Crikey



Abbott confused on A$ — and that gift to the RBA

Tony Abbott

Did Prime Minister Tony Abbott’s confusion over economics and the strength of the Australian dollar lead him to mislead Parliament last week, and suggest the Reserve Bank had done a deal with the government to lower the value of the dollar?

The RBA’s continuing efforts to jawbone the dollar down appear to be bearing fruit after Governor Glenn Stevens’ latest effort on Friday when he expressed a wish in a newspaper interview for a dollar around 85 US cents. But less than 24 hours earlier, Abbott said something that appeared to suggest there was a trade-off between the RBA’s efforts to lower the currency and the still surprising decision by the government to inject $8.8 billion into the RBA to boost its main reserve:

I am pleased to say that what goes up can come down, and the floating dollar is now down to about 90c, a level which makes it much easier for our manufacturers and for our exporters. I support the floating dollar just as, it seems, the member for Kennedy supported the floating dollar, at least when it was low in the mid-1990s. Just as well that the Reserve Bank has been, in effect, recapitalised to the tune of $8 billion because that enables the Reserve Bank to intervene prudently and appropriately in the market to try to ensure that the Australian dollar is at the best possible level.”

Putting aside that Abbott famously attacked the floating of the dollar in 1994, his remarks appear to indicate that Treasurer Joe Hockey’s wholly unnecessary near-$9 billion handout to the RBA to strengthen the bank’s capital reserves (and pay back bigger dividends in coming years) was actually to help it reduce the dollar’s value.

On Friday, Abbott followed up those comments with slightly different ones, saying that the market should determine the value of the dollar but “that doesn’t mean the Reserve Bank shouldn’t from time to time prudently involve itself in the market to encourage what it thinks is the right market developments”. So, strictly speaking, Abbott doesn’t believe the market should always set the value of the dollar — he thinks the RBA should sometimes step in to “encourage the right market developments”.

Despite the Prime Minister’s comments, the RBA actually is doing little at the moment — it is not, to the best of our knowledge intervening to drive the dollar’s value lower by selling the dollar for US dollars or any other currency. Senior officials are trying to talk it down by publicly commenting on the value, how it is too high — and in the case of Stevens, pointing out how the bank can intervene if it has to, to try and force the currency lower. But on the basis of data from the bank and comments by Stevens and his deputy, Phil Lowe, the bank has been talking, not doing.

Doing is something the RBA only does in times of extreme stress. Intervention is an easy way to lose money for a small central bank like the RBA; the forex market is simply too big and the Aussie dollar / US dollar is the fifth most traded currency pair in the market. It’s all but impossible for the RBA to influence its value, except those times of extreme stress. These are not those times.

It seems that Abbott doesn’t have a basic grasp of why exactly he’s blowing a $9 billion hole in his own deficit …”

But the odd thing about Abbott’s remarks linking the $9 billion to pressure on the dollar is that there is no link. In contrast to the urgency portrayed by Hockey, the RBA hasn’t received the funding yet — as Treasury’s briefing on the issue to then-treasurer Wayne Swan earlier this year noted, there is no mechanism for the government to simply hand $9 billion to the RBA, so it will require a parliamentary appropriation. The RBA will in turn use the funding to buy foreign currencies, mainly the US dollar, because it aims to hold just over half of its assets in foreign currencies.

The $9 billion in fact has no bearing on whether the bank can intervene against the strength of the dollar — for one thing, it’s nowhere near enough to make a big difference. And pushing the dollar down will actually increase the value of the bank’s foreign currency holdings, rather than deplete its assets as Abbott appeared to suggest. It seems that Abbott doesn’t have a basic grasp of why exactly he’s blowing a $9 billion hole in his own deficit (no matter how much he might insist it’s Labor’s deficit).

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16 Responses

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  1. What a shock - the bloke who promised lower taxes, bigger spending, lower debt and bigger surpluses doesn’t understand economics!

