Tuesday, October 19, 2010

More on the Dollar

Two articles today provide different slants on the rise of the dollar the first provides an international focus and is by Peter Hartcher. He argues in "We may have landed booby prize in the currency wars" for the importance of US Dollar weakness in the Aussie rising story:

Countries everywhere are trying to cheapen their currencies to win a competitive edge over each other in world export markets. It's classic "beggar they neighbour" stuff.
By doing this, a country seeks advantage at the expense of others, trying to push its economic misery onto its competitors. When a number of big countries do this at once, you have a "competitive devaluation", a race to the bottom.
A rising dollar according to Hartcher is a "perverse victory, an apparent win for national pride that qualifies us for economic punishment ... overwhelmingly, the Aussie is strong now because the US dollar is weak."
While the Aussie has gained 10 per cent over the US currency over the past 12 months, almost all other currencies have risen against the US unit, too - India's by 2 per cent, Canada's by 3, Sweden's by 5, South Africa's by 7 and Japan's by 10.
A number of governments are desperately trying to resist this tide, fearing that their exports will lose a competitive edge as their currencies rise - South Korea, Taiwan and Japan have all intervened in the market to try to cheapen their money.
The main story, however, is China which is not trying to devalue its currency but prevent it from rising too rapidly.
The Chinese currency is already undervalued by every measure, yet it cannot rise because it is fixed by Beijing's decree. Other capitals, especially Washington, are livid. The US Congress is afire with threats of trade sanctions against China for "stealing American jobs" by "artificially manipulating its currency".
The US Treasury secretary, Timothy Geithner, cannot accuse China of joining the competitive devaluation, but he has accused it, as one commentator put it, of setting off a cycle of ''competitive non-appreciation". The meeting of world finance ministers and central bankers two weekends ago for the IMF annual meeting was supposed to deal with this problem. It failed.
The US, despite popular perceptions has powerful options of its own to deal with the problem, as Hartcher points out:
Last Friday Ben Bernanke, the chief of the US central bank, the Federal Reserve, signalled that he was preparing to send a new flood of free money into the country's economy, under the innocuous technocratic name of quantitative easing of money, or QE.
This is an admission of economic desperation from Washington. The Fed has already pushed interest rates to near zero. It has already sent out one flood of free money, called QE1, where it bought up $US1.7 trillion worth of mortgage and other debt, in effect pushing money into the hands of the sellers in the hope they will invest or spend it to simulate the economy.
Now Bernanke was announcing QE2. By hugely increasing the number of US dollars in circulation, this will push the greenback's value down further. It was this speech of Bernanke that sent the US dollar so low as to match the Aussie on Friday. 
Dr Ken Courtis, an international economist and former vice-chairman of Asia for Goldman Sachs, said: "The US is doing a lot of screaming about currency manipulation, but it's the one doing the manipulating, and no one has called them on it."
QE2 is just another way for the US to devalue its dollar to pursue export advantage over others. Courtis says: "The US public and private debt is running at 400 per cent of GDP. It's naive to expect that amount of debt to be repaid."
By devaluing its currency and by increasing its inflation rate, the US is trying to "melt away some of its debt at the margin", Courtis says. "This crisis is really the breakdown of the post-Bretton Woods international monetary system" as the US dollar's reserve status comes into question.
With the price of gold rising and private banks reopening gold vaults to accept investors' gold for the first time in two decades, "gold is the precursor", Courtis says. Increasingly, investors will store wealth in hard assets, including resources, real estate and agricultural land. Australia may have won the booby prize in the global currency war.
But, Courtis says, it will be well placed in this new world, because it has plentiful supplies of the most desirable hard assets.
QE2, Courtis jokes darkly, should be renamed Titanic 2.
A more sanguine take on a rising currency comes from Peter Martin, one of Australia's best economic commentators. In "Sit back and enjoy the wealth a higher dollar brings", Martin compares a rising dollar to a pay rise for all Australians. Although he doesn't note that like all pay outcomes in Australia some do much better than others.
NEVER let anyone tell you the high dollar is a bad thing. Unless you're the kind of person who wouldn't want a pay rise. The sharp increase in the dollar is boosting the buying power of every dollar we have.
If this is making you feel uneasy because the wealth seems unearned, lighten up. When our dollar bought less than half of what it does now (US47.75c in 2001) we accepted the impoverishment with grace.
As Martin points out the rise in the dollar - or increased international buying power has been earned through massive price increases in coal and iron ore prices (coking coal up 60%, iron ore up 100%)
Our miners are shifting more of the stuff as well, meaning the buyers (often in China) need to swap a lot more of their currency into our currency to complete the transaction, pushing up the price of our dollar and making even those of us who don't mine better off.
A higher dollar helps to distribute mining generated wealth throughout the economy, as do increased royalties and taxes, dividends and share prices, and industries that service the mining industry. Martin likens this (tongue in cheek) to "automatic socialism - spreading the gains (just as a lower dollar helps spread the losses when our export earnings fall)."

