Is Australia Next in Competitive Currency Debasement? Ross Garnaut, one of the authors of the float of the Australian dollar 30 years ago, warns RBA may have to cap dollar

Is Australia Next in Competitive Currency Debasement?

Posted: 17 Apr 2013 04:00 PM PDT

Japan, the US, the UK, Switzerland, China, and even the EU with the LTRO (and upcoming hinted at rate cuts) are all in on competitive currency debasement.
The question at hand is “who is next?” How about Australia?
The Sydney Morning Herald reports RBA May Have to Cap Australian DollarRoss Garnaut, one of the authors of the float of the Australian dollar 30 years ago, warns that the Reserve Bank might have to consider intervening to push the currency down to minimise the recession he sees coming as the mining boom goes bust.

Professor Garnaut, of the University of Melbourne, says he would rather see the Reserve cushion the economy’s looming fall and bring down the overvalued dollar by cutting interest rates to bring them closer to those of other Western countries.
While the International Monetary Fund forecast Australia will stay on its present track, with growth of 3 per cent this year and 3.3 per cent next year, Professor Garnaut warned that mining investment would fall from 8 per cent of gross domestic product back to its long-term average of 2 per cent.
He said the fall in China’s use of coal in electricity generation last year was a forerunner of its shift to a new, less resource-intensive phase of growth, which would trigger a plunge in Australian mining investment. ”We can be pretty sure that we’ll be [losing] 5 or 6 per cent of GDP from expenditure, and that’s one hell of a fall,” he said.
The bank’s assistant governor for financial markets, Guy Debelle, told the Melbourne Institute that the way mining companies have financed the resources boom has contributed to pushing up the dollar’s value to a level ”higher than one would expect, given [the] fundamentals”.
Dr Debelle said 75 per cent of the record investment by mining companies since 2003 has been financed from cash flow. As the mining industry is overwhelmingly foreign-owned, the Reserve estimates that 80 per cent of the investment was funded by overseas owners and lenders. He would not estimate how much it had raised the dollar’s value, but ranked it with the massive foreign purchases of Australian government bonds as one of the key factors holding up the dollar’s value despite the sharp falls in commodity prices and interest rates.

Interview with Ross Garnaut
In case the above interview does not play, simply click on the link at the top.
Mathematical Absurdity
I would like one of these economic illiterates to explain how Australia can cap the Australian dollar when Japan wants to cap the Yen, when Switzerland wants to cap the Swiss Franc, when the ECB wants to cap the euro, when the US wants to cap the US dollar, when China wants to cap the yuan and the UK wants to cap the British pound.
Competitive currency debasement mathematically cannot and will not work. Period.
The only possible outcome is economic distortion, mispricing of capital, and sponsorship of more bubbles. Yet economic fools everywhere sponsor the idea.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

 

Garnaut warns RBA may have to cap dollar

April 17, 2013

Tim Colebatch

Is Australia on the verge on an economic recession? Peter Martin explains why leading economist Ross Garnaut thinks so.

Ross Garnaut, one of the authors of the float of the Australian dollar 30 years ago, warns that the Reserve Bank might have to consider intervening to push the currency down to minimise the recession he sees coming as the mining boom goes bust.

Professor Garnaut, of the University of Melbourne, says he would rather see the Reserve cushion the economy’s looming fall and bring down the overvalued dollar by cutting interest rates to bring them closer to those of other Western countries.

In 1983, as economic adviser to Bob Hawke, Professor Garnaut urged his boss to float the dollar. He still views it as one of Australia’s great successes.

But if conventional means fail to cut the dollar’s value and relieve the pressure on other tradeable industries, he told a seminar at the Australian National University, the Reserve should consider following its Swiss counterpart’s example and put a cap on the dollar’s value.

A former ambassador to China and author of an influential report urging Australia to focus on exports to north-east Asia, Professor Garnaut warns the ”China resources boom” is about to go bust, and bring Australia down with it.

While the International Monetary Fund forecast Australia will stay on its present track, with growth of 3 per cent this year and 3.3 per cent next year, Professor Garnaut warned that mining investment would fall from 8 per cent of gross domestic product back to its long-term average of 2 per cent.

He said the fall in China’s use of coal in electricity generation last year was a forerunner of its shift to a new, less resource-intensive phase of growth, which would trigger a plunge in Australian mining investment. ”We can be pretty sure that we’ll be [losing] 5 or 6 per cent of GDP from expenditure, and that’s one hell of a fall,” he said.

The bank’s assistant governor for financial markets, Guy Debelle, told the Melbourne Institute that the way mining companies have financed the resources boom has contributed to pushing up the dollar’s value to a level ”higher than one would expect, given [the] fundamentals”.

Dr Debelle said 75 per cent of the record investment by mining companies since 2003 has been financed from cash flow. As the mining industry is overwhelmingly foreign-owned, the Reserve estimates that 80 per cent of the investment was funded by overseas owners and lenders. He would not estimate how much it had raised the dollar’s value, but ranked it with the massive foreign purchases of Australian government bonds as one of the key factors holding up the dollar’s value despite the sharp falls in commodity prices and interest rates.

The IMF’s World Economic Outlook has trimmed its forecast of global growth this year from 3.5 to 3.3 per cent, but still predicts 4 per cent growth next year.

The IMF warns that while the world has cleared some hurdles, it faces many more, including new risks from the fallout from the Cyprus banking collapse and political deadlock in Italy.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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