No point of intervention for currency

Find below footage of Wayne Swan speaking with Bloomberg this afternoon. His responses include deeply contradictory commitments to a diversified economy and an Australian dollar free to appreciate for ever. Apparently he “would never want to see our economy become too excessively dependent upon one country or one commodity”!?!

Comments

    • Apologies for flying off the handle a bit there. But he will probably be going down as one of the worst treasurers this country has ever seen IMHO when all is said and done. Costello and Keating I know cop alot of flack, but atleast they had a backbone (Keating more than Costello). Swan though….

      And this is coming from someone who leans towards Labor (though have been pretty fed up of the party of late of course).

  1. “We are committed to market based exchange rates”.
    Sounds like someone reciting a faith based mantra rather than a considered position. Has anyone got links to anything where Swan and co. justify this belief? I’d really like to hear what their rationale for abandoning a balanced economy is.

    Oh, and seeing this is my first post here, I’d like to congratulate MB on a sterling job

  2. Wow. Good interviewer there – asking the questions straight.

    Just a quick comment. How can you be committed to market based exchange rates when everyone else in the market is heavily manipulating their own currency to their advantage? Does he not realise there is a currency devaluation competition happening globally?

    Of all the actions the government could take at the moment to help Australia maintain some kind of diversified economy, intervening on the currency is probably the best thing to do.

    But governments (politicians) can turn on a dime, so perhaps we can expect an announcement next week about currency intervention.

    • ‘How can you be committed to market based exchange rates when everyone else in the market is heavily manipulating their own currency to their advantage?’

      Without an adequate explanation can only assume dogma: ‘We will not act in any way to contravene our WTO obligations (Gillard) or market determined exchange rate (Swan)’. Concurrently, other nations are actively intervening in various markets to protect national interest. Only in Australia…

    • Perhaps Swanny can see the futility in intervention. The Swiss and Japanese have tried without any great success and they have way more fire power than we do.

    • who do you think hurts more long term out of currency intervention… its the same argument as people who complain about competition from foreign companies that are subsidised by foreign govt… who suffers more, the Australians getting products at below cost, or the foreign govt running a company at a loss?

      • We also can’t buy their products unless we too also produce something to trade – which is more difficult with a higher currency. Otherwise, our consumption of their cheap products must be partially funded by debt.

  3. If you guys need a little comic relief after that interview, just remember Mark Twain: “A (gold) mine is a hole in the ground
    with a liar standing next to it.”

  4. It will take a lot of self-discipline to keep this comment civil.

    His point about fiscal policy is a joke. Fiscal policy is in good shape when compared to the sovereign trainwreck in the rest of the developed world. But its in extremely bad shape when you consider the positive terms of trade and the fact our central bank thinks its necessary to have the highest interest rates in the developed world.

    His point about the currency belongs in another place and another time (probably another planet). Only a long cold winter in Canberra and a healthy dose of head in the sand could possibly inspire that level of detachment from reality.

  5. When a government directly manipulates their currency, the exchange rate becomes a political issue. The importers will want it to be high, exporters will want it to be low, and you get into all kinds of problem with your trading partners.

    Imposing capital control and limit the inflow of money will help, as will a mining tax which directs the proceed to a soverign wealth fund. Under the current political climate thsoe solutions are not possible. The best we can expect is a ‘hands off’ approach as the government can no longer act in the national interest. The ‘rentiers’ are in control right now.

  6. Fair points, although I am no longer persuaded of the possibility/functionality of a SWF. MRRT has been negotiated and proceeds will be allocated elsewhere.

    You are quite right though, currency intervention that advantages one segment of the economy, will disadvantage another. Interesting dilemma.

      • How many times has it got to be shown that mining is NOT hte problem per se????????????????????

        You’ll know we have the right exchange rate when you no longer have to borrow money to pay for the day to day consumption.
        Anything is better than what has been happening in Aus for the last 40 or 50 years.

        • Who said mining was the problem per se? I’ve written extensively on the benefits of the mining boom. But, in the long term, it is also a problem.

          More to the point, it’s also an opportunity to reframe Australia’s CAD.

