Oct 27, 2008

Et tu, economy? Then fall, Aussie Dollar!

A Facebook friend recently posted a note declaring his economic ignorance, and pleading for someone to explain how the Aussie Dollar has gone from near-parity with the greenback to South Pacific peso territory.

I am no economics expert, and struggle often with understanding the global financial crisis we find ourselves in. But dealing with the subject every day in the newsroom, I am constantly trying to improve my own knowledge and comprehension.

So I cobbled together an explanation...

The Aussie dollar used to be fixed. In the 1980s, it was "floated", so it became like a share or a stock, able to be bought and sold at varying values.

But if the US dollar, pound or euro are a "blue-chip" shares - ie, less risk, then the Aussie dollar is like an ostrich farm project - ie, riskier, but a good potential earner if the eggs hatch. The economists call it "high-yielding".

Over the last couple of years, the Aussie dollar has been strong against the greenback, because there's been strong growth and high demand for Australian goods from overseas - mostly raw materials that we dig out of the ground, chuck on ships, and shoot off to China. Also, America’s economy has been slowly slowing, but more on that in a minute.

You need to spend cash to grow the economy. But spending too much too quickly can lead to too much growth, meaning higher prices for everything (higher inflation). So the Reserve Bank of Australia put interest rates UP over the past few years, to try to stop people spending as much. Of course the biggest impact that has is making it more expensive to pay your mortgage. But from what I understand, higher interest rates at home, help make the dollar stronger. So basically - it sucks to be a home-owner, but it's a fine time to be a traveller, particularly if you’re heading States-side.

Now this year has seen a collapse on the share markets, primarily because a bunch of US banks lent money to people to buy houses who really shouldn't have gotten loans. It was OK while the economy was still growing. But then the economy slowed. I don't really know why, but it meant a bunch of people suddenly couldn't afford all their repayments. All of a sudden the big banks that had all this invisible money found themselves like Wiley E. Coyote standing in mid-air after the cliff has fallen out from under them. Whooosh, smash, meep meep, that's all folks.

The likely result of all this is a recession - meaning people lose jobs and consequently have less cash. So they need less stuff. Turns out the stuff they don't need is the stuff Australia has. So they sell off their Aussie dollars, heading back to the "blue-chip" US dollar.

A whole bunch of people getting the hell out of Dodge generally means prices go down. It's like if you found out your house was on a radiation dump. You'd want to sell out, and you'd eventually take a price, even if it was way lower than what you paid.

On the home front, the Reserve Bank has started cutting our interest rates, to help people start spending again. If overseas people aren't buying our stuff, we'd better get more people at home spending up. But essentially we're left in the opposite position, which is that it's much better to be a home-owner (pay less on your mortgage), but sucks ass to be a traveller, because all of a sudden nobody wants your currency and a milkshake in London costs the equivalent of a day's salary.

The bottom line is in tumultuous times people aren't going to branch out into buying Aussie dollars, making them less in demand and therefore worth less.

The upside is our exporters might catch a break once the dollar stablises, and we might get more tourists here exchanging their sweet pounds and euros. But if you want to go overses, or buy fancy TVs or posh European cars, then it's going to suck the big one for the next year or so.

Am I in the ballpark? I'd welcome any feedback or corrections!

18 comments:

  1. your pretty close girl clumsy if not actually spot on?

    most currencies are floated and their mainly rated against the us dollar as the american economy is the biggest or was anyway...

    the sub prime dramas were the trigger..

    banks lending 110% on the true value of homes..multiply this by a few million and people r paying off homes worth nowhere near their mortgaged value..

    something had 2 give...

    between 10 and 20 million homes r now empty as people have quite simply just walked...

    the dollar being low is terrfic for exporting aussie goods most particularly the farmers..but remember its still worth 100 cents within our shores..

    i dont understand at all the price of fuel...the price of crude has dropped by more than half yet we r still paying 26 cents more than we should..

    and yes goods coming in will increase..

    the people in the know..financial planners / accountants etc tell us we must stop spending and economise..

    but

    if we all do this?..the economy will grind 2 a halt...

    i guess we need 2 do both..we both must spend and economise at the same time..

    but if we check history on recession/depression...this is a so called ( normal occurance )....

    perhaps they need 2 happen???

    ironicaly...

    if world war broke out...for the first part the worlds economies would boom...hard 2 find cash / credit would all of a sudden appear from the black hole!!!

    is the pound really that sweet?

    cheers

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  2. As I understand it, the reason for the A$ heading downwards (like the world trade centre) is due to hedge funds arriving at the time when loans have to be repaid.
    As they didn't see the this particular traincrash coming, they now have to find lots of US$ to cover their repayments, so they are selling off all of their other currencies.

    As to the sub-prime disaster, the people who couldn't afford to buy a house under any circumstances were offered(by mortgage brokers, whose job it is to sell houses) not only 100% of the value of the house but also enough to cover all other costs plus the brokers fees ie about 120%. The brokers then sold the loans to the US banks, who, in turn on-sold them to other banks around the world
    All went well until Wile-E-Coyote very slowly put his foot through the cloud and found there was no nothing supporting him and it was WTC time around the world.

