The likely repercussions of a USD collapse for the Australian economy?

mining companies are very important because they can do stuff like this ...

http://www.youtube.com/watch?v=uEDAE_9v4h0

 

For a start, and i won't be too hard, but 2006 figures are a bit old and don't reflect the commodity boom since that time but ill leave that alone.

Yes the army also has a lot of support workers as well, but the army is a 'cost' to the taxpayer, it is an expense not an income stream. The fact that it contributes 6% of GDP you have taken from 01 and as above will not reflect the commodity boom of the last decade. The fact that the services sector represents over half our economy (71% if you trust wikipedia) I do not view as a good thing. If you read the info too it says that "Distribution services (the wholesale and retail trade industries) contributed about the same to total GDP in both 1900-01 (15%) and 2002-03 (14%)."

As an interesting aside the rent alone contributs 10% of GDP i found shocking and i am looking at what happened last time this figure was at this level around 1930. Nothing economically significant happened then of course..


To answer your original question...

Australia has a massive Current Account Deficit. It can reduce this by either a)importing less (ill wager that chocolate testicle again) or b)exporting more. The answer really is as simple as that I believe.
An interesting link is
http://en.wikipedia.org/wiki/List_of_countries_by_current_account_balance

Look at the top few countries with the positive account balances. Now look at the last few countries... Notice a trend?

 

Wow... thanks for that link. I had now idea that we sat way...way....way....down there.

Spain, Italy, Greece.....erm, thats some highly dubious company, given the latest bout of euro hijinks. :/ Should I be massively concerned? Please excuse my lack of knowledge, but is it oversimplistic to use only a nations deficit/surplus as representative of a nation's economic well-being?

Or.....am I to conclude that we are about to witness an unprecedented shift in global power, of which Australia is certainly not exempt from feeling the fallout?

Still, wow, the US deficit seen beside all other states just makes it all the more outrageous!!!

Re. the original question - can you please elaborate on the implications for Australia? Thanks for your time - I'm still learning, and have learnt much from each of the contributors to this thread.

 

A nations economic health is much more complicated than that and just looking at the current account deficit would be overly simplistic. But it is one of many things that one would look at I guess. As I understand it (someone will correct me) If we were on a gold standard and trade had to be settled on gold, A country simply cannot run a deficit forever as it would deplete reserves. The exception to this would be if the country had enough mining production to balance that out. On a fiat standard however, one just prints more to cover the shortfall.

Don't discount the complexity of economics, but at the same time don't try and control every variable. Nothing is ever really simple, but at the same time it is amazing how simple things are and how sheeple can be dazzled by economists who pull levers and open valves, occasionally blowing up a gas main in the process. It is a chaotic system, very small changes in the inputs can yield massive and unpredictable changes to the outputs. A few people cannot allocate capital or anticipate the decisions of millions. This is why socialism failed.

As for what would happen in a USD collapse, you could take a very simplistic approach and say that the US dollar becomes worthless and loses purchasing power, so the Chinese cannot sell to them and their demand for resources drops away. Very bearish for Australia we stop exporting so many resources, our currency falls in value so it buys less. This gives a one-two to the current account deficit, which is a feedback loop for more debt and a weaker currency again. Until we can begin to increase demand for the AUD via exports of other industries, but who do we sell to? and what do we export? Make no mistake though, a USD collapse will be felt worldwide, Australia included and things will be very difficult until the world can readjust to a post USD world, i could forsee this taking a while. Australia, being a resources country, most likely would not recover until the rest of the world does, which would largely be dependent on China and the rest of the BRICS internalising their economy and becoming wealthier.

 

The current account is a reflection of the capital account. I gave much more credence to martin armstrong and his call for the aussie dollar to go much higher when I read his piece on the current account.

http://armstrongeconomics.files.wor...lia-the-current-account-deficit-8-23-2010.pdf

edit

note the money flowing out of china!