          Mining tax + offshore SWF + lowered property subsidies = lower interest rates and dollar + higher savings + just as high external sector investment + lower unproductive investment + lower spending + no CAD.

          • You’re going to wipe out a few % of GDP CAD by imposing a mining tax and setting up an offshore SWF??

            Despite repeated calls for some numbers you decline to provide any to support this assertion.

            Mining makes up, what 8-9% of GDP? Just how much tax are you proposing?

            As for lower interest rates, how much lower will they be under your plan? If I am a carry trader how much of my 450 basis point margin are you going to wipe out?

            If you seriously believe this stuff why not show some numbers to your readers? How much tax would be needed? How large a SWF would be needed? How long would it take to get a SWF of sufficient size? How much lower will interest rates move? How much lower will the currency go?

            Australia has had a CAD for 49 out of the last 50 years. That seems structural to me. Until you can show us, with numbers, how a several % CAD could possibly be wiped out your assertion is not credible.

          • Mining makes up, what 8-9% of GDP? Just how much tax are you proposing?
            .
            What is the relationship between % of GDP and the CAD?
            .
            I thought CAD had something to do with the amount of interest+dividend payments that goes out because of the huge amount of foreign capital that we borrow to fund our leveraged house purchases and to dig holes in the ground.
            .
            Mining tax + offshore SWF + lowered property subsidies
            .
            Mining tax will slow down foreign capital investments in mining.
            .
            SWF will take capital out of the country and the resulting investment can be used to establish a dividend contra-flow back into Australia reducing the CAD.
            .
            Lowered property subsidies + lower interest rates will reduce the mis-allocation of capital into housing and redirect some of that into mining + other industries.

          • Mav, you linked to an RBA paper on SWFs. What was your take on the RBA assessment of the pros/cons. There were a number of questions as to the viability of any SWF, I recall it appears difficult to enact/achieve and benefits (if accrued) only meaningful with ongoing conservative fiscal policy by government etc…very little obvious enthusiasm from the RBA it would seem.

            Clearly you felt inspired.

          • What was your take on the RBA assessment of the pros/cons.
            ..
            very little obvious enthusiasm from the RBA it would seem.

            .
            You are skating on the same thin ice of “appeal to authority” that you usually accuse Chris Joye of.
            .
            I recall it appears difficult to enact/achieve and benefits (if accrued) only meaningful with ongoing conservative fiscal policy by government
            .
            Yes, it is difficult to enact prudent fiscal policies in a political economy – most part of which is due to the powerful mining lobby.
            .
            So basically, you make it difficult and then turn around and say it is difficult!

          • Mav, I have very rarely spoken of Mr Joye, apart from suggesting his feathers have been ruffled by MB. Not sure what you are referring to there.

            Government fiscal responsibility or otherwise has nothing to do with the mining lobby. Your attempts to ‘blame’ mining for all conceivable ills will get tiresome.

            What did you make of the RBA paper?

          • Your attempts to ‘blame’ mining for all conceivable ills will get tiresome.
            .
            I don’t care how tiresome I get. It would help if you can give a better rebuttal than that.
            .
            What did you make of the RBA paper?
            .
            I agree with the RBA paper -conservative fiscal policy is difficult to implement.. in a poltical economy, caused mainly by rentier lobby groups having undue influence over fiscal policy.

          • Dr Nick,

            Assuming you accept that the mining boom causes the high currency and interest rates. Then it is not a big leap of logic to conclude that diminishing the boom would cause both to fall somewhat. How high a tax? High enough.

            As for the CAD, you’re using the same circular argument you always do. That because we have a CAD, we can’t save.

            I agree the CAD is structural but right now we have record terms of trade so your 50 year argument is redundant. The whole point of changing fiscal policy is to shift the structure so that saving and investment patterns change.

            DE has made the case that the CAD is largely driven by housing investment, I needn’t repeat it.

            Let’s agree to disagree. I’m sure both of us have better things to do than argue in circles.

          • Why don’t we stop attacking miners and go after the actual source of the problem?
            If mining was the (a) problem we would be running a CAS.

