New Australia

Balancing the Current Account

Leigh Harkness's graph of the relationship between unendowed money and the current account deficit (Buoyant Economies)

The Current Account Deficit Problem

Australia's has run a Current Account Deficit for too long. This deficit adds to our ~$600 billion foreign debt (60% of GDP) and threatens our economic well-being. As shown in the above graph, Fiscal Policy (such as running a huge surplus) has no effect on the Current Account Deficit.

Jobs are being lost overseas because we currently import more than we export.

Causes of The Current Account Deficit

NewAustralia subscribes to the view proposed by Buoyant Economies that the Current Account Deficit is caused by excessive growth of bank credit.

This has raised national expenditure above national income.

The 'Optimum Exchange Rate' Solution

• A foreign reserve based banking system that ties bank lending to each bank's net holdings of foreign reserves.
  • Commercial banks to hold foreign reserves. These reserves can be held directly by the commercial banks or indirectly through accounts with the central bank.
  • The amount banks are permitted to increase their net lending is then regulated according to the net growth of these foreign reserve holdings. For example, Australian banks may be authorised to increase their net lending by, say, A$5 for every US$1 increase in their net foreign reserves.
• Incentives for the banks to set the exchange rate at a level that will achieve desired economic objectives.
  • The central bank may permit the banks to increase their total lending by, say, A$10 for each US$1 increase in their net foreign reserves, provided that the unemployment rate and the inflation rate were both below 2 per cent.
  • If this target was not reached then the banks would have to settle for a lower ceiling on lending.
  • As bank profitability depends on how much they can lend they have a strong incentive to set an optimum exchange rate.

See the Buoyant Economies website for details.

How the 'Optimum Exchange Rate' Solution Works

High Deficit, High Unemployment

• $A is devalued.
• Value of exports increases in $A.
• Cost of imports increases in $A, making local goods and services relatively cheaper.
• Deficit reduces towards zero.
• Employment increases.

High Surplus, Labor Shortage

• $A appreciates.
• Value of exports decreases in $A.
• Cost of imports decreases in $A, making imported goods and services relatively cheaper.
• Surplus reduces towards zero.
• Labor shortage eases.

Implementation

The 'Optimum Exchange Rate' solution can be phased in by gradually tightening the borrowing limit for Australian banks. At first the limit might be that the banks can borrow $US10 for every $US1 held in reserves. This would gradually be tightened by the Reserve Bank over time.

Tariffs Not Required?

If the above Optimum Exchange Rate System is adopted then the value of capital outflows becomes equal to the value of capital outflows. This also impacts on the value of goods leading to balanced trade.

This means that what low tariff barriers Australia still has are no longer required - the exchange rate does the work of the old tariffs.

This makes it much easier for business to import components or equipment without threatening Australian jobs.

The Natural Strategic Tariff?

Rather than picking and choosing which industries to protect with a complicated tariff regime some propose a simple flat tariff on all imports. This may have benefits that outweigh the known costs of tariffs. (See Free Trade Doesn't Work)

Buoyant Economies

The website of Leigh Harkness - the ex Australian Treasury economist who knew too much.

Read Leigh's solutions to Australia's current account deficit problems and explanation of the failure of Australian monetary policy.

It's the foreign debt stupid!

16^th Feb 2009: CAD "...last sighted at $658 billion or about 60 per cent of GDP, it will surge as we prime the economy while demand for our exports falters. Our current account deficit (CAD) - already 6 per cent, will soon be at 9 per cent of GDP. " more...

In hock to the world

7^th Oct 2008: "If the banks can't get their funding in global markets then the RBA will have to step in (as they are already doing to prop up the system). How long can they keep this up given that we have another four years or more of mortgage money being called in as it falls due and our currency being manipulated by major external interests?" more...

ASEAN FTA Farce

11^th Sept 2008: "What it means is we haven't got anything to bargain with. We go to the table and say we are thinking of cutting tariffs from 10% to 5% and the other side looks good when it says, "We will cut by the same, from 35% to 30%." more...

Foreign Debt $1 Trillion

4^th June 2008: "AUSTRALIA'S ballooning foreign debt topped $1 trillion for the first time in the March quarter, as the nation borrowed record amounts from the world to finance its spending habits." more...

FTA Failure

DFAT: '...positive and negative effects of the free trade agreements will take many years to fully materialise." more...