Back in 1986 when I did my HSC the teachers told us that we had to read the Sydney Morning Herald in a crucial window during the year because whatever Ross Gittins was writing about was likely to form, or frame, the questions in the Economics exam we were going to sit later in the year.
So we did and it did.
Based on what I’ve been reading lately though I’d hope that the NSW Board of Studies and the teachers have moved on because increasingly when it comes to our manufacturing base and other industries buffeted by the high Aussie dollar I find myself seeing Gittins as retelling stories from the past as the road to the future without reference to changed circumstances.
So it is again this morning that I see that Mr Gittins is channelling his inner Schumpeter in his article for the SMH Never Fear, manufacturing will survive a high dollar:
Beware of dire predictions that manufacturers will be wiped out by the strong dollar unless they’re propped up by the government. All our experience says it won’t happen.
Manufacturers and their (highly vociferous) unions gave us the same warning in the 1980s when the Hawke-Keating government decided to take away their protection from imports. It didn’t happen – the industry adapted, and survived to complain another day.
So we are not exactly kicking off with love for manufacturing or its pesky unions are we.
Indeed in his best Glenn Stevens, we manage the economy in aggregate voice, Schumpeter – sorry Gittins, says:
In a market economy, nothing stays static. Industries could just sit there doing nothing until their last customer leaves, but they don’t. They take evasive action. They cut their coat according to their cloth. More formally, they adapt to their changed economic environment.
Individual firms may bite the dust, but the industry regroups and survives. Consider the advent of television from the mid-1950s. Many people imagined it would spell the end of radio.(My bolding)
So we aren’t worried about any of you workers losing your jobs nor companies going out of business because the dollar is high.
No, we are not!
Because in aggregate she’ll be right mate!
His analogy between the current high dollar situation and the advent of television and radio to me is ludicrous. I’ve written about it before but it really busts my boiler when I see technological change trotted out as an example how industry must adapt.
Saturday week ago I wrote about this very topic after hearing Australian Treasury Secretary Martin Parkinson’s similar comments about technological change:
…if the Aussie Dollar is 30 cents above its long run average or roughly 40% then that is a heck of a productivity gain Martin is looking for. And exactly what change is he talking about? Technological? If that’s it then sure I agree no point having a typewriter factory when I am writing this blog on an iPad is there.
But in fact it’s not technology that has driven the Aussie dollar higher or is putting Australian manufacturing under pressure is it? No.
It is the policies of central banks and sovereign nations to pursue competitive devaluations and the fact that our economy, almost singularly among developed nations with a freely floating currency, has skirted the edge of the Great Recession.
So Mr Gittins is just off on the wrong track in my humble opinion.
Indeed he then floats offshoring as a way for Australian manufacturing to survive. That may work for Australian companies but not Australian jobs – or am I wrong? But like the “mining boom will save us” logic he doesn’t care because the workers will get jobs elsewhere.
And probably they will. But not everyone is as lucky as I am in the sense that I am at the doorstep of the Hunter Valley coal industry. It’s a long way from Geelong to Singleton or Karratha.
But with all of what I have written above the thing that really set me off about Mr Gittins article was the following statement he made:
Another response is to find non-price ways to stay competitive. A reputation for high quality can justify pricing at a premium. Indeed, if you’re smart you can get into the space where the causation is reversed: people take your higher price as a sign of higher quality (utterly contrary to the most basic assumptions of conventional economics).
You can use superior design to justify charging higher prices. You can beat the foreign mass-producers by being more carefully and quickly attuned to changing fashion. Or you can be more willing and adept at customising your product. If all else fails you can get yourself a reputation for giving good after-sales service.
This is an old Australian angle, but still relevant: look for niches to occupy. One advantage of our smallness relative to the rest of the world is that what seems too small to the big boys seems quite big to us.
There is of course a country that tried this route over many years and was very successful. It found niches and exploited them, it could and can charge a premium price for its product and it remains an example of what any small country (population wise anyway) can do if it sets it mind to it.
That country is Switzerland and we should accept Mr Gittins wisdom and follow its lead.
Ahh, but that road is not exactly paved with gold is it? No!
Switzerland recently fixed its currency against the euro in order to halt the inexorable rise of the Swiss franc for reasons unrelated to the economic performance of the Swiss economy.
But we won’t see any similar moves here in Australia as SBS reported after RBA Governor Stevens Testimony on Friday,
Reserve Bank of Australia (RBA) governor Glenn Stevens says the RBA doesn’t intend entering into a Swiss-franc style of intervening to bring down the Australian dollar.
But, that is not to say the central bank never will, he said.
Facing his six-monthly grilling in front of the House of Representatives Economics Committee, Mr Stevens said the heavy intervention by Swiss officials on the franc against the euro a couple of years ago was not all that effective at that time.
“I’m not tempted to do that at the moment because I’m not sure that it would be effective,” Mr Stevens said.
“Any intervention to try and hold the Australian dollar down, I’m not saying we never would, we have been known to intervene, but we certainly don’t foreshadow it.”
He said moves in the currency had to make sense, noting the recent bout of strength which occurred at a time when the terms of trade had peaked and was starting to come down.
My bolding of course because it tells you all you need to know. The Aussie’s strength is not just about the fundamentals of our economy per se but in large part about the relative performance of our economy, our sovereign debt position and our fiscal space in a world of economic torpor.
This will eventually change and the hot money will exit to other destinations once the fear of loss recedes from investors minds. But the question that needs to be asked, and isn’t by the likes of Gittins, is what will be left when this happens. This is an oft forgotten dimension of Dutch disease: its affects are worst only after the boom has passed.
I am a markets guy and readers know I don’t like or favour a peg for Australia or the Aussie dollar because I think it just creates pressure elsewhere in the economy. I know too that there are costs for the type of intervention I’m proposing: interests can be encouraged to seek protection, productivity can take hit, inflation may be a touch higher and the adjustment to mining growth will be passed onto other sectors like retail. So, as I have written many times now, I favour manufacturing and Aussie dollar buffeted industry support in the manner of drought relief for farmers. The relief can be appropriately framed and time limited, and need not cause permanent damage to our political economy.
Certainly jobs will be lost with an Aussie well above parity and probably headed higher at some point but we should be taking a long view of our economic future and smoothing the adjustment phase. In this way we can ensure that vital economic biodiversity remains in the economy for the future.
Have a great day
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Please remember these are not recommendations for you to trade these are my views and I have my risk management tools and risk parameters that you do not have access to. Thus, this blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation