US debt default and Australia

Vanguard November 2013 p. 7
Jim H.

The Reserve Bank of Australia has admitted it was helpless in the face of the US government default crisis because it could not predict or properly prepare for how the drama would play out.

In the week before writing, the US Congress approved a late deal to increase the US borrowing authority for a few months and end a partial government shutdown. Of course this does nothing to resolve the American debt crisis except to buy a little more time.

It is telling though that the situation drove the Reserve Bank of Australia’s governor Glenn Stevens to publicly state that the result could have gone “very badly” for Australia. What he means is that a default would have pushed down the exchange value of the Australian dollar.

How could this be?  Because it is the flood of American dollars, mainly into government and private bonds and to some extent company takeovers that is keeping the high exchange rate.

It is the outcome of a high demand for Australian dollars. This is possible because of the close and subservient linkages between the Australian and American economies and the strength of mineral exports. The US is using this to export its crisis.

The Australian dollar is also being held higher than it would otherwise be by exports to China, which continue to grow in value. This remains a secondary factor however.

In the short term, a high value dollar makes the price of imports relatively cheap but provides few export opportunities. An American default would have an impact here through a fall in the Australian dollar due to less American demand. This is what Stevens is talking about.

From the longer perspective, an ongoing high value dollar is increasingly distorting the Australian economy. It is a major factor behind the fall of manufacturing and the over dominance of mining and the financial industry. Even more to the point, it is serving to strengthen the economic and therefore political and cultural domination of Australia by American interests. This is not good.

The US Congress decision immediately pushed up the Australian dollar to $US96.47 and share prices on the Australian stock market by 0.7%. It is telling.

The Reserve Bank is now under pressure to ease interest rates again, underlining the essential weakness of the Australian economy.

Australia needs to assert much less dependence on American interests. This cannot be realised unless their economic and political clout  is overcome. A government and institutional system that is based on dependency cannot do the job. Australians must, as a people, provide an answer to this by their own efforts.

Meanwhile the threat remains. It is important to prepare for the worst. Prepare for the possibility of a default actually occurring. Prepare for breaking the link that is bringing so much long term hurt to Australia and the people of this country.