    Just 3 months in and the “This is the ALP’s fault” arguemtn on the deficit is already being called out by all but the News Ltd press - Hokey isn’t going to get any sympathy when he announces another deficit in May.

    by Jimmy on Dec 16, 2013 at 1:20 pm

  2. Knowledge is irrelevant - Tony is happy with his first 100 days, and is quite satisfied with his own intelligence - what more could an honest taxpayer ask for?

    by leon knight on Dec 16, 2013 at 2:08 pm

  3. The only reason why the the government is injecting the cash is for prop up the RBA’s reserves (which are sitting at around 2% of Total Assets). As the Australian dollar has strengthened, the value of the foreign currency assets of the RBA has decreased, and hence reduced the total assets of the RBS. This has led to the risk of the bank going into negative equity…never a great thing for a central bank, even one as highly regarded as the RBA.

    I did a regression on this not so long ago and found that a 1% increase in the value of the Australian dollar against the US dollar resulted in a 0.87% decrease in the total Assets of the RBA (holding interest rates constant, statistically significant at the 95% confidence interval). Adjusted R2 was only 17% to be fair, but it isn’t a fallacy to suggest that the injection of funds into the RBA was partially due the strengthening dollar.

    However, there was also an element of the RBA trying to get more cash out of a fresh incoming government as well. There was no need to get the reserves to 15% TA when 10% was probably plenty (and a good compromise)

    by Scott on Dec 16, 2013 at 4:57 pm

  4. Scott - did the RBA ask for the money, no! Did the RBA say they were surprised to get the money, yes.
    Is this just a cynical exercise to make the deifcit bigger this year then pull back bigger dividends to try a show some improvement in future years, yes!!!

    by Jimmy on Dec 16, 2013 at 4:59 pm

  5. He’s Abbonomical with the truth too.

    by klewso on Dec 16, 2013 at 5:03 pm

  6. The RBA also said it was a “prudent” thing for the Government to do, so let’s not get lost in the symantics of “Did they ask for it or not”. The reserve is down to 1.85% of TA as of last week so maybe the Government is playing it smart.
    As for the politics of the move, well a lot of speculation regarding Hockey being able to rip higher dividends out in the future when the Aussie decreases in value, but they could do that anyway, without the upfront injection of capital. So I don’t think that is really the motive. I think Hockey reconns the QE program has still some more time to run and hence it will be a while before the Aussie drops substantially. He could be right. Picking currency movements is pretty tough and I wouldn’t be commenting on crikey if I could do it consistantly. (I would be watching the sun set on my boat moored off Bora Bora)

    by Scott on Dec 16, 2013 at 5:34 pm

  7. That “Inevitable Abbott Recession” seems to be doing its job of getting the dollar down.
    Onya ‘Tone!

    by Hamis Hill on Dec 16, 2013 at 7:05 pm

  8. At first I used to think that the litany of lies, falsehoods and patently wrong things that emerged from Abbott’s mouth was because he was an ignorant, dumb, bigoted and stupid muppet, however I now feel that I am wrong.
    It appears that no matter how contradictory to reality any statement that Abbott utters, it is just glossed over by a stunningly passive media.
    I take it all back, Abbott and his familiar Credlin are evidently arch media manipulators able to bamboozle the best of Australian journalism.
    A media that appears unable to realise that the LNP are feeding them bullshit when they even bother talking to it.

    by DiddyWrote on Dec 16, 2013 at 8:34 pm

  9. Abbott - the prime minister we had to have”

    by klewso on Dec 16, 2013 at 9:03 pm

  10. Scott - It isn’t just about making future deficits lower by getting biggere dividends - it is about making this one bigger so future deficits look like things are getting better and making the ALP look worse.

    It will be interesting to see what Mark Stevens has to say at the senate hearings.

    Also considering we have a “budget emergency” don’t you find it strange that the govt can blow the deficits out by a further $8.8b just to give it to the RBA?

    by Jimmy on Dec 17, 2013 at 9:03 am

  11. Where was Stevens when the dollar was at $1.08. I smell a bit of partisanship in the so-called “independant” RBA.

    by Johansen Frank on Dec 17, 2013 at 9:09 am

  12. I presume you mean Glenn Stevens, but I get your point.

    There is a rich tradition of blaming your predecessor for problems. Happens everywhere, from new starters blaming previous employees for not doing stuff, to CEO’s. You can always count on a massive loss when a new CEO takes over mid way through the year (as they encourage impairments/depreciation/bad debts/write offs..anything with some management discretion) and blame the loss on the previous occupant of the big chair. Then the next year, they look like a genius when they record an improvment. Issue is you can only do it once.

