Tuesday, August 14, 2012

It is time we intervened to hold back the dollar

OUR problem is the dollar. You can pontificate until you're blue in the face about productivity, or business taxes, or the carbon tax or cautious consumers and they're all important. But what is putting otherwise viable Australian businesses at risk now is the fact that our dollar is too high for them to compete.

On the broadest measure, the Australian dollar is now 72 per cent higher than it was a decade ago. Against the US dollar, it has almost doubled. At $US1.05 or more, it is 50 per cent higher than its long-term average of US70?, between 1985 and 2005, before the mining boom drove it up.

A high dollar makes Australian exports more expensive in the rest of the world. It makes imports cheaper here. It makes it cheaper for us to spend our money abroad as tourists or consumers and more expensive for the world to spend its money here.

If you lower the dollar, the other problems become second order issues. If you can't lower it, and it keeps going higher, then business and government may have to move hard and fast to find ways to save enterprises and the workers they employ.

That is the reality the Reserve Bank highlighted in its quarterly statement on monetary policy last week. It is the reality that has made its former board members Warwick McKibbin and Adrian Pagan urge it to try new ways to stop foreign demand for Australian dollars driving up its price.

In March, I wrote on this page that we need to talk about the high dollar, suggesting the Reserve should drop its hands-off policy, and intervene to cap its value, as the Bank of Switzerland has capped the value of the Swiss franc. That conversation has now begun, and about time.

The stakes are high: not only for our trade-exposed enterprises and their workers, but for both sides of politics. On July 1, we began living with the carbon tax that Tony Abbott has told us over and over will be "like a wrecking ball through our economy". It has become the defining issue of our politics, the prime mover for Abbott's rise in the polls and Julia Gillard's fall. Now the rhetoric of both will be put to the test.

In July, the wrecking ball failed to wreck anything. Last week the Bureau of Statistics estimated that seasonally adjusted employment grew by 14,000, and private analysts TD Securities and the Melbourne Institute estimated that inflation rose by just 0.2 per cent.

Of course, these are early days, and survey data can be wrong. But it was a preview of the potential damage to Abbott's credibility if the carbon does not wreck the economy. The polls show he himself is unpopular; if his campaign against the carbon tax turns out to be hollow, the political balance could swing sharply against him.

But the argument cuts both ways. If the economy goes badly in 2012-13 and I mean the economy of south-eastern Australia, where Labor has 60 of its 72 seats in the House of Representatives then Labor and its carbon tax will be blamed, regardless of whether or not it really caused the slump.

The Age economic survey last month found an overwhelming consensus among private forecasters that Australia would do well in 2012-13. Virtually none think the carbon tax to be a wrecking ball through the economy.

But the economic tides now are very uncertain. Even the Reserve Bank, with its well-documented tendency to be over-optimistic, now concedes the big risk is that the economy in 2012-13 will go worse than expected, not better.

Part of the reason for that, as the Reserve sees it, is Europe's inability to solve its problems. It is sanguine about China, although the anecdotes from there point to a more alarming slump than the statistics admit to. But it is also worried that the rising dollar is doing more damage than its models have forecast and in Australia too, the anecdotes point to deeper problems than the statistics so far show.

Most observers expect the Reserve to do nothing more than voice concern. It has never intervened in the markets to keep the dollar down, only to push it up. Deputy governor Philip Lowe said last month it was hard to make a case that the dollar was overvalued. But then, the International Monetary Fund disagrees, estimating that in June, when the $A was roughly at parity with the $US, it was already overvalued by 5 to 15 per cent.

What could we do? Two options stand out:

The Swiss solution: impose a cap on the Australian/US exchange rate, maybe at parity, and print dollars to sell whenever the cap is threatened. There is no limit on the Reserve's ability to create Australian dollars only the risk that they will end up back here adding to inflation, and the risk that it will become a huge holder of US dollars and other currencies.

The McKibbin solution: since the main surge in demand for Australian dollars is from other central banks buying them as safe investments, the Reserve should sell them directly to its cousins, printing dollars to meet their needs, and so taking pressure off the dollar in the markets.

I'll say it again: we need to talk about this. We should not let fear of trying something new cost us good enterprises and good jobs.