Yabby, a current account deficit of 6% of GDP is not at all like a banana republic. 'Tis more like the USA.

Anyway, current account deficits and government budget deficits are very different things, and the former is far more likely to cause the latter than vice versa. The main cause of a current account deficit is a trade deficit, and the main cause of that is our dollar being overvalued. Ultimately that problem is self correcting (as we've seen this year) though a more competent RBA board would've prevented the dollar getting so high a few years ago IMO.

Aiden, the US current account deficit is around 2.3%. 6% is banana republic stuff, if maintained over the longer term, which we have. The US has one distinct advantage, their's is the default currency, so they borrow in US Dollars, which makes the US dollar other peoples problem, as China and Japan found out the hard way.

We do not have that liberty, our current accounts have to be repaid in foreign currency, not Australian Dollars. So at some point we either borrow more from overseas at ever increasing interest rates, or we sell off a bit more of Australia, which is what we are doing. The real problem here is that we still live in dreamland in alot of ways. Million Dollar public service salaries, double time and a half, holiday leave loading, long service leave and all the other bells and whistles which our molly coddled workers insist on, make us uncompetitive in most things. So farming and mining have had to carry us for decades and still do.

Yabby,
Although the US current account deficit has fallen, they maintained it at high levels much longer than we have. Banana republics do not have the means to do so.

The Australian government does not borrow in foreign currencies. Australian businesses sometimes do so, Should we worry about what commercial decisions businesses take? If so, why? And if it's a problem, wouldn't the best solution be to make it easier to borrow in Australian dollars?

"So at some point we either borrow more from overseas at ever increasing interest rates, or we sell off a bit more of Australia,"
...Or we export more and import less, which is the likely result of our dollar falling.

And where do you get the idea that interest rates are "ever increasing"? Haven't you noticed how many countries have had them at zero lately?

Who cares if our good pay and conditions make us uncompetitive for low value activities? We should be concentrating on the high value activities anyway. And if we fail in that, the market will adjust the value of our dollar to a level where we do become competitive. But considering our current level of foreign investment, it's clear the market has much more confidence in our future than you do.

*And if we fail in that, the market will adjust the value of our dollar to a level where we do become competitive.*

It certainly will, but short term we have been rescued by farming and mining, so our current account has been much better, at -3.3% with record coal, iron ore etc. Once those collapsing prices register, it is back to banana republic for us, which Keating noted years ago and we only just escaped at that time.

Lower interest rates only apply to first world countries with a healthy current account, where investors have confidence. A devaluing Aus $ would mean increased inflation, which would undermine that confidence. So interest rates would have to rise, to allow for a falling currency. The RBA could do nothing about it, as they have to hand over US$ to pay our debts. Or they can keep using money they have, from when we sell off more of Australia, as is happening now.

Yabby, your argument is based on a false assumption: that the Australian government borrows in US$.

The reality is very different: as I said before, THE AUSTRALIAN GOVERNMENT DOES NOT BORROW IN FOREIGN CURRENCIES. That's been general policy for the last three decades (since our dollar was floated) and absolute policy for the last two.

Keating floated the dollar so that we'd avoid becoming a banana republic, It was a total success; we don't have to worry about that outcome any more. We are a first world country, and the fact that we have a floating currency means the markets will correct any current account problems we have. BTW it's often the first world countries that have the highest current account deficits.

Our dollar falling does of course mean those companies that have borrowed foreign currencies will need to pay more. But that's their problem; the RBA is not liable for their debts.

Aiden, if only life were so simple! Feel free to dream. The Australian Govt can borrow as it pleases, the market will charge it interest rates to cover the hedge costs of a falling A Dollar, if there is a risk of it falling. The risk grows with a growing current account. In the end, countries have to pay their bills. Note that Greece nearly became a banana republic, saved only by the EU. Argentina was not so lucky. When currencies go down, costs of imports go up, the standard of living goes down accordingly. If everyone claims higher wages to compensate, inflation goes up and interest rates go up even more. Go see what they pay in Brazil or South Africa as bank interest. As you know, Keating had to enforce interest rates of up to 18% to solve things, hardly a great time for those buying a house.