A Bouncer Thrown at the Australian Dollar

A lack of creativity. That’s the criticism Australian cricket captain Michael Clark has faced for his violent sledge at bowler Jimmy Anderson. Meanwhile, there’s no lack of creativity in the war zone of economics.

The Australian dollar lost three cents in the last five days against the US dollar. (You’ll never guess where our family just left for on holidays.) RBA governor Glenn Stevens got most of the credit for the plunge. He ‘jawboned’ the currency down by threatening it. Well, he said he was ‘open minded’ about an intervention. That’s central bank speak for ‘get ready for a f’in broken arm then’.

Selling the Australian dollar even made it onto Goldman Sachs’ ‘Top Trades for 2014′ list. Here’s why:

‘…the AUD is facing structural headwinds from domestic dynamics, hence limiting its upside even in a better growth world, with policy makers there open a bit to further currency depreciation to help boost prospects at home and we expect another rate cut from the RBA, even as others consider a (slow) shift to monetary tightening.

‘Second, it is also largely a commodity currency and more levered to China-driven, commodity-driven growth impulses…with most commodity prices expected to moderate over the course of the year. These factors underscore our FX forecast for AUD at 0.85 by year end.’

Ah yes, China and commodities. Australia’s strengths could turn to weaknesses. Who’d’ve thunk it?

By the way, interesting figures about the size of China’s debt driven economic boom turned up on the blog ZeroHedge. This chart compares the increase in bank assets since the Lehman Brothers failure for China and the US. In short, the Americans have seen next to no loan growth, but the Chinese went berserk:

click to enlarge

US$15.4 trillion is a lot of debt to build an economy on top of. And the move in China’s economy certainly puts the Federal Reserve’s stimulus program into proportion.

Anyway, back to Australia. The RBA’s deputy governor Philip Lowe has a solution to the headwinds facing Australia from China and commodity prices. Spurred on by a brilliant idea coming from the planned G20 agenda, which Australia chairs next year, Lowe reckons we should invest in infrastructure. How? By raising tolls.


The idea is an old one. So called ‘public goods’ like bridges and tunnels don’t charge the user, they charge us all via taxes. Sorry, that’s wrong. They charge those of us who pay taxes. By making those who actually get the benefits pay the costs, the infrastructure should be used more efficiently. And efficiency should improve productivity, which is the source of economic growth and material wellbeing.

The problem with this is that we’ve been paying taxes already. And will continue to do so. Sure, if you want to cut taxes and introduce tolls instead, go for it. But we all know governments would end up having both. So introducing tolls is just another tax in the end. The money that would’ve gone to bridges and tunnels will go to something else. And productivity will go nowhere.

It just so happens that the Abbott government set up an inquiry into just why major construction and infrastructure projects are being held up. Interesting submissions were made by overseas constructions firms. Italian firm Salini reckons Australia’s tender process has ‘no equal in the world’ when it comes to complexity and effort. Yes, an Italian construction firm is criticising Australian bureaucracy. And it also said this causes higher costs down the road.

Meanwhile international steel companies reckon Australian firms OneSteel and BlueScope control the certification standards in Australia. They convince the government that complex, expensive and unnecessary tests are required to certify steel. The higher standards in Australia stop international competitors from bringing in their steel, once again increasing prices.

In other words, Australia’s construction industries are a cartel. And cartels only survive with government backing via ‘standards’, licenses and government contracts. And you thought Australia was innocent when it came to currency wars. It turns out we’re just clever about how we use tariffs.

On the other side of the trade balance things are interesting too. Our biggest banks are scaling back lending in resource boom driven localities around Australia. They’ve lowered the assumed rental return property investors can collect in these areas, which is a key metric in calculating borrowing capacity.

Clearly the banks have figured out the resource boom is in trouble. The thing is, Australia is just one big mining town, remember. The two speed economy, resource curse and all that. If the banks have it right on Chinchilla and Gladstone, they need to take a look at Melbourne and Sydney too.

But in those markets, foreign investors continue to pile in. The Japanese bank Tokyo-Mitsubishi is throwing money at Australian finance company AMP. The idea is to securitise around $500 million in mortgages and sell them off (before anything goes wrong).

On that note, we’ve been invited to speak at the third ever Australian Mises Seminar this weekend in Brisbane. You can find the details here. We’ll be speaking about Australia’s Secret Sub-Prime Crisis and how it could sink our banking system.

But what is the Mises Seminar? Well, it was set up by libertarians who became exasperated with the Australian think tanks that masqueraded as libertarian. It’s the home of dangerous ideas like ‘Why Democracy is Evil‘ and ‘The Bankruptcy of Mainstream Economics‘. Ok, so the second one doesn’t sound like much of a revelation.

This year’s keynote speaker is Jeffrey Tucker, a frequent guest editor for the Markets and Money Australia. Jeffhappens to work for the same international company we do. And he’s known as one of the most flamboyant and fun advocates of the free market around.

If you’d like to join us in Brisbane for the two day event, click here.


Nick Hubble+
for Markets and Money

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Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like.

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