            So what is wrong? Obviously we consume too much. REAL after-tax Interest rates are ALWAYS negative…this is REALLY stupid. So people do the rational thing and borrow and consume. We don’t save and invest.
            But…higher interest rates, under the current stupidity, would mean the A$ rises even further. This is a seriously insane concept which can only be understood in terms of the Pitchford thesis which was itself so far removed from reality.

            A tax, levied on a specific industry at a specific time that contravenes the contracts and understandings under which the investment was made, is confiscation of private property.
            We’ve done it to farmers with trees so we can have a Carbon Tax/ETF (this was dreamed up by one J Howard!)
            There are other examples.
            We are getting a way too loose attitude to confiscation. We MUST operate based on the principals on which our society is based. Otherwise the place is doomed………….
            More than an economic problem we have a moral problem and confiscating the property of those who have invested in mines is just going to make that moral problem a whole lot worse.
            Further the mining tax is NOT going to solve the problem we are trying to fix.

          • As for the CAD, you’re using the same circular argument you always do. That because we have a CAD, we (can’t) DON”T save.

            That is true by definition! If we are running a CAD the joint Govt and Private spending is in excess.

            Look at what will happen. So you are advocate lower interest raters or at least seeing it as a desirable outcome.
            So we destroy foreign mining investment in a fit of jealous pique. On the other hand we do noting to rein in consumption. Presume you get, in the short term a lower dollar, with rapidly increasing FOB prices out of China, combined with already high (about 6%) domestic inflation, we get real after-tax interst rates that are more exaggerated than at present. This means greater consumption and a higher CAD especially combined with a lower revenue from mining.
            In addition, you get a higher CAD because instead of reinvesting profits the foreign owners repatriate dividends rather than re-invest. Sure this gives a lower dollar but…how confused is this????

            You have to fix the structure of the economy.
            You have to actually fix what is actually wrong not just attack a particular sector.

          • A tax, levied on a specific industry at a specific time that contravenes the contracts and understandings under which the investment was made, is confiscation of private property
            .
            If the tax violates the law of the land – the constitution – which guarantees protection of private property, miners have legal remedy. They can take the dispute to the Supreme court and plead in front of judges who are experts in constitutional law.
            .
            (I don’t know what you’ll do if the court disagrees with your assertion.)

          • “SWF will take capital out of the country and the resulting investment can be used to establish a dividend contra-flow back into Australia reducing the CAD.
            .
            Lowered property subsidies + lower interest rates will reduce the mis-allocation of capital into housing and redirect some of that into mining + other industries.”

            That is plain non-sensical.

            One other thing as I’ve argued previously. Your model of how foreign debt arises is not correct.

            As Keen shows the Banks can just create money (credit). Only if a Bank was losing market share would it need to replenish its reserves.

            Banks lend money for houses. Much of it comes back to the Banks as deposits except some of it arrives at my place as people buy imported products. When i go to buy the imported products the Bank then needs to borrow the Foreign Funds. Hence the CAD, Foreign Debt et al.

            Repatriation of interest and dividends is now certainly a major part of the CAD. It is not the CAUSE of the CAD. The cause of the CAD is over-consumption or under-production if you like.
            The interst and dividend repatriation is just PAST over-consumption coming home to roost!!!!

          • That is plain non-sensical.
            .
            Am I just supposed to accept assertion at face value?
            .
            Are you saying our banks do not borrow from overseas credit markets? Even some miners and property developers borrow capital overseas and invest it here.
            .
            Repatriation of interest and dividends is now certainly a major part of the CAD. …….The interst and dividend repatriation is just PAST over-consumption coming home to roost!!!!
            .
            Yeah, So? Reversing the flow of dividend + interest is reversing the CAUSE of the CAD (which is over-consumption and under-production.)

          • H&H the reason I keep asking for numbers from you is that I don’t think your proposed solution scales with the problem, and you clearly seem to have no grasp of the relative scales.

            I haven’t said that a CAD means that we can’t save, you know I haven’t said anything like that, this is just willfully misinterpreting what I have said. People on aggregate can choose to save anytime and do e.g. witness declines in consumption, deleveraging in economies etc.

