Henry says high dollar to Hell and back

From AAP:

Former treasury boss Ken Henry has told business the Australian dollar is likely to remain high for the foreseeable future.

Dr Henry told the Australian Industry Group forum in Canberra it would not be prudent to bank on an early sizeable depreciation in the exchange rate.

“There is no silver bullet that is going to rapidly devalue the dollar and make things easier for Australian businesses in the immediate future,” he said.

…However, Dr Henry said Australia’s economic policy framework – which includes a floating exchange rate, the independent setting of monetary policy and competition policy – had served the nation well.

“These things have helped to protect Australia from the impact of several economic shocks emanating from overseas,” he said.

This makes no sense. The floating dollar has helped protect the Australian economy from external shocks because it has fallen when its fundamentals have weakened. The other kind of protection it has afforded is to rise during commodity booms, by preventing an inflationary breakout. But if it isn’t going to fall when that boom comes off and there is no inflation then it isn’t working as it should. Henry goes on:

“It is important that we will build on them and resist the temptation to dismantle parts of the framework, even though we may perceive from that dismantling a short term advantage.”

Contemplating a short term, well communicated and targeted strategy addressing an obvious over-valuation resulting from portfolio flows is not “dismantling” the regime. Other central banks are doing that already. Nor is there any issue with the RBA, an independent body, printing some dough and tossing is to other central banks if it so chooses. It’s in the bank’s charter to ensure that the dollar works as it should.

Comments

  1. Once again….
    The floating exchange rate hasn’t served us well at all. What has served us well is our massive natural resource capital that we have been willing to sell to fund our profligate consumption.

    Why would it bother Ken? He’s doing OK!

    • GunnamattaMEMBER

      On the nail – it is doing us no good whatsoever.

      At the moment the RBA is about the sole central bank playing hands off (which means it is the sole central bank allowing every other central bank to play hands on with our currency).

      There are seriously negative rates on the primary sovereign primary markets in Europe, rates in US and Japan are virtually nil. The three of them represent what percentage of global capital? And is that global capital wanting a return? Is that a bigger factor than Australia’s investment attractiveness?

      Of course it will come to Australia where and when it can, and of course the AUD will go up as a consequence. And once Australia’s export/import competing sectors are fried (and no mining bot – I am not referring much to manufacturing, but services) we can go through the mind numbing embuggerment of trying to convince the rest of the world all over again that we are good for something other than dgging things out of the ground or (with a good season) planting.

  2. He’s factoring in future boom. Maybe he’s knows something that we don’t, and I’m thinking combined bazooka central bank action before long. Draghi is ready…

  3. When the boom REALLY falls off, the dollar will too. Our ‘exceptionalism’ will be a distant memory. I don’t totally buy the divergence from the commodity price too much anyway, in historical terms the price is still strong and there are very few other positives in the global economy – we still look OK and as you know the rug can be pulled at anytime if/when we don’t look so good in times ahead.

    • 3d1k, have you done figures to see how much the big guys are impacted by this, and also what are effects on tax receipts.

      I’m sure China will still buy, but at what price, and some of the small suppliers could be hit right?

      I know in gold e.g. it’s getting marginal, so some of the high cost producers will fail soon at the current prices. Maybe the big bazooka soon will change that.

      • Nasser, Kloppers and Albanese have all recently discussed the impact of the currency – I leave that to them. Of a more general nature you might find this of interest:

        “Costs for mining enterprises for several years have displayed a CAGR of 10-15%. It is not just the gold producers facing steeply rising costs but the whole mining sector. Cutifani sys that gold grades are falling, mines are deepening and margins collapsing. AngloGold recently reported total costs, before interest and tax of US$1,280 per ounce. The current margin with gold trading at US$1,600/oz cannot be sustained medium- to long-term.”

        http://www.henrythornton.com/article.asp?article_id=6470

        • Thanks for the link. It’s about 12 months back I had a look at the recovery cost/oz and for many miners it was looking bad. I was invested in a few Aussie gold explorers/producers, but I’m out now.

