Excel­lent post on $A Carry Trade in SMH, Age

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Ken­neth David­son has been one of the most con­sis­tent voices for sen­si­ble eco­nomic analy­sis in the Aus­tralian media for decades now (another I’d give a sim­i­lar acco­lade to is Brian Toohey), and he’s writ­ten a bril­liant piece in The Age and The Syd­ney Morn­ing Her­ald on the specual­tive bub­ble that is the Aus­tralian dol­lar.

David­son lays out the causes and prob­a­ble effects superbly in the length of a news­pa­per fea­ture. The causes are that:

  • The bailout funds in the USA and UK in par­tic­u­lar have cashed up finan­cial insti­tu­tions that don’t want to lend any more to mort­gages (and have long ago for­got­ten how to lend to fund pro­duc­tive enter­prises), so they’re look­ing for short term hot money gains;
  • The RBA’s flag­ging that it intends rais­ing rates from 2–3% above rates in the USA and UK to pos­si­bly 4–5% above is a “sure thing” return on a cur­rency that was already appre­ci­at­ing because of com­mod­ity sales to China;
  • This gives the hedge funds a sure fire dou­ble whammy gain: 
    • bor­row in the US or UK at 1% to buy $A and “invest” in float­ing rate bonds or shares (par­tic­u­larly in banks) and get a higher return (at least 2% bet­ter than the bor­row­ing costs, and assured to rise); and
    • drive up the $A in the process, so that when you sell out, you get both a higher return and an appre­ci­ated cur­rency in which it is denom­i­nated.

The most remark­able thing about this bub­ble is that the RBA’s “we’re rais­ing rates now and we’re going to keep on doing it for a few months” mes­sages are part of the cause, and yet they seem unaware of both the phe­nom­e­non and the dan­gers it poses. David­son points out that Brazil, which is expe­ri­enc­ing a sim­i­lar com­mod­ity-dri­ven cur­rency appre­ci­a­tion bub­ble, is aware of the dan­gers and is doing some­thing about it:

The ris­ing value of the Brazil­ian real and the Aus­tralian dol­lar against the US dol­lar has had a dis­as­trous impact on both coun­tries’ non-com­mod­ity export and import com­pet­ing indus­tries. Brazil’s pop­u­lar and largely eco­nom­i­cally suc­cess­ful left-wing Gov­ern­ment led by Pres­i­dent Lula da Silva is meet­ing the prob­lem head on. It has decided to impose a 2 per cent tax on all cap­i­tal inflows to stop the real appre­ci­at­ing fur­ther.”

In the mean­time, our RBA seems pos­si­bly even pleased that this short-term phe­nom­e­non is afflict­ing our man­u­fac­tur­ing sec­tor adversely.

Of course, like any spec­u­la­tive bub­ble, this has an end-game–and that’s when you think the rate rises have come to an end, sell out and watch the $A crash for those who are still hold­ing it. Then the dol­lar (and Aus­tralian bank shares) will crash, and our econ­omy will have acted as a dol­lar pump for the hedge funds.

David­son also accu­rately notes that the RBA’s obses­sion with dri­ving rates higher now is dri­ven by the clas­sic “fight­ing the last war” syn­drome of believ­ing that an out­break of wage-dri­ven com­mod­ity-price infla­tion is the main dan­ger fac­ing the Aus­tralian economy–just as it was in, oh, about 1973 (if you ignore pri­vate debt lev­els of course…).

He con­cludes that:

The world has moved on but the obses­sive debate about wage infla­tion and union pow­ers hasn’t. Since the begin­ning of the ‘80s, the prob­lem has been peri­odic bouts of asset price infla­tion. It is the biggest dan­ger now.

Instead of con­trol­ling the unions, there should be con­trol of finan­cial insti­tu­tions. The Aus­tralian dol­lar bub­ble and the incip­i­ent hous­ing bub­ble should be micro-man­aged. Cap­i­tal inflow could be damp­ened by a com­pul­sory deposit of 1 to 2 per cent to be redeemed after a year to stop spec­u­la­tive inflow. Home own­er­ship has become a tax shel­ter. The steam could be taken out of the rise in house prices if neg­a­tive gear­ing was lim­ited to new hous­ing. This would obvi­ate the need for higher inter­est rates that affect every­one.