            I’m not sure how a record terms of trade makes the CAD argument redundant because regardless of the terms of trade the CAD still exists. Your comment about this is quite bizarre actually.

            I’m happy to agree to disagree with you but I don’t see how such an agreement precludes you from having to support your assertions about an SWF. e.g disagreeing with me, and/or if I am wrong, doesn’t make you and your model right. You need to support your model with some data showing how it will work rather than just provide assertions and expect everyone to take that as indisputable fact.

            (And actually I was suggesting that the CAD was largely driven by housing investment and have been for awhile, e.g. interest payments on offshore borrowing for ponzi housing. I think from memory DE was siding with Leigh Harkness that the CAD was due to rising imports from credit expansion …as of an article that LH posted here early August. I was trying to convince DE of the housing angle in comments to that article.)

          • Mav
            The very reason they are going for the tax side is that it IS THE way they can legally confiscate property in this case.
            It doesn’t make it right.

            We CHOSE not to invest in our own mines and nation.
            We CHOSE to over-consume
            We CHOSE to run CAD’s rather than save and invest

            We all had the opportunity.

            We made a free choice.

            Now because others did invest in mines, while we were buying TV’s and imported carsd, we want to confiscate their investment.
            Tell me how that is right?

            Mav I think what was referred to as tiresome is that, no matter what anyone writes in rebuttal, you don’t seem to bother reading or thinking about it and just come out with the same old hate the miners routine
            JMO of course.

          • Flawse: Haven’t read the Keen article you refer to for a long while (he wrote it several years ago right??) but don’t recall any disagreement with it.

          • The very reason they are going for the tax side is that it IS THE way they can legally confiscate property in this case.
            It doesn’t make it right…

            .
            ..in your opinion. I am afraid individual non-judicial opinion matter very little in matters of law, especiall property rights. Everybody has their own opinion on what is fair and what is right.
            .
            We CHOSE not to invest in our own mines and nation.
            We CHOSE to over-consume
            We CHOSE to run CAD’s rather than save and invest
            We all had the opportunity.
            We made a free choice.

            .
            Speak for yourself (or for the vast majority of the baby boomers). Just because somebody from the distant past made some choices does not mean the present or the future generations need to suffer the consequences.

          • Do you even remember saying..
            .
            We MUST operate based on the principals on which our society is based. Otherwise the place is doomed………….
            .
            Then you admit the mining tax is legal. So it seems you want our society to operate on what YOU think are just principals.

          • Negative REAL AFTER-TAX interest rates NEVER repeat NEVER allocate capital efficinetly. Interest rates that are more negative than ever before are unlikely to fix this situation.
            You can only reverse over-consumption by saving. If you have no saving then lowering interest rates will hardly likely, in the medium term at least, lead to higher savings.
            As I pointed out the Mining Tax and SWF that results from it will be unlikely to reduce the Divs and interest paid overseas. In the end it would. In the meantime you’d have an exit of interest and dividends instead of being reinvested here (as most of it has been in the past)
            Yes money is borrowed overseas for investment one form or another particularly by non-deposit taking institutions.
            However if a Bank is free to create the credit, and then takes the deposits, effectively the overseas borrowing occurs to plug the hole.
            DE and leigh are right in this regard.
            You are also correct in that overseas borrowing, and foreign ownership, IS a factor in keeping the dollar high and allowing the CAD to continue. That has been my tenet all the time.
            Carry trade may come and go with its disastrous consequences of both destroying industry and then plunging the whole economy into a credit and production crisis.
            However, longt-term it is the Overseas borrowing and sale of our assets that ALLOW us to continue to over-consume.
            Credit creation, continuously negative interest rates and the resulting zero savings, cause the over consumption and CAD.

            You argue for every seemingly EASY way. Tax the miners, lower interest rates and change the capital gains tax laws and all will be at peace with AUS? There is no easy way out of this. The choices are damned difficult and the power groups (inlcluding the PS, powerful unions, powerful groups such as lawyers, and any other monopoly or oligopoly,in the country will not want to take their share will not want to be subject to those difficult choices.
            So looking for easy ways out and implementing that sort of policy will just result in all the pain being felt by the few including small businesses and those who work in them, the average Bob and Sheila in the street, farmers etc etc.

