Sunday, December 15, 2013

'Twas the dollar that killed Holden, not the carbon tax

At the risk of labouring the obvious

What do Holden and Qantas have in common?

Here’s a clue. It isn’t that they are being strangled by the carbon tax.

(Although you might think they were. In his letter to Holden on Tuesday the deputy prime minister Warren Truss said axing the carbon tax would “lower the cost of producing cars in Australia”. The truth is the cost would scarcely budge. The cheapest new Commodore sells for $35,000. Holden says the carbon tax costs it $45 per car. That’s right, only $45. It’s a decimal place of a per cent.)

And nor are Holden and Qantas being done over by rapacious unions.

During the global financial crisis Holden’s workers accepted half shifts in order to stop job losses. In April this year they signed up for a three-year wage freeze in exchange for a commitment from Holden to stay in business beyond 2016. Each production line worker put in an extra quarter hour per day.

They are literally the most productive in the 37 countries General Motors in which General Motors manufactures cars.

Every 60 seconds a vehicle rolls down our assembly line,” Holden boss Mike Deveraux told the Productivity Commission this week.

“The people making cars in Adelaide have to deal with a significant amount of complexity as each car comes past them - much more than many and most other GM plants. They will build a couple of Cruzes, they will build a Commodore, a sports wagon, a Caprice, another Cruze. I mean, a different car and a different job comes at these people every 60 seconds, and on Cruze, they are loaded to 56 seconds out of that 60-second cycle time, balanced across hundreds of people on that assembly line.”

“It's the highest loading in GM plants anywhere that build the Cruze"...


And yet Australian workers cost more than their less agile counterparts overseas.

Around 80 per cent of the cost of making a car is people.

Deveraux asked rhetorically: “Is the cost of labour higher in Australia than it is in Asia?”

He answered: “Of course it is. We have a very good standard of living here and I don't think I would be making anybody surprised when I say that people in Australia make more than they do in many other places in the world.”

Holden told the Commission it cost twice as much to make a car in Australia as in Europe, four times as much as in Asia.

Holden never needed to close that gap. The deal it had struck with the Gillard government (which the Abbott government reneged on) wouldn’t have closed the gap. But it would have closed it somewhat, enough to make it worth staying.

A global corporation like GM can tolerate having loss-making plants in affluent markets like Australia. Its general philosophy is to “build where we sell”. And it knows the dollar might one day turn down.

The dollar is the common thread that’s linking the death spirals of Qantas and Holden. Not as obvious or as politically charged as less important issues like the carbon tax or industrial relations it has jumped to where it has jumped to a height never before seen in its 30-year history as a floating currency and hasn’t yet moved too far down.

In the quarter of a century to January 2010 the Aussie averaged 72 US cents. In recent months it has been 105 US cents. It has been great for car buyers, great for travellers. A foreign car that used to cost $20,000 now costs $14,000. A foreign air ticket that used to cost $2000 now costs $1400.

For companies like Holden and Qantas that were on the edge before the dollar soared, it means anything they try to sell overseas costs 45 per cent more. Its why Golden Circle is closing its canneries and moving to New Zealand, its why Electrolux is closing its factory in Orange and will source fridges from Asia and Eastern Europe. It’s why neither Holden nor Qantas can survive. Unless the dollar falls.

On Friday the Reserve Bank governor Glenn Stevens abandoned his usual reserve and said he would prefer a dollar nearer to 85 US cents than 90 where it has recently been. It’ll need to go lower still if we are regain our competitiveness. When mining prices were high and earnings were flooding in, it didn’t much matter whether the rest of the economy was able to make money. Now that they are not, and that the Australian dollar is still high, we have a problem.

One way or another we will have less buying power next Christmas. Either the dollar will be dramatically lower allowing us to compete again or more and more Australian firms will collapse, bringing on a recession. It’s time to talk seriously about how we can bring the dollar down.