It’s an excel­lent article–read it and pass it on. The more peo­ple who do read it, the higher it will rise in the news­pa­pers’ online-indi­ca­tors of reader inter­est, which will push it towards the top of the online page. And I’m head­ing out now to buy a paper copy of the SMH as well. Bravo, Ken­neth David­son.

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  • Lyon­wiss


    The way I see it, one rich with one bil­lion dol­lars has one bil­lion votes (notion of cap­i­tal­ism). Now one mil­lion non-rich with one thou­sand dol­lars each should have the same influ­ence or power. But not so, because the for­mer is con­cen­trated and has the power whereas the lat­ter is dif­fused and have no power. One dol­lar one vote does not apply under actual cap­i­tal­ism, but ought to.

    Democ­racy is a painful way to get fair and decent results. Other ways may be quicker, but run the risk of get­ting serf­dom instead, whether it is through cor­rupt com­mu­nism or klep­to­cratic cap­i­tal­ism, as Philip rightly sug­gested.

  • GSM


    Japan can cre­ate as many Yen as it wants. Moun­tains and moun­tains of Yen if needed. That is entirely not the point. The point is, who will accept those Yen and under what rate of exchange. Exchange for other cur­ren­cies, wheat, iron ore , coal etc. To think or even believe that exten­sive print­ing of money sim­ply for the pur­pose of increas­ing deficits by wan­ton Govt spend­ing is some­how ben­e­fi­cial and has no neg­a­tive recourse is absurd. Japan has been at it for nearly 2 decades. Prob­lem solved?


    GSM #66

    The Japan­ese Gov­ern­ment can never go bank­rupt sell­ing Yen bonds to its own domes­tic pri­vate sec­tor.

    For the Japan­ese domes­tic pri­vate sec­tor a 1.3% 10 year bond yield on Gov­ern­ment Yen bond debt is close enough to the func­tional equiv­a­lent of the domes­tic pri­vate sec­tor vol­un­teer­ing to pay tax ‘at near zero yield’.

    What’s the func­tional dif­fer­ence between a close on zero yield gov­ern­ment bond and tax?

    There is no dif­fer­ence. The Japan­ese domes­tic pri­vate sec­tor are vol­un­teer­ing to hand the gov­ern­ment part of their wage and the gov­ern­ment spends it. (a triv­ial few yen get dis­counted into the paper game).

  • ak


    Please read the expla­na­tions pro­vided by prof Mitchell on his site under which cir­cum­stances cre­at­ing exces­sive amount of yen will lead to infla­tion (ris­ing prices — either domes­tic or for­eign prod­ucts).

    His point is very clear — these con­straints which have been imposed by neo­clas­si­cal eco­nom­ics are false. How­ever this doesn’t mean that there are no con­straints at all and that a gov­ern­ment can­not over­cook the econ­omy espe­cially under pres­sure from cer­tain pres­sure groups. He has never writ­ten that Japan can cre­ate an unlim­ited amount of cur­rency or issue an unlim­ited amount of debt with­out adverse effects.

    Prof Mitchell him­self is very crit­i­cal to poli­cies of the Japan­ese gov­ern­ment in regards to man­ag­ing the defla­tion­ary cri­sis grip­ping their econ­omy (with a short break) for the last 20 years.

    I haven’t seen him advo­cat­ing bail­ing out insol­vent invest­ment banks.

    I do not buy into 100% of what he has writ­ten any­where. How­ever I do agree with his argu­ments regard­ing con­se­quences of bud­get sur­pluses or deficits and the obvi­ous fact that a sov­er­eign gov­ern­ment is not fis­cally con­strained in its spend­ing (in domes­tic cur­rency).

    If the RBA wants to set cer­tain inter­est rates and deficit must be financed by sell­ing bonds — we have the con­se­quences for exam­ple in the form of uncon­trolled cur­rency appre­ci­a­tion due to carry trade.

