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Wednesday, April 17, 2013 6:00 PM

Is Australia Next in Competitive Currency Debasement?

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Japan, the US, the UK, Switzerland, China, and even the EU with the LTRO (and upcoming hinted at rate cuts) are all in on competitive currency debasement.

The question at hand is "who is next?" How about Australia?

The Sydney Morning Herald reports RBA May Have to Cap Australian Dollar

Ross Garnaut, one of the authors of the float of the Australian dollar 30 years ago, warns that the Reserve Bank might have to consider intervening to push the currency down to minimise the recession he sees coming as the mining boom goes bust.

Professor Garnaut, of the University of Melbourne, says he would rather see the Reserve cushion the economy's looming fall and bring down the overvalued dollar by cutting interest rates to bring them closer to those of other Western countries.

While the International Monetary Fund forecast Australia will stay on its present track, with growth of 3 per cent this year and 3.3 per cent next year, Professor Garnaut warned that mining investment would fall from 8 per cent of gross domestic product back to its long-term average of 2 per cent.

He said the fall in China's use of coal in electricity generation last year was a forerunner of its shift to a new, less resource-intensive phase of growth, which would trigger a plunge in Australian mining investment. ''We can be pretty sure that we'll be [losing] 5 or 6 per cent of GDP from expenditure, and that's one hell of a fall,'' he said.

The bank's assistant governor for financial markets, Guy Debelle, told the Melbourne Institute that the way mining companies have financed the resources boom has contributed to pushing up the dollar's value to a level ''higher than one would expect, given [the] fundamentals''.

Dr Debelle said 75 per cent of the record investment by mining companies since 2003 has been financed from cash flow. As the mining industry is overwhelmingly foreign-owned, the Reserve estimates that 80 per cent of the investment was funded by overseas owners and lenders. He would not estimate how much it had raised the dollar's value, but ranked it with the massive foreign purchases of Australian government bonds as one of the key factors holding up the dollar's value despite the sharp falls in commodity prices and interest rates.
Interview with Ross Garnaut

In case the above interview does not play, simply click on the link at the top.

Mathematical Absurdity

I would like one of these economic illiterates to explain how Australia can cap the Australian dollar when Japan wants to cap the Yen, when Switzerland wants to cap the Swiss Franc, when the ECB wants to cap the euro, when the US wants to cap the US dollar, when China wants to cap the yuan and the UK wants to cap the British pound.

Competitive currency debasement mathematically cannot and will not work. Period.

The only possible outcome is economic distortion, mispricing of capital, and sponsorship of more bubbles. Yet economic fools everywhere sponsor the idea.

Mike "Mish" Shedlock

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