Advertisement
Advertisement
Advertisement
Today I want to talk about why the US dollar is going down and the Australian dollar is going up. The basic reason is that we have had big realignments in currency. These realignments exist because of the large variation we’ve had this decade in the US fiscal balance.
Interestingly, this period of variation in fiscal balance and realignment of currencies is very much like an earlier period, the 1980s. The reason for the similarity is that the policies that are followed by George W Bush are very similar to that of an earlier president of the United States, Ronald Reagan.
In economics we have what is called the twin deficits hypothesis: if you increase the budget deficit you also increase the current account deficit by the same amount. When Ronald Reagan faced re-election he also had a big current account deficit, but that didn’t matter because the US economy was growing so strongly. This strong growth attracted a lot of investment and that held up that US dollar. But as Ronald Reagan got into his second term in office, and in particular into the second half of his second term, the stimulus from the budget expansion slowed down. In this second half of his second term Reagan had a weak US economy and a big current account deficit. And the result of that in 1987 and 1989 was to force down the US dollar - and as the US dollar fell the Australian dollar rose. Exactly twenty years later the same policy cycle was being repeated.
In his first term in office, his first four year term, George W Bush cut taxes and increased military spending, does this sound familiar? But for George W Bush, twice as big was twice as good. So instead of increasing the budget deficit by three percent of GDP, he increased the budget deficit by six percent of GDP. That generated a strong stimulus to the US economy so when he faced re-election after four years the economy was growing strongly and George W Bush got re-elected.
But, as we know from the twin deficit hypothesis, an increase in the budget deficit also increases the current account deficit. So he took into his second term a very large current account deficit. As the stimulus from that budget expansion slowed down, the US economy slowed down so in 2007 and 2008 George W Bush is facing a weak US economy and a large current account deficit. The result of that is that the market is forcing the US dollar down and the Australian dollar up. On the historical example we think that the US dollar will continue to fall until February 2009, and the Australian dollar will continue to rise until February 2009.
Because the expansion of the budget deficit is twice as large as during the 1980s, the variation in the currency is much more theatrical. We think that the Australian dollar will finally find its peak well north of 90 cents. This is Michael Knox.
Interestingly, this period of variation in fiscal balance and realignment of currencies is very much like an earlier period, the 1980s. The reason for the similarity is that the policies that are followed by George W Bush are very similar to that of an earlier president of the United States, Ronald Reagan.
In economics we have what is called the twin deficits hypothesis: if you increase the budget deficit you also increase the current account deficit by the same amount. When Ronald Reagan faced re-election he also had a big current account deficit, but that didn’t matter because the US economy was growing so strongly. This strong growth attracted a lot of investment and that held up that US dollar. But as Ronald Reagan got into his second term in office, and in particular into the second half of his second term, the stimulus from the budget expansion slowed down. In this second half of his second term Reagan had a weak US economy and a big current account deficit. And the result of that in 1987 and 1989 was to force down the US dollar - and as the US dollar fell the Australian dollar rose. Exactly twenty years later the same policy cycle was being repeated.
In his first term in office, his first four year term, George W Bush cut taxes and increased military spending, does this sound familiar? But for George W Bush, twice as big was twice as good. So instead of increasing the budget deficit by three percent of GDP, he increased the budget deficit by six percent of GDP. That generated a strong stimulus to the US economy so when he faced re-election after four years the economy was growing strongly and George W Bush got re-elected.
But, as we know from the twin deficit hypothesis, an increase in the budget deficit also increases the current account deficit. So he took into his second term a very large current account deficit. As the stimulus from that budget expansion slowed down, the US economy slowed down so in 2007 and 2008 George W Bush is facing a weak US economy and a large current account deficit. The result of that is that the market is forcing the US dollar down and the Australian dollar up. On the historical example we think that the US dollar will continue to fall until February 2009, and the Australian dollar will continue to rise until February 2009.
Because the expansion of the budget deficit is twice as large as during the 1980s, the variation in the currency is much more theatrical. We think that the Australian dollar will finally find its peak well north of 90 cents. This is Michael Knox.
