Colebatch: RBA must lower Australian dollar

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Australia’s best non-MB economic commentator, Tim Colebatch is today as eloquent as he right:

There is something to be said for conventional wisdom. Since it is widely shared, a government can win support for sensible action by appealing to it. We can’t live beyond our means. Australia has to be a country that makes things. Markets, not governments, should decide what the dollar is worth.

But conventional wisdom can work against us in unconventional times. Its rules can become like blinkers on a horse, preventing us seeing that we are in new terrain where the old axioms no longer work. We mistake policy principles that worked in the past for eternal truths, and refuse to think seriously about new ways to solve new problems.

…In many countries, central banks intervene or governments change laws to hold their currencies down, and ensure that producers remain competitive. But in Australia, it is conventional wisdom that the Reserve Bank and the governments must let the dollar float freely (apart from occasional raids to stop it falling too low).

…This is orthodox policy, in unorthodox times. It has made Australian producers uncompetitive. It is forcing jobs overseas…The high dollar cannot last forever. But there is a limit to how long companies can go on losing money while waiting for the dollar to fall. We are allowing a temporary over-valuation to shut down economic capacity permanently.

…It makes far more sense to bring the dollar down. Stevens has tried to talk it down, in vain. Even interest rate cuts are doing more to inflate house prices than to deflate the dollar. It’s time to try new policies.

First, the Reserve should intervene in the market – either by pushing back against the currency traders as they push the dollar up, or by setting a ceiling for the exchange rate, as the Swiss do, and selling dollars to keep it down.

The Reserve has only limited ability to push the dollar up; that requires foreign exchange. But it is much simpler to push the dollar down; it just requires lots of Australian dollars, which the Reserve can create at will.

The government should remove the $2 billion a year tax break Wayne Swan gave to foreign buyers of Australian bonds in 2009 when he thought we needed incentives to attract them. There are other options, but that would benefit the budget and the economy.

Hear, hear.

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About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.