But there are losers, even if Martin gives mainly short shrift to their arguments saying that concerns have diminished over time.
The losers are traditionally said to be Australia's manufacturers, who compete with imports or try to sell their products overseas.
In a direct sense manufacturers also benefit from the higher dollar. Every dollar a manufacturer earns, every dollar a manufacturer has already saved, buys more. But in the same way as having a higher wage might put a job seeker at a disadvantage when it comes to getting or keeping a job, suddenly charging a higher price when expressed in foreign dollars will make it harder to sell your product. At home you will be competing against suddenly more affordable imports.
This is partly true but really a higher dollar is mainly negative for the tradeable manufacturing sector. Martin's argument that it matters less now because there are fewer manufacturers than there once was is also slightly comical.
It's less of a concern now, in part because there's less manufacturing than there was. Most of the Australian textile and clothing firms that used to compete with overseas suppliers have shut up shop. Mitsubishi has stopped making Australian cars.
And the manufacturers that are still here are increasingly importers as well as exporters. Holden imports parts for the cars it sells here and exports. Many firms are now so integrated across borders that it is hard to tell whether they export, import or just produce.
In Parliament yesterday Treasurer Wayne Swan rattled off the usual list of supposed victims of the higher dollar, ''trade-exposed industries such as tourism, manufacturing, agriculture and education finding it tougher to compete in global markets''.
He then points out the agriculture has also benefitted from higher prices for many products and the end of the drought might have come at the right time for many farmers. Indeed agriculture is a factor in a rising dollar
Official forecasts have the global wheat price up 20 per cent this year. The volume of wheat leaving the country will be up 33 per cent. The global beef price will climb 5 per cent, the global wool price 2 per cent. Agriculture is likely to join mining as one of the causes of the higher dollar in the year ahead rather than languish as one of its victims.
Sadly he is correct in pointing out that the education sector (Australia's third largest export) will be badly affected.
Education will do very badly. But it was set to do badly anyway. Bad providers of education have damaged the brand. The higher dollar will make the poor service the industry provides to overseas customers all the more apparent.
One wonders whether Asian students will still come to Australia if the dollar is worth $1.20 US. While the  education sector has made some mistakes, other parts of the economy will be badly affected through no fault of their .
Broadly, anyone who sells a service without a significant import component will find their product less attractive.
Tourism providers are a good example. (Although not the international airlines. We left the country an extraordinary 600,000 times in August, up 13 per cent on the year before.) Artisans and computer programmers are other examples.
Australians making musical instruments or software, for example, will find themselves undercut - unless they cut their prices. I am not being flippant. No one likes to cut their prices (except smart firms such as Coles and Aldi who have discovered there's money in it.)
But quoting a constant US dollar price on a website is one way to do it with dignity. Another way is to do it knowing that although you are charging fewer Australian dollars each is worth more.
Trying to stop the dollar climbing - trying to stop Australians becoming more wealthy in a mining boom - is next to impossible.
But if you want to try, Norway points the way. It imposes a petroleum super profits tax of 50 per cent and stores the loot offshore where it can't push up the currency.
It has succeeded in not giving itself a pay rise.
Now I know that Martin has in the past supported the Norwegian model so either he has had a change of heart or this whole exercise has been slightly tongue in cheek. We should be thinking about the future and putting off some of our so-called pay rise to benefit current and future Australians. We need to occasionally think that we are producers as well as consumers and while the consumer in us always wants lower prices, we need to produce to be able to consume. This doesn't mean closing ourselves off, rather it means simply thinking of innovative ways to increase our productivity and economic diversity.

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