In today's Canberra Times, Sydney Morning Herald


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Wednesday, December 11, 2013

Inside story. How the Aussie dollar floated, 30 years ago today

1983 was the year

It was Sunday March 6 1983, hours after the election that swept Labor’s Bob Hawke to victory. Australia’s 39-year old Treasurer-elect Paul Keating was pacing a bedroom in Canberra’s Lakeside Hotel greeting his team of would-be economic advisors. Australia’s most powerful bureaucrat, the Treasury boss John Stone was about to present them with the “Red Book”, the incoming government brief that would tell them everything Treasury knew about the state of the budget and the economy.

But the room was too small.

“Keating talked to the manager and said: ‘Look I need some better space’,” remembers Barry Hughes. Hughes was an economics professor who had caught the early flight from Adelaide.

“The manager said there was plenty of room in the lobby, but the lobby was crawling with journalists. The upshot was, it being Sunday and Canberra pubs not open on Sunday, we all went down in the lift right into the basement, went through all the plumbing and ended up in the empty saloon bar. It was about two o'clock in the afternoon.”

Stone opened the conversation not by talking about the Red Book, but by recommending a devaluation - a big one, immediately.

“Stone amazed us by saying he wanted 10 per cent. What was amazing was firstly the amount, and secondly the fact that the Fraser government had been keeping the dollar high as a sort-of anti inflation policy. We had always thought Stone supported it,” Hughes says.

Worried about Australia under Labor, investors had been converting their Australian dollars to US currency and whisking them out of the country. An astonishing $3 billion had left the country in a matter of weeks, the same as $24 billion today.

Short of draconian currency controls the only way to stem the tide was to make converting Australian to foreign dollars more expensive, and the only way to do that was to devalue the Aussie.

But doing it - as Stone had Keating do in his first act as Treasurer (actually it was before he was Treasurer, he had to visit Kirribilli House to ask the outgoing government to do it) only enriched the traders. They were able to convert their US dollars back to Australian dollars at a cheaper price.

Peter Jonson was incensed. By then head of the Reserve Bank’s research department, he couldn’t see the sense in manually adjusting the dollar to staunch such flows. It allowed the speculators to make easy money by punting on near certain outcomes.

Shortly after he joined the Bank in the early 1970s he had asked the then deputy governor Harold Knight why the dollar hadn’t already been floated.

“Harry replied that, like Saint Augustine, he wished to be made pure, but not yet,” Jonson says. “Those were almost his exact words.”

Knight became the governor a few years later and maintained his opposition to a float right up until he left in late 1982, months before Labor came to power. Jonson says his replacement Bob Johnston had no such reservations.

“I kept making the point personally to Johnston and to the treasurer that in effect over that weekend in March 1983 speculators had made $300 million,” he says. “They had done it at the expense of the taxpayer. I left Keating in no doubt as to my view: it wasn’t right that that should happen under a Labor government.”

Jonson had a better idea. He wanted buyers of dollars to negotiate with sellers of dollars and agree on a price. Then they could make money off each other...


Jonson had some experience setting the price of the dollar. By the early 1980s the rate was adjusted weekly and later daily by a committee of four - Stone or his delegate, the Reserve Bank governor or his delegate, and the heads of the finance and prime minister’s departments or their delegates. They posted the result at 9.30 each morning and had to accept whatever foreign exchange would flow in to the country at that price and whatever would flow out for the next 24 hours. For a while Jonson had the related job of determining the “forward rate”, also posted at 9.30 am. It was the rate at which the Australian government agreed buy and sell dollars some time into the future.

“I was feeling comfortable at 9.16 one morning when a colleague told me President Reagan had been shot,” he recalls. We didn’t know whether he would survive. New Zealand had kept its market closed, meaning we would be the first in the world to open. I had to decide whether to close our market or to pick a price and hope it was right.” Jonson sipped his coffee, picked a price and at 9.25 told his colleague to open and make sure Reagan wasn’t dead.

By mid 1983 the entire weight of opinion within the Bank had swung toward a float. Much of the rest of the world had been floating for a decade.

The Bank’s international division undertook “an exercise to look at the options for a more market oriented exchange rate system”. It bundled up the documents in what it called a “War Book” and kept it ready. The then Treasury head John Stone says that he too was in favour of a float by then and points to a memo he sent to Keating in October which supported the Bank “to the extent of agreeing that some change in the system is warranted”. It said the change “should be undertaken in stages”.

