Monday, November 17, 2008
The Australian Dollar
As you can see from the chart, the Australian Dollar has also lost a third of it's value against the US dollar since August (and dropped precipitously against the yen too). This despite the Aussies running budget surpluses. The Australians were due to have a budget surplus of 1.8% of GDP in this tax year, it will be less than that as they are increasing spending to offset the downturn - but they will be in a fiscally sounder position than both the Americans and Japanese.
So why are they having a downturn and why is their currency falling? Hint: it's nothing at all to do with Gordon Brown! There is a global recession going on that is effecting every country on earth. As for currency movements, hot money tends to overwhelm movements due to trade or government borrowing. (If you doubt this, ponder on the fact that the pound's value against the dollar is exactly what it was in 2002, when the Labour government was running the biggest budget surpluses since the 1940's).
Since 2002, hedge funds and other traders have borrowed in dollars and yen (which had very low interest rates) and invested in Europe, Australia, New Zealand, and the emerging economies (Brazil, South Africa etc). These loans are being called in, money is also being withdrawn from hedge funds by investors, so they are selling assets abroad (causing falls in the world markets), and then repatriating the money to pay off their loans - which is why the dollar and yen are rising.
Now, every world finance minister and their opposition counterparts know this, apart from George Osborne, who is under the impression that the forex markets can actually be controlled by governments!
No one can control the forex market, it's too big, there is too much money in it and too many players. Those who direct fiscal and monetary policy with an aim to target a certain exchange rate are doomed to failure, as Nigel Lawson and John Major proved so expensively.
If exchange rate movements make you queasy, you can always take refuge within a fixed rate system like the euro. But if you want a floating currency, you need to accept that it will move all over the place, you need to accept that you will have no control over it and you need to have enough nerve to not intervene or panic about it.
The trouble is Tories hate Europe, so don't want the euro. But they are also the biggest panic merchants out there! We saw that with Lawson and John Major, and now with Osborne. But panic and intervention combined with a floating currency system is the worst of all worlds. Intervening in currency markets doesn't work. Crafting fiscal and monetary policy with the aim to target the exchange rate instead of domestic consumption, destabalises economies.
The Tories have clearly learnt nothing from the disasters of Lawson shadowing the D-mark and John Major's ERM experiment. But we should be grateful to Osborne for letting us see now, before the general election, how clueless he is.