          BTW I don’t think it’s just the dollar , but we’re going to see an impact soonish IMO. I can’t in the long term see how we can be more expensive than many other countries and still be supplier of choice.

    • Your orders haven’t changed then?
      Is there a threshold in your programming that determines when you change your tune?

      if AUD > 1.00 USD and ore spin benefits of weaker dollar
      else
      —> bang on about how expensive petrol would be

  4. Jake
    Treasury just ignores the fact that the high dollar is not a result of our great economic performance, productivity and production.
    Our high dollar is a result of our willingness to accept a combination of hot money issued by other central banks under ZIRP and to sell off our mines and industries to pay for our consumption.

    That makes the Treasury paper drivel!

    The point that Billy McMahon had an economics degree reveals a lot about Treasury.
    McMahon presided over the ransacking of rural Australia. Yet he is some sort of pioneering hero just because he had an economics degree??? Treasury…Give us a break!

  5. Clearly, Ken Henry and the RBA know something they aren’t telling us. There is no known reason the RBA shouldn’t be increasing the money supply to offset the hot money demand for A$. Ken Henry is a shill for somebody, but we don’t know who’s book he’s talking

    • robert

      There is a jolly good reason why interest rates should not be lower. We should NOT be taking on more debt. We need to save so we don’t take on more debt. So I feel your prescription is not the real answer.
      I admit it’s a bit of a conundrum as to how to stop the hot money and it needs better brains than mine really concentrating on the problem.

    • d_r

      A very good point. There have been a number of comments from high level sources just lately backing a high $ and RBA not taking any action.

    • “Ken Henry is a shill for somebody, but we don’t know who’s book he’s talking.”

      KH is a very smart man. The only “book” ive ever heard him talking is that of the hairy nosed wombat. IF the high AUD benefits the HNW im all for it.

  6. Stop the hot money flows, control the capital sell-off of industry, CONTROL the dollar at a lower level.
    At the moment we are on teh road to ruin under the combination of Treasury and RBA slavish adulation of modern US economic tripe.

  7. GB
    I actually talk facts all the time to back this. You just don’t read! 🙂

    What are you arguing specifically
    Are you saying Zero to negative RAT doesn’t result in more debt?
    Are you saying we haven’t sold off our secondary industries and 80% of our mining industries
    Are you saying that none of the mining industry is having trouble with our high dollar and high cost structure?
    Are you saying that hot money resulting from printing by other CB’s is not a significant factor in the high dollar?

    Your comment required no thought. So let’s follow this through…exactly what are you saying? Or are you just trying to be insulting because my logic runs against the view you need to hold for your future prosperity?

    Have a look at the economy. There are facts everywhere. The chronic CAD is the biggest fact. It involves us in more and more debt and more and more sales of assets. This is well recorded and well documented.
    Every day in MB, thanks to HnH and others, there are facts. The RBA site is full of them.
    It’s a matter of whether you are looking backwards or forwards. If you are looking backwards everything is OK because we have got this far OK…well some have. In the process we destroyed rural Australia and we are now destroying the livelihoods of many businesses and workers unnecessarily.
    If this thing turns turtle re terms of trade and money flows we will really find out the cost. We will have, extremely suddenly, a much much lower dollar, inflation we can’t stop and ruinous interest rates. Why do we allow ourselves to get into this position? The only answer is blinkered short-termism and a slavish cow-towing to US economic drivel based a short term interpretation of the advantages they get from their status as the world’s reserve currency.

  8. Jumping jack flash

    I think the the size of our economy doesn’t match our productivity. We’ve been caught out on a limb after everyone else has trashed their currency.

    As a result Australia has been left with some of the highest relative wages in the world, for some of the lowest productivity.

    Either we shrink the economy/wages or we raise productivity. Unfortunately raising productivity to justify our high wages will be fairly impossible, so wages and the economy are going to have to shrink and counter the high dollar.

  9. if short term, well communicated targeted strategy addressing obvious over-valuation from portfolio flows is not “dismantling” the regimem then why do we pay such eggheads so much to deliver messages to business which they want to hear, and then use to foll the rest of us economic ignoramuses?