
Issue No 73		13 October 2000

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Economics

At The Mercy Of Gamblers

By Frank Stillwell

The plunge of the Australian dollar relative to the greenback has consequences for Aussie workers according to Frank Stillwell.

The sharp fall in the value of the Australian dollar has important implications for Australian workers. It may all seem a bit remote from our everyday lives: after all, most workers aren't speculating in international currency markets, and only a minority are considering overseas holidays. But all of us are affected by the changing prices of imported goods, by higher interest rates and other general changes to the conditions in the Australian economy.

At the outset it needs to be emphasised that it is the American dollar which is at the centre of the action. Its value has risen generally, relative to most other national currencies, not just Australia's. That reflects buoyant conditions in the US economy and the politics of the US Presidential election. It is hard to see any correction coming until after the election, unless there is a major economic collapse. The sharemarket there is considerably over valued, according to most commentators, so a correction or even a crash can be expected eventually. Meanwhile all of us have to live with the consequences of the pumped-up American political economic conditions.

What does this mean for Australians? The financial press has made much of the potential benefits for our export industries. Their products are cheaper on world markets to the extent that the Australian dollar has fallen relative to other currencies. That should help in the competition with US exporting firms in particular. However, the volume of sales has to rise proportionately more than the fall in the value of the currency for there to be a net increase in sales revenue in terms of Australian dollars earned.

Meanwhile, imported goods - especially US imports - are now relatively more expensive. If that causes Australian consumers to stop buying them, that could improve the nation's trading balance. But that is a big if. In some cases there are no locally produced substitutes: the inadequacy of Australian industry policy has let some industries go to the wall. In other cases, consumers just carry on buying the imported goods (perhaps unaware of the relative price changes partly as a result of the coincidence of timing with the impact of the GST or perhaps just because of a continuing 'brand loyalty'). So the lowered value of the currency causes both an inflationary impact and an adverse effect on the overall current account deficit.

The general inflationary stimulus coincides with the specific effects of the rising price of imported oil. The sky-rocketing petrol prices are a major element, both directly and indirectly, in an inflationary surge. Inflation has not been a problem for over a decade now, but this situation now looks increasingly unsustainable.

The conventional response of the monetary authorities, facing a resurgence of inflationary pressures, is to further increase interest rates. The intention here is presumably to 'choke off' the 'excess demand' and thereby reduce economic growth. This is fundamentally misconceived to the extent that the inflationary process is driven, as I have argued, by a 'cost-push' rather than a 'demand-pull' process. Moreover, such a policy has potentially very damaging effects - increasing unemployment, raising the costs of investment for small businesses, and hitting hard at those trying to pay off their loans, particularly home buyers. It is particularly inappropriate for those parts of regional Australia already facing relative economic decline.

For the nation as a whole, the lowered value of the Australian dollar also intensifies debt repayment problems. To the extent that the foreign debt is set in terms of US dollars, the effect is to raise the interest repayments in terms of Australian dollars. A significant proportion of this burden falls on corporations because they account for much of the total foreign debt, but some falls as a burden on government finances. That has broader implications for the capacity of governments to reduce taxes and/or increase expenditures on social services and much-needed public infrastructure. Given that our federal government leaders are ideologically opposed to those sort of social expenditure programs anyway, they are likely to use the falling dollar as an excuse for even more cuts. Health, education and social security policies are the obvious targets.

So there are plenty of reasons to be concerned about the value of the currency. It is not a symbol of the overall health of the economy: its value depends more on the activity of speculators than on any 'economic fundamentals'. But a plunge in the value of the currency can have adverse social consequences, magnified by the responses of the monetary institutions and a conservative government seeking excuses for stiffer doses of 'economic rationalist' medicine.

So what can be done? Reserve Bank intervention in the foreign exchange market can help to 'prop up' the value of the Australian dollar. Indeed, this can be a source of income for the Reserve Bank if the value of the dollar rises as a result of its active purchasing of dollars in the market. However, it is a risky strategy because, if the RBAs purchasing does not significantly offset the effect of widespread speculative selling which is pushing the dollar's value down, the nation's reserves are depleted.

More generally, the need is to eliminate the speculation in currencies which is at the root of the problem. Over 19 out of every 20 transactions in the foreign exchange market are purely speculative, having nothing to do with the financing of foreign trade or travel. There is growing interest in an international tax on currency transactions - the so-called Tobin tax - as a means of discouraging that speculation. But speculation seems to go hand-in-hand with capitalism. That observation suggests a more radical conclusion!

Frank Stilwell is Associate Professor of Political Economy at the University of Sydney. He is the author of the new book, Changing Track: a New Political Economic Direction for Australia, recently published by Pluto Press, Sydney. His book proposes an alternative to the prevailing economic rationalism.

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Issue 73 contents

Interview: Righting The Wrongs
Improving the lives of Aboriginal people can't be taken out of the context of the economy, welfare and other areas says Bob McMullan, Shadow Minister for Aboriginal Affairs.

Economics: At The Mercy Of Gamblers
The plunge of the Australian dollar relative to the greenback has consequences for Aussie workers according to Frank Stillwell.

History: Labour History Under Seige Again
The Friends of the Noel Butlin Archives Centre have recently been informed of proposed changes to the Noel Butlin Archives Centre (NBAC), changes that will cut staff by more than 50% and leave the Archives mothballed in the tunnel where the repository is situated.

Workplace: Fighting The Flexible Firm
We are told that hardship and exploitation at work is dying out, and the new economy offers opportunity, freedom and job satisfaction for all. Richard Sennett unveils the true nature of the flexible workplace.

Safety: Being bossed around is bad for your health
A survey of more than 3,000 Australian workers has revealed that some 54% of workers experience intimidating behaviour in their workplace. In almost 85% of cases it is employers, managers and supervisors who are identified as the culprits.

Unions: Discrimination
New to the union and the maritime industry and with only a few days casual work to live off, Stephen Rolls courageously spoke up against individual contracts during a job interview with Burnie Port Corp.

International: Serbian Workers and Their Unions Fight for Freedom
Serbian workers and their unions have been at the forefront of the struggle for democracy in Yugoslavia as they led a general strike in response to attempts by President Slobodan Milosevic to nullify the defeat he faced in the Sept. 24 election.

Satire: A few more years of civilised brutality will advantage Aborigines: Ruddock
CANBERRA, Tuesday: The Minister for Reconciliation Philip Ruddock has defended his comments to French newspaper Le Monde claiming that Aborigines were disadvantaged because they were late in coming into contact with developed civilisations.

Review: Poetry For Workers By Workers
Poems about the trials and tribulations of a waitress and what you learn in a chocolate factory are among the gems from the 925 anthology.

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