Wednesday, August 15, 2012

Dollar problems


Tim Colebatch writes that the Reserve Bank should definitely do something to bring down the Australian dollar.

As usual, I find him convincing and reasonable:
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......

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.
Update:   David Uren in The Australian strongly disagrees, claiming that the Swiss experience exposes the country to big dangers.

Hmm.  I can't tell how valid his arguments really are, but I generally do not trust the Australian with its current set of writers and editors to do an adequate and unbiased job on reporting anything political, economic or scientific.     

I am therefore skeptical that he's got the better case.

And incidentally:  doesn't this just show was a hopeless bunch economists are?   They can barely agree on the source of problems, let alone solutions.  

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