    Why do we have to use inter­est rates to mod­er­ate the growth of the hous­ing debt? Why can’t we just impose an upfront tax on new loans exceed­ing 70% of the value of the prop­erty and phase out neg­a­tive gear­ing?

    It is pos­si­ble to use the hand­brake to con­trol the speed of my car while keep­ing the accel­er­a­tor pedal in the same posi­tion. Even­tu­ally I will burn the brake — but who cares, I am in con­trol for a while!

    I just want to add that the mess we have to deal now in the form of the debt bub­ble is a direct effect of apply­ing incor­rect eco­nomic the­o­ries.

  • Philip


    The banks and the revolv­ing door they have within polit­i­cal and eco­nomic insti­tu­tions ensure that through reg­u­la­tory cap­ture and eco­nomic ide­ol­ogy that the banks have, are, and will con­tinue to influ­ence and cre­ate the reg­u­la­tions they pre­fer.

    The rich con­trol the state, not the other way around. Elec­tions are when groups of investors coa­lesce to con­trol the state for another four years. Enter the util­ity of ‘democ­racy’: peo­ple enter the polit­i­cal arena once every four years to rat­ify state poli­cies, laws and reg­u­la­tions that orig­i­nate else­where e.g. cor­po­rate sec­tor. How long is ‘good’ poli­cies going to last once the banks reassert their power?

    Pre­tend­ing that the state will be nice and reg­u­late in the pub­lic inter­est when they are appar­ently staffed with cor­rupt bureau­crats as you point out is not going to do much unless the source of the cor­rup­tion is dealt with. Treat­ing the symp­toms and not the cause isn’t going to get far.

    How do politi­cians become this cor­rupt? Lay­ing the fault at the doorstep of sta­tism with­out men­tion­ing pri­vate power is disin­gen­u­ous. As the philoso­pher John Dewey once stated: “As long as pol­i­tics is the shadow cast on soci­ety by big busi­ness, the atten­u­a­tion of the shadow will not change the sub­stance.”

    Dur­ing the 1960s/1970s Aus­tralia had some­what work­able reg­u­la­tory appa­ra­tuses. I find it dif­fi­cult to believe that it was all the fault of cor­rupt politi­cians that they undid this them­selves.

    As for class war­fare, there is plenty of it: cap­i­tal­ists vs. labor; state vs. labor; cap­i­tal­ists vs. state; upper-class labor vs. middle/working class labor; finan­cial cap­i­tal vs. indus­trial cap­i­tal; big cap­i­tal vs. small cap­i­tal; etc. It take will­ful blind­ness not to see this.

    Tak­ing con­trol of gov­ern­ment, that is, the insti­tu­tion that is respon­si­ble for approx­i­mately 30–40% of the econ­omy while giv­ing a free pass to the rest of it also disin­gen­u­ous.

    The unelected and unac­count­able cen­tral plan­ners who serve poten­tial life terms within enor­mous and grow­ing cor­po­rate com­mand and con­trol insti­tu­tions have enor­mous power. These are minia­ture com­mu­nist states. Believ­ing that some poten­tial democ­ra­ti­za­tion of the state and not oth­ers (firms) is no real solu­tion at all.

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  • Anti­Moral­Haz­ard

    GSM, “Aus­tralians need to take con­trol of their Govt. Until then we are all sim­ply mus­tered out­side the slaugh­ter­house.”

    How are we going to do that when many Aus­tralians them­selves are co-opted by their prop­erty spec­u­la­tion?


    Anti­Moral­Haz­ard #62

    You allude to the dichotomy of the ‘Neo’ eco­nomic par­a­digm.

    On one hand we have a major­ity of the nation spec­u­lat­ing in some­thing akin to a fren­zied tulip bub­ble whilst their ‘Neo’ cheer­lead­ers tell them they are engag­ing in ratio­nal self inter­est.

    OTOH the mar­ket minor­ity who believe this is ponzi spec­u­la­tion are in effect athi­ests that the mar­ket is effi­cient at all prices and at all times.

    It’s axiomatic the effi­cient mar­ket athi­ests are the gen­uine effi­cient mar­ket mak­ers.

