• Don’t Be Wimps!

    “Don’t be wimps,” seems to be the advice on offer to exporters groaning under the burden of the overvalued dollar. “Lie back and enjoy it,” advises one sage. “Get on with it – there’s nothing you can do about it anyway,” says another.

    Such wrong-headedness would matter little if it involved only a handful of disaffected exporters. But it affects us all – as it has done for decades now, and will do for the foreseeable future.

    But surely there is nothing we can do about it? The rate for our currency – floating as it is – will be decided by the foreign exchange markets, and not by the policy-makers? The answer to that is a resounding “No!”

    There is no such thing as a clean float. The view that foreign exchange markets take of our currency will be influenced by many factors, most of them inevitably within the control of our policy-makers.

    The legendary Japanese housewife or Belgian dentist knows nothing of our economy; if they knew about our slide down the OECD tables and our perennial trade deficits and record overseas borrowing, they might have been less keen to buy our dollars.

    But what persuades them to buy our currency is the virtual guarantee that we will go on, as we have done for decades, paying them an interest rate premium. And, because so many are attracted by that risk-free windfall , and the demand for and price of the dollar therefore go up, short-term investors can usually expect a capital gain as well.

    To top it all off, they are confident – after nearly thirty years’ experience – that we will not change our willingness to keep on doing it, even though it is plain by now that the more we borrow, the higher the interest rates we have to pay, and the higher rates we pay, the further the dollar’s value rises, and the further the dollar rises, the less we are able to produce and export, and the less productive we are, the more we have to borrow.

    But isn’t the dollar’s recent rise (except against the Aussie – they have their own similar but more manageable problems) the result of high commodity prices? Yes, high commodity prices have helped to fan the flames, but the baseline was already established at an overvalued rate, where it has been for most of the past three decades. High dairy prices have simply exacerbated the long-term problem, making life even more difficult for other producers.

    But what about the up-side of a high dollar – the cheap holidays and the low-priced imports? Aren’t they worth having?

    Yes, there has always been an argument in the short term for overvaluation. Politicians are particularly fond of it, because it means that every overvalued dollar will buy more imports (or foreign holidays) than it should, so that people have the temporary illusion that they enjoy a higher living standard than they can really afford, at least until election day.

    But the price we pay for that illusion in the longer term – in jobs, services and living standards – is a heavy one, particularly if governments (with our three-year terms) try to maintain it from one election to the next.

    The high dollar means that our producers get less for everything they sell into international markets, including our own. Even our most successful enterprises and exporters find it harder to penetrate international markets, and when they do, their margins are decimated.

    With smaller market share and lower profits, they find they have less capital to re-invest in new technology, new capacity, new product development, new skill training, new sales promotion, new export support – all the bases covered by their successful competitors from overseas. So, job growth is held back, service levels fall behind, the living standard gap with Australia widens still further.

    Even our most successful exporters – currently our dairy farmers – find that the cream is blown off the top by the overvalued dollar, so that even in the goods times they have less to spend and invest in our economy than they would otherwise have.

    If the over-valuation, or the threat of it, persists for any length time, there is then a second-order range of consequences. Bright graduates cease to go into productive industry; they prefer to try their luck in asset speculation, finance and retailing – anywhere that is protected from foreign competition. People look to non-productive assets like housing as the place to make their fortune. Capital moves to wherever it is possible to make a quick buck. Our successful businesses move overseas or are sold to overseas buyers. Corporate headquarters move to Sydney or Shanghai. Does any of this sound familiar?

    In the longer run – a generation or more – the culture itself changes. Borrowing – in the belief that the word owes us a living – becomes a way of life. We lose faith in saving, investing, and producing goods and services for sale as a way of providing for ourselves.

    It was Einstein who said “Insanity is doing the same things over and over again and expecting different results”. Our results are not about to change any time soon.

    Bryan Gould

    21 June 2011

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