
Hi jc122872 - I have a slightly different response and believe that jdownie's response that the cut of 1%, the largest in 16 years, should "let you know" is, I believe, not necessarily correct. The step and its magnitude were unexpected and that is a plus in using this sort of tool in these sort of times. If you want to break a cycle you have to do the unexpected - in fact the cut suggests to me that the A$ is anything but toast and probably highlights the one positive that Aus has got going for it - that it can and has the capacity to move independently.
The simple reality is that there are few economies that will escape unscathed. In Australia's case with I believe something like 30% to 40% offshore borrowing exposure there is going to be an impact if financial markets tighten. However, the reality is also that, again as I understand it, the structure of the system is substantially different. We have:
- a central bank that is Government owned and financial systems that are subject to greater control and oversight (hasn't run as far off the rails);
- an operating surplus for the nation and higher interest rates which provide greater capacity for response/stimulus through either direct investment in the economy and/or interest rate reductions - witness what happened and talk of bringing forward the infrastructure fund expenditure;
- an ecoonomy that still has a relatively significant resource and agriculture component vs a service based economy that doesn't produce (this is perception but I believe it is correct - if someone want to check I would welcome it); and
- relatively speaking a significant and stable pool of investments in the form of superannuation contributions that can't be stripped out of the market in a hurry and are still providing a continuing shot in the arm - I don't normally cite Wikipedia but for this purpose it'll do - "After over a decade of compulsory contributions, Australian workers have over $1.177 trillion in superannuation assets. Australians now have more money invested in managed funds per capita than any other economy." And importantly it is growing at the rate $160billion per year - this is basically injecting demand and expenditure into the financial system;
- a mortgage and borrowing system that wasn't sold down the path of low docs loans and the like as far as the US (although I know some mortgage vendors who were pushing them hard and "won't save you");
- a system of mortgage ownership that makes it very difficult to just walk away from home property investments even if the asset value declines below market value;
So these are just some of the reasons why the impact in Australia will be different. Just how different remains to be seen. I won't jump on the bandwagon of saying it is "toast" just yet - but suffice to say that if there is stale toast in the kitchen and ants come to town you will still get a few on your good slice of bread. I suspect that the differences provide scope for a softer landing but the impact here will still be substantial due to the global nature of the economy we live in. Whether the impact will be result in inflationary or deflationary cycles or both remains to be seen.
In terms of preparing for $2/litre fuel - that's a certainty somewhere along the track - whether it get's sheeted home to the current financial crisis, a reduction in supply (peak oil) or exchange rate movements remains to be seen - and these all have potentially different time frame effects - and can I add that there are places in Australia where the price is so close to that already that the meaning is a little light on. In the short term the the crisis will take some of the sting out of international demand and I suspect that for Australia this will be matched in the short term by declining A$ values with negligible impact in real terms. In the longer terms we'll see which factor hits first recovery related demand (even under a new system) or peak oil.
What is certain is that whatever the impacts are - the cost of the US interventions:
- bailouts and various rescue packages (Fannie, Freddie, AIG) and those that are yet to come (read another US$2 trillion);
- physical interventions (Iraq and Afgahnistan); and
- current deficit budget policies
are likely to combine to result in the US taxpayer being settled with a significant intergenerational debt - unless the currency goes bust.
While the Australian circumstances are different the reality is that the country is part of a global eonomy and even the sort of exposure mentioned will have a signficant effect if/when the US$ fails. That's where the fireworks may start and the best we can hope for is an orderly move to another currency system that the world can rapidly realign with and which is based on a bit more morality, that it doesn't take too long to get there and most importantly that noone does anything truly stupid in the interim - unfortunately based on evidence to date I am most concerned about this last one.
Go to www.rba.gov.au and take a look at the Statement of assets and liabilities 3 Oct 2008. You will see that Exchange Settlement Balances (ESB) were at $9389million, the average for August was only $1715million (Bulletin Statistical Tables-Liabilities & Assets), a massive increase! There are no figures yet available for September.
These ESB are the claims of the banking system on the assets of the Reserve Bank of Australia (RBA), hence why they are listed as liabilities of the RBA. The RBA has been funneling credit, not money, into ESB in amounts not seen since 1997, in exchange for God only knows what worthless rubbish. This is the same 'hot money' as Chris refers to in his The Fed-Picture of the Day article, part of the liabilities of the Federal Reserve are claims of the banking system on its assets. It is credit expansion, pure and simple. Or in another word, inflation.
Interestingly, the 1997 inflationary episode was about the same time as the RBA sold two thirds of its gold reserves, at rock bottom prices, and the AUD began its decline against the USD.
The price of gold also hit a record in AUD today, I think a pretty good indication of where the AUD is headed. The RBA has also just expanded (once again) the range of acceptable collateral it will accept in return for 'loans'.
My apologies for only just now being able to get to your posting and the RBA site etc.
