A little over 30 years ago the Australian dollar was permitted to float on international currency and futures markets.
The prevailing wisdom of the day was that the value of any national currency should be determined by market forces through which a form of fiscal discipline would be imposed on both Government and economies. It was believed national economic efficiency would then reign supreme.
Before the idea of floating currencies took hold the gold standard was among the more popular methods of underwriting currency value and thus conversion rates to other currencies.
Trade is materially affected by exchange rates. A higher exchange rate makes exported goods more expensive and imported goods cheaper. Whereas a lower exchange rate means exported goods are relatively cheaper and imported goods become more expensive.
Exporters generally prefer lower exchange rates as it make their prices more competitive and importers prefer higher exchange rates as it makes imports relatively less expensive.
In absence of direct Government control over exchange rates, politicians have very few levers to pull that may materially affect currency value. Interest rates is the main option, relatively high interest rates on say, Government bonds, attract international inflows of capital seeking a good return which has the effect of pushing up the exchange rate. Lower interest rates have the opposite effect.
Transparent and competitive
The fundamental fulcrum and prime reasoning behind floating exchange rates was that the financial market in currency buying and selling was open, transparent and competitive in the most purist capitalist context. So much so that such a market would deliver “true value” or intrinsic value to any national currency.
Well, that was then. Today any keen observer would require copious amounts of courage to believe anything remotely similar to those outdated views of open markets and intrinsic value.
Many believe large international financial institutions have a degree of power and control over pricing today whether it be currencies, commodities or equities that could only have been dreamt off decades ago.
Through wolf pack buying, selling and churning of futures contracts along with “dealer always” wins computerised trading it is suggested the major international players can turn any currency into one of their playthings driving it up (or down) to whatever price they choose as well as prices of gold, iron ore and so on.
For the most part Governments can only stand by helplessly while “the boys” ply what some believe is their trade or cartel control and price manipulation over anything that piques their interest.
Temporary boom in short term jobs
Recently Australia endured the twin effect of these tactics. An absurdly high price for iron ore which drew large sums of rent seeker money into unsustainable business models the ultimate effect of which has been to see many Australians put out of work.
Moreover, a temporary boom in short term jobs few of which were ever going to be medium or long term sustainable.
At the same time a remarkably high exchange rate was crushing Australian manufacturing and secondary industries and exporters was the high iron ore price.
The primary beneficiaries from the high exchange rate and high iron ore price were the mining operations that were mostly internationally owned anyway and were financed by the same folks who were controlling the currency and commodity pricing.
It is true Australia did benefit from some short term well paid jobs in remote mining operations and Government did gain some short-term revenues from taxes and levies, but with the overall loss of so many jobs in manufacturing and secondary industries exports generally could this exercise be viewed as a runaway net gain for Australia?
The mobility of capital and the degree of control over market mechanisms by the bigger international financial players suggest that floating exchange rates or their imagined benefits are a unique 1970s-1980s answer to the presumed challenges of those times.
Is it now time to revisit how currencies are valued and traded to better reflect the economic realities of our times?
David Gray is lead consultant at BizTechWrite (BTW) which offers comprehensive technical on-Line E-learning services, course development, learning management systems, web content and support. David can be contacted at firstname.lastname@example.org