    And so it is with Governments. Labor will take a bath on this MYEFO, but next year’s budget will be all the coalitions.

    by Scott on Dec 17, 2013 at 1:20 pm

  13. Yeah - Mark Stevens is the channel 7 reporter.
    Interesteing the deficit has come in about $17b above the PEFO forecast - about $7b is attributed to lost revenue of a slowing economy (wasn’t that supposed to be fixed simply by the “confidence” of consumers and businesses rocketing up becuase the Libs were back in - that is more for old SB), $8.8b is due to the gift to the RBA and the rest is down to things like not sacking public servants or spedning more on Gonski - it’s a very long bow to blame any increase on the ALP.

    by Jimmy on Dec 17, 2013 at 1:31 pm

  14. Is this just a cynical exercise to make the deficit bigger this year then pull back bigger dividends to try a show some improvement in future years, yes!!!”

    Jimmy has pretty much nailed it with this comment. It is largely a political exercise in that it is all about the timing, which as Jimmy points out will expand the deficit.

    I read numerous commentators before the election who honestly held the opinion, or lied to that effect, that the election of a coalition would see confidence returning, business growing, a thousand flowers blooming. Some of them were very senior corporate types as well, and clearly they were passing on the wisdom of the mutterings of other corporate chieftains.

    I wonder at what point they will realise that Labor wasn’t nearly as much to blame for the terrible mess (mess - world’s best growth and lowest unemployment) as they wanted to believe, and that magic Tony Abbott isn’t actually a magician at all.

    by Dogs breakfast on Dec 18, 2013 at 9:54 am

  15. I believe that what the Japan’s monetary easing policy is doing to push the YEN downwards healthily is an appropriate action for the Australian government to contemplate. In a layman term, just print more money to make the currency move downwards.

    Since the YEN is much cheaper now than before, the Japanese export and tourism businesses now become active again. This is exactly what we want to see here in Australia.

    The Australian government ought to consider adopting similar monetary easing policy to drive the AUD downwards appropriately. So, our Export competitiveness can be strengthened again, our economy can be improved and our people can keep their jobs.

    The lower AUD currency can help improving our Car Exports to other countries and save our car manufacturing industry like Holden.

    Japan just announced the other day another 60 Billion economy Stimulus plan…………So, why cannot Australia?

    Another thought is a linked currency policy for AUD:USD at e.g. 80 cents. The known successful case is the linked currency between HKD:USD in the past 25 years or more.

    by Dulong Ttil on Dec 20, 2013 at 7:08 pm

  16. I believe that what the Japan’s monetary easing policy is doing to push the YEN downwards healthily is an appropriate action for the Australian government to contemplate.
    Since the YEN is much cheaper now than before, the Japanese export and tourism businesses now become active again. This is exactly what we want to see here in Australia.
    The Australian government ought to consider adopting similar monetary easing policy to drive the AUD downwards appropriately. So, our Export competitiveness can be strengthened again, our economy can be improved and our people can keep their jobs.
    The lower AUD currency can help improving our Car Exports to other countries and save our car manufacturing industry like Holden.
    Japan just announced the other day another 60 Billion economy Stimulus plan…………So, why cannot Australia?
    Another thought is a linked currency policy for constantly linking AUD:USD at e.g. A$1 : 80 US cents. The well-known success case is the linked currency between HKD:USD in the past 25 years or more. This link has more detailed discussion: http://en.wikipedia.org/wiki/Linked_exchange_rate .
    Some other success cases of linked currencies can be found on this link: http://ec.europa.eu/economy_finance/euro/world/other_currencies/index_en.htm

    by Dulong Ttil on Dec 20, 2013 at 7:27 pm

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