    His­tory is lit­tered with evi­dence the mar­ket is not effi­cient and that ‘Neo’s’ are bub­ble cheer­lead­ers and intel­lec­tual char­l­i­tans.

  • Sean

    Octo­ber 27th, 2009 at 11:13 pm
    Philip, I feel forced to place a slightly cranky com­ment in defence of my per­sonal lit­tle patch. I am a doc­tor, specif­i­cally a gen­eral prac­ti­tioner, and in return for ten years of train­ing, an IQ in the top 0.1% and a fifty hour week with one in four nights on call I am paid about $240,000 before tax. I keep my patients out of hos­pi­tal, and pro­mote health and pro­duc­tiv­ity for the patients I care for. Work­ing a 35 hour week with no nights my wife’s hair­dresser makes almost $180,000. I’m fairly con­fi­dent I could have done bet­ter finan­cially in other fields.

    Some­thing doesn’t sound right about those fig­ures. A GP in Rand­wick, Syd­ney con­fided to me that he was paid $80K p.a. out of the busi­ness after over­heads, and the aver­age pay level for GPs is under $100K in Aus­tralia — it is some­what higher in the UK and the US. A recent pro­posed change to Medicare would have pushed GPs payscales to about $120K — which didn’t go ahead, so they remain on the lower payrange. A friend of mine con­fided a while ago she was only paid $40 ph to be a locum, equiv­a­lent to about $80K p.a., out of which she had to draw her own super. Pay scale for grad­u­ate Drs in the hos­pi­tal sys­tem start at under $25 p.h., or $50K per year, includ­ing much worse con­di­tions than ‘being on call’ for one night a week, while other Aus­tralian work­ers are work­ing increas­ingly odd and casu­alised hours. Nurses are forced to work night shift reg­u­larly and con­tin­u­ally for much lower pay rates. ‘dan­m­m78’ claims to be mak­ing about 3x the usual GPs rate — s/he must be either very effi­cient or very slap­dash, or dis­cov­ered a model of ser­vice deliv­ery hereto­fore unknown.

    Spe­cial­ists such as anaes­thetists or sur­geons can make $200-300K after many more years study and sit­ting some gru­elling and expen­sive exams. I’ve also seen ‘com­pet­i­tive’ salary rate for Drs in the ADF in the high­est ranks, and it’s nowhere near $240K.

    Hair­dressers are extremely low paid on aver­age, which is one rea­son there is a short­age of them and the need to bring in many immi­grants to be trained as hair­dressers — a typ­i­cal wage would be $30K p.a. Some­how dan­m­m78 has dis­cov­ered what his wife’s hair­dresser earns, and it is appar­ently 6x the aver­age hairdresser’s salary for a ’35 hour week’.

    The aver­age national full-time salary is only $60K.

    And appar­ently there are loads of ways of mak­ing so much money in today’s econ­omy, with­out the auton­omy and dis­cre­tion that doc­tors enjoy, with no boss on their case — per­haps work­ing in a call cen­tre, for instance? Or per­haps work­ing in the finance sec­tor in the GFC with thou­sands of lay­offs of fore­merly well-paid work­ers and anciallry progessi­nals like lawyers also los­ing their jobs. Being a doc­tor is a pretty cushy and pro­tected occu­pa­tion all in all, and they milk that pro­tec­tion while always claim­ing they could have done this or that occu­pa­tion that would not suit their per­son­al­i­ties at all. Being a slightly nerdy sci­ence per­son in your own med­ical prac­tice with auton­omy and free­dom is not he same sort of job as man­ag­ing 10 staff and wip­ing their noses and check­ing their time sheets and hir­ing and fir­ing staff and so on, and all the other unpleas­ant jobs int he world when you look at them in detail, and more doc­tors need to face up to that fact and stop mak­ing super­fi­cial assess­ments of what they ‘cood­abeen’.

