Once again Leigh Harkness joins us for a guest post. This time he is analysing the floating exchange system and the mining “investment” boom.
There is a mistaken belief that we are experiencing a mining boom in Australia. But if you had listened to the Treasurer’s Budget Speech, you would have heard that we are experiencing a mining “investment” boom, not a mining boom.
We cannot experience a mining boom because the floating exchange rate system ensures that international trade does not create any additional money in the economy. Money is a measure of our income. If no additional “money” is allowed to enter the economy from trade, it means that no additional “income” is allowed to enter the economy from trade.
The only additional income we can receive from the expansion of mining is when companies borrow funds to invest in mining. The more they borrow and spend, the greater the “investment” boom.
Financing organisations may proposer by lending to finance that boom, but that hardly benefits the remainder of the economy. For many people, it has made things worse. The growth in mining investment has already led to cuts in government spending and threats of higher interest rates.
As we have seen, the growth of bank credit increases international debt. Therefore, the mining “investment” boom also means a boom in foreign debt. This is a perverse outcome.
In the Budget Speech, the Treasurer recognises that “for some, talk of an investment boom seems divorced from reality.” This is because the growth of exports has inflated the value of the Australian dollar, further tilting the playing field for competitive international trade against Australian industries. The high dollar makes imports cheaper than Australian products thereby eroding away Australian industries and jobs. Also, the high dollar undermines the incomes of traditional exporters, such as farmers.
Some economists claim that Australian industries must raise their productivity for the economy to prosper. But Australia’s economic problem is not a “hardware” problem. Such advice is a backhanded method of blaming the victims of the floating exchange rate system for their demise. Australia has the skilled workers and the resources to be a prosperous economy. It is the monetary system, or “software”, that is preventing our economy from prospering from its export growth.
The government is aware that there is something wrong with our monetary system. The first recommendation of the Senate inquiry into bank competition was for an independent broad ranging inquiry into our financial system.
But more businesses are going to fail while waiting for yet another inquiry. Under the current exchange rate regime, most Australians would be better off leaving the minerals in the ground rather than exporting them.
Other high exporting countries, such as Norway and Singapore, have already modified their exchange rate systems to allow their economies to prosper from trade. We, too, need to change our system. We should prosper, rather than suffer, from our mineral wealth.