 

I always viewd the current account as an income/expense statement and the capital account as the savings. I can see the logic that the AUD would rise if we keep exporting stuff as our trade is settled in AUD and this would be increasing demand for the AUD.The USD maintained its demand even with a large current account due to having the world reserve currency and a lot of commodities having to be traded in USD.

What happens when we stop exporting due to a china collpase? where is the demand for AUD coming from? If we dont sell stuff where is the demand for AUD? I don't know if armstrong's theory holds up in this scenario.

 

The question was why, when there are other much more influential sectors, does the Govt put so much emphasis on mining? Why doesn't it squeeze the bigger sectors harder, surely that would be the easy way to go?

I couldn't find any more recent trust worthy data than the 2006 stuff on the breakdown of employment...the most recent ABS figures just show unemployment Stats. I'm open to real data, but considering the 'boom' started around 2000, how much would it (the employment figure) have grown from 2006 to now (4 years)? Even if you double or triple the 2006 figure it's still trifling compared to the 11 million aussies working full time... for instance, when I was working at German Creek, the biggest coaking coal mines in the country it was flat out having 500 staff. That included 3 collieries running 24 hours a day. The camp town of middlemount had bearly 2000 people that included the families of miners and their school kids!?... but that's aside from the point :/

 

From euphorias post
Quote
"the US dollar becomes worthless and loses purchasing power, so the Chinese cannot sell to them and their demand for resources drops away. Very bearish for Australia we stop exporting so many resources, our currency falls in value so it buys less.


", i could forsee this taking a while. Australia, being a resources country, most likely would not recover until the rest of the world does, which would largely be dependent on China and the rest of the BRICS internalising their economy and becoming wealthier."

Very simply put and very interesting,
thanks

 

It's at the bottom because that graph is calculated purely in dollars ( a big economy can have billions outstanding and still be a small %)...what would make more sense is to calculate it's rank based on % of GDP...not just dollars... now look where they/we sit (i.e. we're in no worse shape than China)
http://en.wikipedia.org/wiki/List_of_countries_by_public_debt

 

I would think most trade would be done in US dollars. The demand for aussie dollars would come from the inflow of capital into australia that balances the current account. Armstrong suggests the aussie dollar would only be a sell if the current account reduces indicating a drop in capital flows into the country and in turn a drop in demand for aussie dollars.

If there is another bust, whether it be form china, eurozone or the US, then the dollar could fall as people flea risk such as the aussie dollar and move to the US dollar, treasuries, gold or whatever they see as safe.

 

While the trade may be in US dollars, (as was my point about the USD maintaining demand) these US dollars would have to converted back into AUD as the mines are in AUD with an AUD work force and as such transact in AUD. Correct?

 

The mines and what ever else come from the capital flows in. They are built to meet the trade demand.

 

I like how Australia gets a special mention here: http://en.wikipedia.org/wiki/Current_account#The_Pitchford_thesis

-----
The Pitchford thesis
A current account deficit is not always a problem. The Pitchford Thesis states that a current account deficit does not matter if it is driven by the private sector. Some feel that this theory has held true for the Australian economy, which has had a persistent current account deficit, yet has experienced economic growth for the past 18 years (1991-2009). This has been attributed to persistent drawing on foreign investment (Around 60% in the form of debt securities) generating a significant income deficit. Others argue that Australia is accumulating a substantial foreign debt that could become problematic, especially if interest rates increase. A deficit in the current account also implies that the country is a net capital importer, foreign aid is a part of current account.
-----

PS. I don't agree with this. I believe a perpetual CA deficit is most certainly a problem.

