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The Forum > Article Comments > The 'dutch disease' > Comments

The 'dutch disease' : Comments

By Ian McAuley, published 13/5/2011

Australia is much more vulnerable, because we have no strong integration with a large economy and our currency has become the plaything of commodity speculators and carry traders.

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any nation that has such a dependence on others to sustain its currency is asking for trouble. Nauru may not be appropriate, maybe Argentina, Portugal or Ireland might be better. Then if all else fails, there's always the example of Somalia and Zimbabwe.
Posted by SHRODE, Friday, 13 May 2011 8:14:53 AM
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Yes, Australia does have a VERY bad case of Dutch disease. I've posted extensively on this here and in other forums.

Eg:
http://forum.onlineopinion.com.au/thread.asp?discussion=4053&page=0

And, as I remarked back then, we should consider the Norwegian cure.

http://notendur.hi.is/gylfason/Trinidad2006.pdf

One reason I favoured Rudd's mining tax is that it would make mining in Australia less profitable at the then current value of the dollar. The mining tax would not have slowed down investment, it would have driven down the value of the Aussie dollar.

In other words I thought Rudds "big new tax" was a good idea for the very reason the mining companies said it would be a bad idea
Posted by stevenlmeyer, Friday, 13 May 2011 9:13:21 AM
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You're right, stevenlmeyer, we have had this discussion before.

>>Yes, Australia does have a VERY bad case of Dutch disease. I've posted extensively on this here and in other forums.<<

Your "cure" was to tax the crap out of a successful industry, and distribute the money in a series of investments across the globe.

This article highlights another aspect of the problem: interest rates.

The main driver of our present exchange rate is that the US, Japan and Europe are mired in a low-interest economy as they battle to resolve their GFC hangovers, sovereign debt issues etc.

That means that money presently sloshing around the system is inevitably attracted to Australian assets.

"Yields on all four leading currencies are low: so low, indeed, that carry traders normally back other currencies such as the Australian dollar." The Economist 5th May 2011

http://www.economist.com/node/18651608?story_id=18651608

So in your scenario, you take money from the miners, and then...

Where do you invest it?

It would have to be overseas, because your actions will have trashed our own economy, reduced interest rates, lowered the attractiveness of Australia as a destination for the currency carry trade (back to the US$0.50c Australian dollar) and sent us reeling into the recession we have so far avoided.

But your future fund will not help us in the long run, because it is only money.

What we should be doing, and are signally failing to do, is to find a home for our good fortune in local investments. In businesses that will survive the point at which the last lump of coal is finally dug out of the ground. Which, let's be honest, is a good few years away yet.

The Norwegians had the foresight to build their future fund before the impact of oil was felt on their economy. We don't have that luxury, and any attempt to retrofit the concept will be very tricky.

Putting air into your car's tyres is a straightforward process when you are stationary, prior to the start of your journey.

Trying the same trick once you're on the freeway, is more difficult.
Posted by Pericles, Friday, 13 May 2011 10:15:25 AM
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Pericles

A sovereign wealth fund (SWF), which is essentially what I’m proposing, would no more “trash” Australia’s economy than Norway’s SWF has “trashed” that country’s economy.

In fact the IMF have advised Australia to set up a SWF.

See: Don't waste the mining boom: IMF

http://www.theaustralian.com.au/business/markets/dont-waste-the-mining-boom-imf/story-e6frg926-1226046573990

>>"While Treasury tells us that 'China Boom' prices may last for a decade or more, we suspect that commodity prices will return to something close to the cost of production before 2015 as significant new supply comes on line," the review says.>>

So it may be too late anyway.
Posted by stevenlmeyer, Friday, 13 May 2011 10:29:58 AM
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Interesting article, stevenlmeyer, thank you.

Did you read it?

"'Some of the boost to government revenues could be saved in order to ensure a more equal distribution of its benefits across generations and reduce long-term fiscal vulnerabilities from an ageing population and rising healthcare costs,' the fund says."

The recommendation is that we put more money aside for aged care.

That will not put Australia in a more competitive position in the world's economy, once the minerals run out. In fact, it will perpetuate today's modus operandi, in which the baby-boomers do everything they can to ensure their last few decades are passed in comfort. Luxury, even. Future generations can go hang.

Anyhow, wasn't this why we set up the Future Fund? How would a new SWF differ?

Incidentally, the quote you provided - "commodity prices will return to something close to the cost of production before 2015" - didn't come from the IMF at all, but from "the consulting firm Macroeconomics", a support organization for lobbyists.

http://www.macroeconomics.com.au/

"Macroeconomics understands the political process and bureaucracy and how to package policy analysis and economic research to have the best chance of influencing decision makers."

My concern with the stevenlmeyer plan that you described in your previous thread is that it doesn't actually do anything except drain money from today's economy, on the tenuous principle that "saving is good".

The crazy thing is, we don't have a serious debt problem at the government level. It is non-government debt, at close to 90% of GDP, that is the proverbial elephant in the room.

And setting up any kind of SWF ain't going to fix that baby when she blows.
Posted by Pericles, Friday, 13 May 2011 1:19:45 PM
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Loathe as I am to intrude in a perfectly good fight between Pericles and stevenlmyer, the so called Dutch disease has always been a feature of the Australian economy. It has been more pronounced of late thanks to high interest rates and commodty prices driving up a high Aussie dollar.

But what can we do about this, assuming we want to do anything? As part of my job I happened to ask both manufacturers and economists what could be done for manufacturing recently and the answer was not much. The manufacturers thought that a strengthened export marketing grants program would help, but that was about it.

If all these factors reverse suddenly it will be a shock but hopefully the adjustment will be more gradual. Either way, rather than try to argue with the markets, it is better to adapt to their verdicts.

Australia did try to ignore the interantional market for decades but abandoned all the policies such as high tariffs, and no-one wants to go back.
Posted by Curmudgeon, Friday, 13 May 2011 2:22:09 PM
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