But back to the thrust of my posting - I don't deny there will be an impact in Australia - and that it will be significant - I just believ that it will be less so than in many other countries and that our capacity to adjust to a brave new world will probably be better as a consequence. I stand by my previous posting.
I have also had a look at what the exchange settlement balance is and the role and function of the accounts that make it up - specifically http://www.rba.gov.au/MediaReleases/1999/mr_99_02_Role.html As I see it, whether it's credit or money is largely incidental, I haven't interpretted the ESB in the same way and suggest you might wish to review as my conclusion based on the information is rather differnt and I would be interested in you expanding on your view.
The 10th October report which relates September suggests the figure has declined to 6,954 - a movement in the oposite direction that you asserted was cause for concern - by and amoutn of over $2b. To me that also suggests that one number in isolation is probably not terribly indicative of anything. It would be interesting to see a time series but I suspect the value and its volatility is probably related to actvitiy in the sector.
Regarding the observation that "... the 1997 inflationary episode was about the same time as the RBA sold two thirds of its gold reserves, at rock bottom prices, and the AUD began its decline against the USD." - are you claiming a link and if so what is the cause and effect. Certainly I would not be surprised if there was an inflationay episode associated with any decline in the AUD against the USD. So many contracts are written in USD, including fuel, that an exchange rate movement down will naturally have an inflationary impact - it's just how long it is sustained for. However, I have not been presented with or found any proof that the RBA's sale of gold was in any way linked to this activity. Timing and coincidence related to one event are not evidence - it's observation and nothing more - if you have some clear evidence I might change by position..
Regarding gold's price movements in the past week being an indicator of the health of the AUD - that's too volatile for me to comment on as the price has gone south again and I don't suggest that means your claim was either right or wrong. It's a relative thing and over a longer horizon on a smoothed trend line we might be able to get a link but certianly not on the short term movements.
Your statement 'whether it's credit or money is largely incidental' tells me you do not have a proper understanding of the modern monetary system. Whether it's money or credit is in fact the crux of the issue. Try www.professorfekete.com, there is much to learn there. www.mises.org is also a wealth of information.
Look again at www.rba.gov.au, Statement of Liabilities & Assets, you will see that ESB have 'inflated' to $9.727 billion, an increase of $2.773 billion in just two weeks. I think it is naive to assume that all this 'liquidity' will be drained from the financial system through the RBA's Open Market Operations. In the same period 'Notes on Issue' i.e. circulating currency, has 'inflated' $387 million, in just two weeks!
Anyway, if the Australian economy was so sound, why would the government be needing to shower 'money' on the people? This is the same helicopter that is currently dropping dollars on the US. We are heading down the same inflationary path as the US, UK and probably every other country that has a fiat currency, which is all of them.
As for gold, keep an eye on www.gata.org. Some interesting articles there.
With regard to jdownie's comments about the same helicopter being used to drop 'money' on the people (I assume the use of quote marks was ironic, as mine is) of Australia, the US, UK, et al, then surely the RELATIVE value of one to another will not move that much, even if they are all equally worthless?
For example, if the US prints $100 and the UK prints £50 and the exchange rate is $2 = £1, then if the US prints $10 trn and the UK prints £5 trn, the exchange rate is still $2 = £1 even though there is a lot more paper out there.
Surely the problem of inflation/hyperinflation only becomes an issue when one (or more?) becomes less valuable with respect to its peers. Hence the Weimar Republic and Zimbabwe, as two examples. Thus, if there is a concerted inflation by ALL the central banks in concert, the RELATIVE values will still hold.
It would seem to be to be self-defeating though, since if the US is now intending to print its way out of trouble and the European banks do the same, it's almost going to become a race to see who can print the most, first, to clear debts before the 'others' catch up - or catch on.
Where does this leave Gold? I wish I knew! Given the massive downward moves in the marets at the end of last week, what did Gold do? Came off ($100!) just as other commodities did, rather than a perceived store of wealth!
You are right, but just because relative values of currencies hold, does not mean they will hold relative to commodities, for example, the food you eat, the clothes you wear, the energy you use, the house you live in, all the things you actually need to live.
I'll leave it with this, so what if the Australian dollar does not become totally worthless?, petrol at $2 or more a litre is bad enough. As Chris states in latest article, it's the government punishing the prudent.
Also you indicated that a look on 3 October suggested ESB at 9,389m when the average for Ausuat was 1,715m but then casually ignored that my more recent look at the table on 10 October had a value of 6,954m. – a drop of 2,400 – yes it went up again – you noted to 9,727 – my point that it is highly volatile stands – give me a longer term time series than a couple of observations and I might be convinced to change my position – e.g. how do you know that the 1,715 in August wasn’t a low aberration etc. If you have more history put it up - I woudl be interested as my connection doesn't allow me to do a lot of hunting - if you haven't then maybe you could start tracking it!
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