Hughes has a different recollection.

“Stone was absolutely adamantly opposed,” he says. “Whatever he says now, he was flatly adamantly opposed to floating the dollar.”

Des Moore was Stone’s deputy at the Treasury. He remains a sceptic. “My scepticism has been reinforced by the difficulties facing smaller nations which have had to go back to a fixed rate or a quasi fixed rate,” he says. “You need a means of protecting the rate from rapid flows.”

In Hawke’s office the newly appointed economics advisor Ross Garnaut pushed for a float. Keating’s office was unanimously in favour. The Reserve Bank had dropped its opposition, and by December foreign money was flowing in to the country as the economy picked up. The government faced the opposite problem. Speculators were punting on the dollar being sharply revalued to stem the flow, increasing the value of the money they had poured in.

The Reserve Bank had turned its back on the daily business of adjusting the rate. On some days Stone did it on his own. Hawke and Keating held a series of private meetings to which they did not invite the Treasury.

On the morning of Friday December 9 in the Cabinet room of the old parliament house Hawke made it official. He was courteous and invited Stone to speak, but Stone says he was “merely going through the motions”.

“Stone used every argument under the sun to delay the float - to delay the freeing of the market,” Hughes says.

“And then Hawke addressed Stone directly.”

“He said to Stone: ‘You have a reputation as a bogeyman amongst my left wing colleagues. Given that it is almost Christmas, in the spirit of Christmas, I wouldn't dare to let them know what you just said and take their boogeyman away from them’.”

Keating had wanted Stone to appear beside him in the historic press conference that followed. He had to make do with Bob Johnston.

Then Johnston flew back to Sydney and directed the Bank to “abolish the foreign exchange control department, today”.

“The relevant officials said we can't do it today,” Peter Jonson recalls.

“And Bob said: Yes, you are going to do it today”.

“Why? So that no-one could turn back.”

“It was like a commander burning the boats to ensure the troops were committed to the battle.”

In the treasury there was confusion about what the decision meant.

“I was responsible for foreign investment,” Moore remembers. “As soon as the decision was made, staff came to me and said: now that the exchange controls have been removed we need to get rid of foreign investment controls”.

“I said, hang on a second, before we do anything like that we need to check with Keating. When we actually got a message to him he said: ‘Wait, I’ll check with my colleagues’, and of course that wasn’t what he wanted.”

The dollar traded uneventfully on Monday December 12. It opened at around 90 US cents and stayed there for six weeks before climbing to a peak of 96 US cents, and then diving and at times climbing in the decades that followed, never again returning to those opening heights until the most recent mining boom.

The movements have enriched traders, at times impoverished and revitalised exporters, and alternately cut and swelled Australian’s buying power.

Going back to having the price set by manually seems unthinkable. And yet...

Peter Jonson spent a decade building the case for a float and much of the subsequent two decades singing its virtues.

Long since retired from the Bank and from a career working in financial markets he wonders now whether Australia shouldn’t be aggressively intervening to drive the dollar down.

“The currency is way too high,” he says. “It is making Australia’s costs too high - you are seeing it with Holden and Qantas. We will need to either bring the dollar down or suffer a recession which will do it for us”.

Johnson suggests a tax on capital inflows.

“John Howard famously said: ‘we will decide who comes to this country and the circumstances in which they come’. It is equally clear we have the right to discourage the excess capital that is flowing in and creating the high exchange rate that’s putting excess pressure on Australian industries.”

Barry Hughes, never a doubter about the worth of floating the dollar, can also see the case for limits.

“I like to think of it as ‘wide tramlines’ around a floating figure. You may not be able to work out exactly what the fair value is, but you should at least be able to work out fair value to within plus or minus 15 per cent,” he says.

The float as we have known it isn’t completely fixed, just as the dollar was never completely fixed. The one constant still with us is the spirit of continual reassessment which brought about the float thirty years ago this week.

Peter Martin worked in the Treasury in 1983.

In The Sydney Morning Herald and The Age



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