The Downside of a Strong Australian Dollar in the New Brand of Capitalism

There are more signs that Australia is slowly being de-industrialised in exactly the same way America has been for the last 20 years. Whether it’s a good thing or not is a separate question. But there can’t be much doubt that it’s happening.

Case in point: Toyota. Yesterday the company warned of a “permanent decline” as a car manufacturer in Australia. The company disestablished 350 of its Australian workers, or about 10% of its total workforce. It cited lower export volumes to the Middle East as the reason.

It’s hard to believe Toyota can’t profitably make cars in Australia. After all, Toyota makes cars profitably in America and Japan. The Germans make cars profitably in Germany. In all three places, wages are high compared to emerging markets. Labour costs are one issue. But it’s hard to imagine they’re decisive. So what’s left?

Well, in Australia, the mining boom has attracted a lot of skilled labour. This might make it hard for companies like Toyota to recruit, train, and retain the work force needed to make cars. There’s a lot more money in the mines than there is on the assembly lines.

The obvious culprit is the Australian dollar. The news media tends to treat the Aussie dollar like a sports team. Hooray for parity! A strong currency, though, is not like a sports team. Having pride in the exchange rate without understanding what it means to the economy is…well…stupid.

Toyota’s Australian operation makes money selling cars to the Middle East. The trouble is export volumes are down. It’s probably not because the folks in Dubai are buying fewer cars. It’s because they’re buying cars not made in Australia.

This leads your editor to wonder which Australian politician will be the first to call on the Reserve Bank of Australia to intervene and weaken the dollar. As far as we know, no one’s done it yet. And after all, high interest rates set by the RBA contribute to the ability of the banks to borrow money on international markets. Australia has become quite the popular destination for foreign capital.

But foreign capital flows to Australia – whether through yen, dollar, or euro carry trades – don’t help Aussie manufacturers one bit. Capital inflows go into shares and currency and other short-term, high-yield investments. Capital intensive industries like mining and manufacturing have to go to the banks directly, or raise funds from shareholders.

The strange result is that the strong Australian dollar makes some export industries chronically uncompetitive. Not only does this make them bad investments, it damages their ability to remain a going concern. So the government has to transfer money it’s collected from resource companies and give it as a handout to car companies. Sorry Peter, but Paul needs this money more than you do.

If the government and the RBA instead joined the global currency war currently raging, the RBA would sell Aussie dollars and lower interest rates. Or, the government, like Brazil, would impose a tax on foreign capital entering the country. This would make vacations in Hawaii and New York more expensive for Australians. But it would also weaken the currency.

In the global currency regime we live in, weakness equals strength. George Orwell would be laughing. In a world awash with productive capacity, only the lowest cost producers can survive making things. Established industries in the US, Europe, and Australia are finding it very hard to compete.

Mind you, there are other ways to make a buck. High value-added manufacturers like Mercedes don’t have trouble distinguishing themselves in a global marketplace. But at the lower end of the value-added chain, it’s getting terminally hard to make ends meet. And what’s worse, once an economy loses the capacity and knowledge to make capital goods, it becomes dependent on others.

We’re riffing on this today because we can’t shake the feeling that 2012 is a transition year in markets. Everyone has been trundling along following the European debt saga. But the big back story is that the Western world is in the midst of a decade of deleveraging, accompanied by lower consumer demand and structural changes in the job market.

Australia is caught smack dab in the middle of that deleveraging process. But the open question is whether the BRIC economies, led by China, are ready to usher in a new world order with a new brand of capitalism. More on this tomorrow…


Dan Denning
for Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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4 Comments on "The Downside of a Strong Australian Dollar in the New Brand of Capitalism"

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Yes Dan, It is a short, slippery slide to the bottom and then a hard grind to pick yourself back up. The economists tell us that we have to be big to have the economies of scale to compete. My experience indicates that being big leads to higher overheads as more and more people try to manipulate there way to higher wages. There is also typically less inclination to make decisions so actions take longer. Then, when they are made, another team / department comes along with different ideas. I would hate to guess at how much money was lost… Read more »

1 for the money, 2 for the show … Indian gold for Iranian oil


Australia can lure Mercedes or BMW to produce car here!!

About time somebody brought this up, instead of the chorus of talking head cheerleaders for the AUD. The AUD at these persistently high levels will cause irreparable damage to the Australian economy, manufacturing (whats left of it), retail, tourism, overseas students and many other aspects and when you get right down to it is not assisting the mining sector either, as higher commodity prices caused by the tidal wave of central bank “liquidity” will ultimately dampen demand (even from the Chinese) and in the meantime the proceeds from the mining boom (which are collected from commodity prices negotiated in USD)… Read more »
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