    As far as fuel is concerned I think it is a case of the fuel companies getting away with it..
    Yes the A$ has dropped 25% but a barrel of oil has dropped 50%
    According to figures I have heard of, the price of a litre of petrol should drop (or rise) by one cent for every one dollar the price of a barrel goes down (or up). The oil price has reduced to about $70 per barrel, add on the reduction in the A$ and as CH says we should be benfitting by about 26cpl,
    But of course until the government says "Hang on..." the fuel companies will go on making their windfall profits (you haven't heard them complaining about the shocking state of the world, have you)and, of course the Government is too busy keeping it's eyes on the world

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  3. Stupid Australian dollar! It doesn't only affect travel obsessed types, it also affects those of us who like to buy our clothes and things online! Especially in time for halloween :(

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  4. Im always darkly amused by the fact people think that fuel companies have to lower the price for fuel because the oil is cheaper. Why? They have a commodity that you want. They charge what they want and if you don't like it.. don't buy it. They are not an elected body, they are not a government agency, they are not your friend, they are a business.. probably the world's biggest. When the price of sugar goes down in the world I have never heard anybody say "Damn that Coca-cola-Amatil the sugar is cheap by fizzy drinks are still three dollars a bottle from the machine". Of course we need oil more than fizzy drinks... and the oil companies know it and charge accordingly. So, feel free to vent your spleen at our society's idiotic dependence on sweet light crude but stop making it sound as if oil somehow belongs to the people of the world and the oil companies are criminals hogging your oil. It is a commodity they dig from the ground, refine and pass onto to you.. and you are the junky desperate for their next fix and whinging at how their dealer doesn't treat you nicely.

    Get off the junk, junky.

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  5. Hey GC, just shared this with the senior economics teacher here at work and he was rather impressed. The factor you overlooked, in his exceptionally learned opinion, was that when the interest rates are high, overseas investors are lured into putting money into Australian banks with a view to getting better interest rates due to the higher interest reserve. When these people suddenly lose a lot of money, such as in the sub-prime crash, they grab their money ans skidoodle.

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  6. Hey guys!

    Thanks for the positive feedback!

    Alice you're right, it is crappy for importers - I should not have held off on buying a bunch of books from Amazon!

    And Chris, thanks for adding in that extra detail. Although I'm a bit embarrassed you showed it to an economics lecturer! Yikes!

    I'll leave the Wah and the Ancient Man to jelly wrestle the big oil companies!

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  7. A "B"?!?!?

    I'm quite proud of that!

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  8. i wasnt whinging about fuel prices

    i just dont understand them

    i drive a v8 so i knew the score

    fuel junky and proud...

    cheers

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  9. i dont know if anyone else likes 2 have a wager on the cup next tuesday?

    i just love this time of year

    anyone having a bet

    the best of luck

    cheers

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  10. I don't think I was whinging about fuel in particular (although the thought of jelly wrestle is curiosly stimulating)
    My complaint is the fact that fuel companies like to beat their breasts about their inherent goodness when the blowtorch is applied but, given the opportunity will screw the public (ie when everyone is too busy to notice) till they squirm.
    They will also try the old "don't blame us it's the Oz dollar" in the next week or so

    I agree that we don't curse CC Amatil or Woolies and Coles
    Maybe we should man the barricades, fill the molotov cocktails and go and visit the above mentioned.
    Although at $1.32 a litre we won't get too many bangs for 10 bucks...
    Did you know that there was a time when CCA was looking at vending machines which would adjust their price according to the daily temperature ( temp. up = price up)
    I think it all fell through when it was realised that most vending machines were in A/C'd buildings

    Congratulations on the B, GC
    Soon you will be the Noel Whittaker of the web ...and much better looking.

    Scuse me must go:
    I like aeroplane jelly, aeroplane jelly for me, Tra la la...

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  11. your spot on ancient one

    my partner and i r thinking about getting another horse..

    i may call him fuel junky

    i can c him now racing down the straight..

    10 litres in front

    cheers

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  12. To complete my rant
    Did you all see the piece in the CM today?:
    "Australian fat cats get richer three times faster"
    Apparently from 2001 to 2007 the pay increase for the 69 CEO's in the Oz top 100 companies was 106% against the 32% in the average adult weekly earnings.
    When you consider that they started out a lot higher up the ladder to begin with and, no doubt, got their contracts paid out when they stuffed up then it is true:
    "Hangings too good for them"
    (not sure who said that)
    And to continue with GC's Shakesperian theme:
    "A pox on all their houses"

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  13. or may a 1000 fleas infest their armpits


    cheers

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  14. Just more proof I need to find me one of those awesome fat cat jobs!

    I'll ride out the financial crisis on my super-yacht, sipping sweet wine while surrounded by palm-leaf waving Chippendales. Nice.

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  15. that's all well and good, but have you watched THE BREAKFAST CLUB yet?!

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  16. i have little or no doubt G C u will be ceo of fairfax ltd...

    that beautifull cruise liner is in brissy atm...

    ooooh man that wld b sooo cool walking her decks let alone sleeping above her waterline

    cheers

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  17. Wow! I actually understand now! Thanks girl clumsy, I was seriously boggled about how it all worked, all I knew was that it was the ebb and flow of finance.

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