 

That couldnt be further from the truth. We cannot be in the same shape as China when they have a positive CAB and we have a negative. China has a GDP of almost 5 trillion and a CAB of +296.2 Billion. Aust has a GDP of 1.2 trillion and a CAB of -33.31 Billion. In percentage Terms, China is +5.9% of its GDP while we are -2.8% GDP. Hardly in the same boat at all. And the people employed by mining is relatively small, I don't disagree, but those people that are represented as 'Service sector'. Who are they servicing? What percentage of them are contract labourers, machine repairers etc. Not including the Freight companies and transport where are they reflected? The people that are permanently employed on a Mine site probably is rather small. But my argument is that are supporting a lot of other jobs directly outside the mine from the sorts of jobs aforementioned. What about the not so obvious jobs that they in turn support etc. I know you could say the same of the military but the military is an EXPENSE. What I would be interested to see is the % of people employed by Government and the % of GDP that is government related. I have heard over 50% but never seen the hard evidence, although I believe it.

If nothing else, to me it shows the uselessness of GDP numbers. Headline in the newspaper the other day, Queensland floods to boost GDP. It was the rebuilding effort and how much money would be required and payouts from insurance companies etc that would boost GDP. The sad reality is that it probably will boost the actual numbers. If we stopped exporting, where is the income for the nation coming from?

http://www.investinaustralia.com/industry/mining/minerals-snapshot
In 2007-08, earnings from Australia's mineral resource exports increased by 11 per cent to $116 billion.

As a reference point, Ireland has a Current account of -6.7 Billion with a GDP of 172.5 or -3.9%.

If mining exports cracked 50% this will detract $58 Billion from the Current account, leaving us with a deficit of 91 Billion. or -7.6% of GDP. A 50% reduction in mining values will cause an increase of over 270% in our current acount deficit
This is not even counting the loss of all the support jobs that I have apparently made up or arent that many. This is purely on The value of the resource, not the impact of job losses. I realise this is rough and probably over simplistic.

But look at those numbers again and tell me Mining exports are not so critical to Australias economy.

 

Exactly rbaggio,
"the Australian economy, which has had a persistent current account deficit, yet has experienced economic growth for the past 18 years (1991-2009) "

...that's through both Labour and Coalition Govts, both of them ran deficits (so neither of them have the moral high ground here)

Also we should remember why Barnaby Joyce (a qualified CPA) got sacked from his job as shadow finance spokesman for mentioning the term "NET foreign debt" i.e. taking into consideration how much others owe us. Talking about this stuff is surrounded with a cloud of 'BS' that I find amazing. Look at this contemporary article from the time;

http://www.smh.com.au/business/why-our-foreign-debt-is-a-taboo-topic-20100312-q42h.html

You just can't believe for 1 second what the Govt tells us. I saw it summed up perfectly today by veteran political reporter Allan Ramsey who wrote about the imagery of TV politics today. "Everyone is sucked in today by images & pictures, at least with radio news the audience actually listened"

 

I wasn't making the data up dude, I just thought GDP would make more sense and clicked on the link

How about this one then?
http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

Australia at 92% of GDP, and China at 7%

3 graphs... 3 different rankings, I dunnoh what to think.

 

Depends on what you do with the capital. If it generates income to pay the debt then its much less a worry but the flip side to that is some capital inflow goes into housing nowadays so a bust in housing may well undermine the good. Banks are borrowing overseas to lend for housing. From memory Australia has always been dependent on foreign capital.

 

I'd also say a positive current account balance had negative ramifications as well. Look a the situation japan has been in for quite a while after being a power house and china's inflation worries now. Adam Smith's famous work was a response to the mercantilist theories of the day which is relevant to Japan in its day and china now.

Its not as simple as a positive current account is good and a negative bad.

 

But exports are just one way to get income....wiki's "economy of Australia" page uses ABS Stats again to state that nearly 70% of the nation's GDP comes from the service sector (Teaching O/S Students, tourism, healthcare etc) while Agriculture AND Mining COMBINED only account for 10%!!!

http://en.wikipedia.org/wiki/Economy_of_Australia

I'm not trying to rile you up.....just looking at the ABS figures.... and it only raises my question again.... why are they flogging the hard-sell to us about how important mining is?

 

Understood. But if i had a business that was always making a loss, and these losses added up year after year after year ... How is relying on foreign capital injections sustainable?

Surely my aim is for these capital investments to be invested in machinery, equipment etc so that my business can start turning a profit???