            One more thing.
            “Yes, it is difficult to enact prudent fiscal policies in a political economy – most part of which is due to the powerful mining lobby.”
            Singling out the mining lobby is just another symptom of the narrowness of your vision.
            Almost everyone, especially the younger generations now vote according to ‘what’s in it for me?’
            That’s why it is difficult. it’s all gimme gimme gimme. nothing about what is good for the country.

          • Flawse, I’m with you. The issues are decades in the making, as you describe. Mining is not the problem now. Never has been. The heart of the problem lies far deeper than some hole in the ground. Any further tax on the resources sector would border on appropriation.

            I wish you luck getting through to the anti-mining brigade. Bit like the Greens, enjoy all the comforts of modern life, international travel, motor vehicles, high speed rail, computers, everything really – without consideration of the source.

          • Sorry to interrupt the self-congratulation society, but you guys need to go and look up the definition of “windfall profits”.

            I resisted the RSPT on principle because its virtual shared equity structure was too reminiscent of appropriation.

            However, that does not mean that the windfall profits shouldn’t be taxed. They absolutely should, especially since to not do so damages other strategically important areas of the economy.

          • Singling out the mining lobby is just another symptom of the narrowness of your vision.
            .
            Ok, let me broaden it by saying all the other lobby groups and the unions are responsible for the political economy. Happy now?
            .
            You argue for every seemingly EASY way.
            .
            And you argue for doing NOTHING, because according to you, it is all very difficult, as it’s been gimme gimme gimme for decades and will be gimme gimme gimme in the future !! As I said, speak for yourself.
            .
            In my book, doing nothing is easier than doing something easy.

          • Self congratulation society?

            Perhaps I should clarify my position – no additional tax on the resources sector should be imposed. MRRT has been negotiated, that should suffice. If it fails to make it into legislation, I will not shed a tear (ditto the carbon tax Bill).

            Perhaps those that are demanding more tax on the resources sector should clarify whether they in fact mean a tax additional to the MRRT.

            And on the question of windfall profits (an arbitrarily determined much disputed concept ) vigour for its application does not appear to apply across all sectors.

          • H&H “However, that does not mean that the windfall profits shouldn’t be taxed.

            The states own the resources.

            They currently charge a royalty for using the non-renewable resources.

            In the event of windfall profit made by mining companies — assuming we can define what they are and how they are to be measured — the states, as the owners of these nonrenewable resources, should increase the royalties. The federal government should keep out. If it were to be agreed that miners should pay more then some sort of algorithm for setting royalties based on cash cost and market price seems reasonable to me. Also a royalty based payment is far more transparent than whatever the Feds come up with via the company tax system.

          • FWIW, I have argued that royalties based system is preferable and far better reflects the compensatory factor for use of non renewable resources.

            But that is a whole other kettle of fish!

          • In what s ense am I not registering the scale of the problem, Dr Nick?

            I am proposing a radical structural overhaul of Australia fiscal regime so that it no longer favours so strongly the pre-modern business of mining and post-modern business of trading houses. Instead it will give the modern (industrial) economy a chance to grow too.

            It is a big idea and a big set of changes for a big problem.

            It is only a matter of will.

  7. “I would never want to see our country become too reliant upon one country”

    So what happens if (hypothetically) chinese growth were to slow and exports to china reduce by 10, 15%. If the above were true, this should’nt excessively impact our economy? Right? And the budget will still be returned to surplus as per Waynes bible?

  8. So Wayne Swan is in favour of market-determined exchange rates. This is the accepted wisdom. Nearly everyone in the country would concur, and, looking back, with good reason. The exchange rate has fallen during times of economic duress and climbed during better periods. The global economy is experiencing very unusual stresses at the moment and the recent high AUD has to be seen against this context.

