exchange rate – Thomas the Think Engine

The Australian dollar has just tumbled. How should that make us feel?

Well for starters, you should feel poorer. If you have any positive number Australian dollars, they are now worth less in international markets.

That’s a 6.2 per cent fall against the USD and a 4.5 per cent fall against the trade-weighted index during the month. That makes imports more expensive

If electricity prices or taxes went up that much, we’d have hyperventilating shock-jocks all up in our front pages. But when the dollar moves that much, the silence is tangible.

That’s actually crazy. We spend far more of our money on imports than we do on electricity. We spend a similar amount on imports as on taxes.

If there is no locally made equivalent for what you like to buy (e.g. a laptop computer, quality coffee, petrol, most clothing) you’re just stuck paying more for what you love. But before your weeping becomes unconsolable read on: a lower dollar could actually do some good, eventually.

The benefit to the Australian economy works in two ways:

1. Australian exports start to look cheaper, and they sell more.

The upside will be extra apparent to you if the company you work for does exporting. Exporting is rarer than you might think. Just 2 per cent of Australian firms export (although obviously they tend to be bigger firms with more employees).

If you work for BHP Billiton, CSL or a school that teaches English to international students, your employer should find sales lifting without any extra effort, and you should find that the payrises start flowing a little more easily. Beauty, mate!

2. Consumers start buying Aussie products, not the imported equivalent.

If the product your company makes competes with foreign imports (including overseas travel), the fall in the dollar will help. Maybe your company is in food production or owns hotels on the Gold Coast. If so, plan for better times ahead. But don’t get overexcited.

The time it takes for a lower dollar to flow through to higher-priced imports can be long. While some things like petrol are traded frequently on world markets, most imports have their prices locked in well in advance.

So, on balance, how should you feel about the lower dollar? It depends.

If you’re a big fan of buying Australian made and you think foreigners should be too, happy days are ahead.
If you’re a connoisseur of foreign made products or a fan of international travel, then it’s more gloom and doom.
If you work in the Australian economy, then you can (gradually) start to whoop it up.
If you’re retired and you mainly consume the output of the Australian economy, then things look less rosy.

This is at once the blessing and the curse of writing about economics. It’s the Kurt Vonnegut effect: there’s no simple story – no absolute doom and gloom.

Every change in price that hurts someone helps someone else. Even if this seems like a windfall to you, the polite thing to do is re-arrange your face into a neutral position and carry on with your day.

Story-telling, the exchange rate and Kurt Vonnegut

The Australian dollar has gone up! The only clear effect of that is that headline writers are in desperate need of a simple story to tell.

I wrote currencies for two years and there is always someone telling you that if only the dollar would fall below Parity / US90c / US80c / US70c, Australian industry will suddenly be in a bed of roses.

Of course the young reporter will include such a statement in a story, because – finally – they have something to say about the currency that could garner a few clicks.

But of course the reporter knows it is not true. There is no magic level for the dollar.

Every little fall in our dollar increases the benefit of exporting. A certain firm may have a break-even level, but an industry will find its exporting grows easier gradually, not step-like, as the dollar falls.

The effect on “industry” is in fact, even more complex than this. Firms don’t just sell. They have to pay employees and import material and equipment. That’s easier with a high dollar.

The simple story is high dollar = bad. But with a really high dollar in the last few years, the Australian economy grew fast, and Australians enjoyed a high quality of life. We bought overseas holidays, flat-screen TVs, overseas apparel, smartphones and Apple Mac computers at an incredible rate.

With a low dollar, such consumption is harder. But businesses should be better off. There will be less competition from imports, and it should be easier to export. But of course the equipment and materials they need to import as an input will rise in price.

It’s almost as if every time the dollar moves, someone benefits and someone loses! The whole thing brings to mind, for me, Kurt Vonnegut’s famous graphing of stories.

The industry wants you to believe that a rising dollar is a bad to worse story. The journalist writing the story is not going to fall for this – they want a better story arc than that.

They position it somewhere along the arc of the first two graphs: Industry had it good for ages, now it is bad. Or, for ages industry had it bad, now it is looking good. But such arcs are only ever true for a sub-section of the economy. Overall, we seem to be able to thrive whether the dollar is low or high.

Here’s the truth: Any move in the dollar is an ambiguous and mysterious development. It takes with one hand and gives with the other. If you’re worse off at work, you may be better off at home. If you lose your job making exports, you may get a job delivering imports, etc.

The ineffable nebulousness of any story about the currency is of course a headache to headline writers. $A Crash Causes Yet More Ambiguity is a headline for a post-modern prose poem, not a news story. It will not fly. It will not get clicks. Do not even try to talk to the subeditor about the way really, uncertainty is the marrow of life

Vonnegut, of course, turns nebulousness into celebrated works of literature. But currency writers are no Vonnegut.

You can expect the inherent uncertainty that should be the backbone of currency stories to remained concealed.

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