BY SEAN HEALY
When it happened to the Brazilian real or the Turkish lira or the Thai baht, they labeled it a "currency crisis" and called in the International Monetary Fund but, this being Australia, the dollar's downward plummet to below 48 US cents is being desperately dressed up by the Howard Coalition government as either of little concern or maybe even a "good thing".
Speaking to retirees at a bowling club in Brisbane on March 20, Prime Minister John Howard claimed that the exchange rate of the Australian dollar (AUD) "doesn't matter at all for people living in Australia" and only mattered to those who travel overseas.
On March 15 — the day the dollar fell through the "psychological" 50 US cents barrier — Treasurer Peter Costello claimed that exchange rate declines are "actually expansionary for an economy" and would help avoid recession by boosting earnings for exporters, whose goods would be made cheaper and therefore easier to sell overseas, and by helping those domestic firms who compete against imports, which would be made dearer.
Both have repeatedly claimed that the dollar's fall was unnecessary and didn't reflect the economy's "fundamentals" — when politicians begin talking about "fundamentals", it's usually a sure sign that you should run for cover.
For, make no mistake, the dollar's plunge is bad news for Australian workers and makes the risk of a bitter recession this year far more likely. In the words of Peter Costello, issued in 1995 when he was shadow treasurer, a weak dollar "impoverishes every Australian".
The scale of the dollar's plunge is unprecedented since the AUD was first fully floated on the currency market in 1983.
In January 2000, the AUD traded at an average 63.82 US cents. Its drop to 49.23 US cents on March 15, a new historical low, therefore represented a fall of 22.8%. The AUD, after a brief rebound to just over 50 US cents, has since fallen ever lower. On March 21 it slipped below 49 US cents.
The fall of the AUD is not only against the US dollar — it's against the yen, the euro, the pound and nearly every other major currency. The trade weighted index (TWI), which measures the AUD against a basket of currencies of Australia's major trading partners, also fell precipitously, from 56.0 in January 2000 to 47.4 on March 15.
Cause
The cause for the fall is a mix of domestic and international factors. Domestically, the falling exchange rate is a sign of decreasing confidence among currency traders that Australia will avoid recession, also indicated by the 2% March 14 fall in share prices on the Australian Stock Exchange.
The plunge may also have a degree of punishment attached to it, what market analysts call "pricing in political risk".
Selling a currency is a clear, and pre-emptive, sign to any government that the financial elite is not amused. Analysts attached to the big foreign and domestic financial institutions which trade in the dollar have expressed fears that, in a desperate bid for re-election, John Howard may do something "stupid" — like increase government spending or knock back Shell's bid for Woodside or call a halt to pro-corporate economic "reform".
Domestic factors don't explain the scale of the plunge however — especially given that similar (or worse) problems beset other Western countries, including those against which the AUD has fallen.
The major international factor is the still monstrous strength of the US dollar.
In a context of plunging economic expectations, investors traditionally withdraw funds into less risky holdings. This "flight to safety" most frequently involves withdrawing money from stocks and putting it into bonds, particularly government bonds which are supposed to be the safest of all investments.
This has certainly happened in Australian financial markets in recent weeks. The fall in the All Ordinaries stock index is mirrored by a flood of funds into the bond market. Yields on the benchmark 10-year government bond, which fall as demand for bonds increases, went below 5% on March 14 for only the second time in 35 years.
The deregulation of financial markets, and the ease with which money-capital can flow across borders, however, means that the "flight to safety" no longer only happens on a national level. No matter where it is, what "nationality" it is, money-capital can now flee easily to the safest of all financial assets, the mother of all bonds, the US government bond. This, in turn, increases demand for, and the relative exchange rate of, the US dollar.
The result is counter-intuitive. The US economy is clearly contracting, the stock market is tumbling and its all-time high current account deficit (the excess of imports over exports) hit US$33.3 billion a month in January. If it were any other country, its currency would be a dead certainty for massive devaluation.
Instead, the US dollar is rising relative to all other major currencies. Regardless of the situation, every capitalist still wants and needs it. During the 1990s boom, foreign investors wanted it to buy into the US stockmarket bubble; during the bust, they want it to buy treasury department bonds. Such are the imperial privileges of being the world's only military superpower and controlling the currency of international payment and exchange: you never have any problems sucking in increasing amounts of "other people's money" to cover your burgeoning foreign debts.
Effect
The impact of the decline of the AUD is likely to be dire. A drop in the "value" of a currency is an austerity measure, a way of passing on reductions in the standard of living to working people. It is as effective as a sharp cut in government spending or a sharp hike in interest rates, but more subtle and more unseen.
The weaker dollar will make imports more expensive and reduce the amount people can buy with the same amount of money. This will hit working people as consumers first and foremost — and, given increasing economic interdependence between countries and the decline of Australian manufacturing, imports are no longer mainly in the luxury goods class.
The dollar's fall, for instance, has already wiped out the 1.5 cent reduction in the cost of petrol flowing from the abolition of petrol price indexation, but with the price of crude oil produced in Australia tied to the world market price fixed in US dollars, prices at the pump are likely now to head upwards even further.
It will also hit working people as producers, squeezing the companies they work for, possibly even to the point of layoffs and closures. The industries most likely to be affected by the rising price of inputs such as petrol, machinery and parts are "cyclical" industries like manufacturing, construction and mining, the exact industries which are already heading into a downturn as a result of excessive inventories and shrinking overseas markets.
Costello's claim that these negative effects will be offset by gains for exporters holds little water.
Other Australian exports will be cheaper in foreign markets, but if lower export prices do boost sales, it will be a boost within a falling world market. This is a situation quite unlike the year after the 1997 Asian economic crisis, when a cheap Australian dollar boosted export earnings because world markets for commodities were expanding.
With a world recession looking increasingly likely, demand for Australian commodities such as minerals in the all-important US and Japanese markets will fall, possibly quite heavily — a fact reflected in plummeting commodity prices in world spot markets. The benchmark CRB index of commodity prices, for instance, fell to an 11-month low on March 16. The US and Japan together account for 30% of Australia's total exports.
The dollar's plunge, therefore, has greatly increased the chances of recession in Australia.