    darn­m78 is also rare among doc­tors in being in the top 0.1% of IQ in the pop­u­la­tion, the spread in the GP pop­u­la­tion is a lit­tle wider than that. I’m per­son­ally also a bit fed up with see­ing over­seas imported doc­tors in 2 local prac­tices as they tend to make wrong diag­noses or the cul­tural dif­fer­ences are such that they are not help­ful at all — and, you know, the Aus­tralian govt is grad­u­at­ing 2,000 doc­tors a year and import­ing 4,000, and the num­bers of grad­u­ates, allow­ing for short-term vis­its by over­seas doc­tors rather than per­ma­nent res­i­dency, should be at least 50% higher. I per­son­ally think that GPs being paid around $80-100K in Aus­tralia is about right given the qual­ity of the work they do and the some­times shod­di­ness and arbi­trari­ness of their work that I have seen. Lots of wasted trips to quacks with wrong diag­noses, basi­cally.

    With regard to the rest, I find most doc­tors aren’t really inter­ested in keep­ing patients out of hos­pi­tal or their health or pro­duc­tiv­ity — they are inter­ested in pus­ing the lat­est drug co rep’s drug onto the pop­u­la­tion, often with debil­i­tat­ing side effects that hurts their pro­duc­tiv­ity, and with ques­tion­able main effects regard­ing effi­cacy. They like to keep peo­ple wait­ing all morn­ing at their surgery, wast­ing a half-day of their time out of work to suit their delib­er­ately over­booked sched­ules (after all, it’s a busi­ness), and give them a drug that will make them tor­pid every day they take it, or worse. They oper­ate in a ‘5 minute model’ of quick-fix med­i­cine which requires the govt to bribe them to stay longer with a patient, apart from the fact that the govt is the main payer of ser­vices already. Despite the ‘high level of care’, Australia’s rate of hos­pi­tal­i­sa­tion is about the high­est in the west­ern world, for some rea­son. Nicola Roxon’s first con­cerns on becom­ing Health Min­is­ter were about ‘pre­ven­tion’, clearly some­thing many doc­tors were not address­ing in their pri­vate prac­tice model. In fact, there is still no onus on donig this, the govt skirts around the prob­lem by run­ning pub­lic health media cam­paigns instead of revis­ing GP pro­to­cols on pre­ven­tion or demand­ing the Col­lege of GPs reform its train­ing con­tent.


    Lis­ten to the lan­guage of the MSM ‘Neo’ cheer­lead­ing each night.

    One exam­ple of ‘Neo’ effi­cient mar­ket zeal­ous reli­gion…

    The ‘Neo’ reli­gious spruk­ers will say ‘The maket was down sig­nif­i­cantly today on profit sell­ers’

    They will NEVER say ‘The mar­ket was down sig­nif­i­cantly today on loss buy­ers’

    The real estate indus­try is just as zelous in its cheer­lead­ing of effi­cient mar­ket reli­gion.

  • rluk

    Debt defaults hap­pen more than you would think. Nearly every coun­try on earth has defaulted at least once, many sev­eral times.

    The mech­a­nisms of a default would roughly go like this: Trea­sury has debt due. Wants to roll over. Auc­tions bonds. Not enough buy­ers. Can’t rollover = Default. 

    I take your point that tech­ni­cally the cen­tral bank can step in and buy the bonds, but who is to say they will? They have failed to count­less times over the past few hun­dred years.

    Fur­ther­more, in lots of coun­tries the cen­tral bank has some mea­sure of inde­pen­dence from trea­sury. For exam­ple the ECB is express­edly pro­hib­ited from pur­chas­ing gov­ern­ment bonds directly from Euro mem­ber states. 

    Japan is a pretty unlikely can­di­date for default at the moment, but their gross govt debt is huge and gross national sav­ings are set to reduce as the coun­try ages and the pop­u­la­tion shrinks.

  • ak


    Obvi­ously you are right regard­ing default­ing on bonds when money was based on gold stan­dard. But the par­a­digm has changed. The politi­cians will not allow for this kind of insta­bil­ity.

    Regard­ing the EU they also have rules which they don’t obey regard­ing bud­get deficit of the mem­ber states. 


    I wouldn’t worry for them. If the Ger­mans or French need to bend the rules they know per­fectly well how to do it — just look at how they are push­ing the Euro­pean Con­sti­tu­tion down the throat.