    Apart from this, had the Treasurer indicated that he favoured placing a limit on the value of the AUD, this in itself would have constituted a signal to the market that the Government might become a seller and/or a buyer. This could only provoke speculation in the currency, with all kinds of possible unintended consequences. At a time when policy stability and predictability are valuable things in themselves, there is no doubt Swan got that right.

    • Doesn’t this complete lack of engagement with the debate around the consequences of a high dollar not promote speculation in the currency that it can rise unfettered forever? By underplaying the effects on the economy, Swan has used distorted rhetoric to support the ongoing speculative inflow.

      • Geez,

        I used to stay up till 2am once – but ti wasn’t to discuss economics 🙂

        HnH – could I ask you a favour? Is it possible to embed videos like the one you have here, but in such a way that the video only downloads/plays if the play button is pressed – rather than the video starts playing automatically and has to be stopped.

        I generally don’t bother with the videos, and by the time I realise that the damn things have downloaded and started playing, I’ve used up a bunch of my prepaid.

        Thanks.

      • Careful H & H
        You’ll have the Conroy Media Regulator at the door if there’s more talk like this..

      • Howdy HnH. Good luck with the mid-night shifts.

        I think we have to see the AUD as a (small) USD counter-weight. The AUD hit its highs on days when the USD was vulnerable generally, and likewise the current AUD weakness is the converse of USD strength.

        The AUD has been fairly stable in the last year or so, and capital inflows have not been excessive (I think they have been declining in relative terms), which suggests there is not a lot of speculative pressure in the market.

        For mine (I am an exporter), the real issue is not the absolute level of the currency – it is the volatility that makes things so difficult. And we have had less volatility, so I am not unhappy about the exchange rate.

        Isn’t there a maxim of some sort that holds a country may control three things – its exchange rate, interest rates and fiscal settings – but not all at the same time. Only two can be determined at any one time. If this is so, surely setting interest rates and the fiscal balance are the two we should be thinking of?

  9. Swanny is an embarrassment to the nation. It is hard to imagine a worse performer as treasurer.

    It is a reflection on the limp state of the government that they feel that there is no capacity to dump this clown as treasurer.

    I wonder how Kate Ellis would go as treasurer. She’s probably a clueless and vacuous as Swanny, but at least she looks much better.

      • e.g. Jim Cairns?

        Swans seems a dud but Hockey and/or Robb don’t give the impression that they would be better (unfortunately). A bigger problem is the quality of advice these blokes get.

      • Just because we there are worst choices for Treasurer, doesn’t mean that the current Treasurer shouldn’t do better.

        (‘scuse the double negatives)

        Being the best of a bad bunch doesn’t necessarily make you good, not that Swan is the best at anything other than spinning pork.

  10. I’m with you on this Prince.

    The Government could do a lot better on some key things – tax policies, productivity policies especially – but they could do a lot worse too.

    It is true that Swan is dull and seems tentative at times. But so what. Politics does not have to be a vaudeville show.

  11. Swan has no idea what he is doing. However he is not alone in that, He has the whole of Treasury backing him on that particular characteristic!

    • Agreed!

      Swanny gets his forecasts and advice from Treasury… and have you seen them? The head of Treasury thinks we’re in a golden age of mining glory that will last forever.

      It’s precisely this kind of backward-looking economics that means we’re even more vulnerable to change than ever.

      • But it’s still up to a treasurer to take some leadership and notice when Treasury forecasts “lack guile” (quote Paul Keating). Keating trusted Treasury implicitly in the 80’s and trusted their prediction that the economy wouldn’t fall into recession. Afterwards he took more control and if I remember correctly the stimulus launched as part of One Australia was larger than recommended by the Treasury boffins but it did have some impact in speeding up the recovery.

        In short, Treasurer takes advice from Treasury but he/she should have enough nous to know when they’re wearing rose tinted glasses.

  12. The state of politics on both sides has really declined, during the 80’s apart from Keating you had some sharp brains like Button, Walsh etc, and some guys with a reasonable idea like Dawkins, these days the only guy that I thought had a bit of nous was Lindsay Tanner. On the Lib’s side of the fence, its only Malcom T.

    I thougt Ken Henry was excellent in treasury.