British Expats - What's going on?

Quote:

Originally Posted by PoppetUK (Post 6859525)

Wish someone could explain the whole thing. Hubby and I were talking about the exchange rate last night and started disagreeing about whether it was a positive thing for Australia or negative. With a bit of googling there didn't seem a definitive answer as to whether it was good or bad so if someone could explain it in an idiots guide I would love to understand it more.

Itâ€™s a long oneâ€¦

Once upon a time there was a country that was considered the breadbasket of the world. They supplied wheat, barley, iron ore, coal, metals, uranium and other commodities to an ever-expanding global marketplace which boosted their own economy, provided good net terms of trade (money made from exports â€“ money paid out in imports), stoked rising asset, share and house prices and generally a sense of well-being that people fed back into the housing market and credit at a massive rate, rather than saving their money.

Over time the demand for these goods rose as basically demand>supply and people could only see the trend going one way. Investors flocked to this economy as it was offering a great return on investment, stability of government, an advantageous yield - and this became a self-perpetuating theme as the investment community looked at the global picture and saw they could borrow money at very low rates overseas, switch that money into the local currency and invest it in this booming economy for greater â€˜carryâ€™ as yields were way higher. As a result the value of their money grew as everybody wanted some of the action.

As these prices showed no sign of abating, there were concerns about inflation, which everybody had regarded as a non-issue for a while. But all was ok â€“ central banks raised rates to â€˜defeatâ€™ this problem and thought all was rosy. Then one day everybody woke up to the realisation that a lot of people overseas who had borrowed money at great rates to buy property were having problems paying that money back â€“ house prices there began to fall, a french bank with hedge funds invested in the housing market announced they couldnâ€™t afford to pay their investors...and the credit crisis became part of common parlanceâ€¦

â€¦and we switch to today - global sentiment has plummeted, international expansionary forecasts and plans have been cut or postponed. Credit is much harder to obtain. The best cure for high prices (oil, commodities etc) has proven to beâ€¦high pricesâ€¦this has forced a change in investment patterns and usage.

The huge drivers of global growth in the west are slowing â€“ and only really worried about themselves. They are reining in a lot of excess spending â€“ partly because they feel scared for the future, partly because itâ€™s so much more expensive to borrow money than it was before and partly because the lag effect of those high prices from before have hit their bills and wallets for long enough for them to notice. The huge drivers of global growth in asia produce most of the goods the west consumes, and even more importantly lend them the money to be able to buy the goods in the first place, so as western consumption slows down, they are closing a lot of factories and finding it more difficult to borrow money to invest in their own future, and worrying about if theyâ€™ll get all their money back. They are also awakening to the realisation that you cannot, for example, drop the water-table in your Olympic city by 80m, build housing at the rate of three sydneyâ€™s a year in perpetuity without suffering demographic, food problems in the longer run â€“ and as result even their domestic investment and infrastructure plans are slowing.

So, back to our breadbasket economy. Those countries which were buying their bread donâ€™t need as much and even the goods they do need are harder to buy because banks wonâ€™t lend them the money to do so. There are global whispers of recession and a lot of scaremongering, because it has become a â€˜crisis of confidenceâ€™ we hear. So all that money that was parked in the country to benefit from the carry trade is being taken out and hoarded in lower-yielding but â€˜saferâ€™ assets classes such as overseas government bonds. So the economy begins to slow and the money in this economy isnâ€™t as valued as it was.

So what do you do as an economy when credit starts to dry up, the economy slows and youâ€™ve left rates far too high by focusing on inflationary risks? You cut rates - hard. This gives you a temporary boost as mortgage and other borrowing rates are lower, yet thereâ€™s still a problem. This time commodity supply>excess and investors globally are becoming more and more risk averse. And those economies buying your goods would rather cut down on use, find alternatives and/or use up their own supplies theyâ€™ve been hoarding first before they come to you. So the price contracts youâ€™re going to negotiate next time round will be far lower than they were before. These goods are generally priced in overseas currencies so at least that fall in the value of your money means that when they do buy some it means more in local currency terms â€“ which is good right?

But what about importers? Well, theyâ€™re considered less important here in the bread basket, relative to the exporters. As the exporters export less, rates are cut and the currency falls, does this actually has a net positive effect on the average family? I mean their mortgage repaymentâ€™s lower isnâ€™t it? Well, the problem now is that for the average family, the goods they want to buy in the shops could still be more expensive. Although global prices of many goods are lower, the local currency and purchasing power is weaker. Add to that the loss of money on investments, superannuation through the â€˜crisis of confidenceâ€™ and consumers start to worry about their own future. Where has most of the good-time money been parked? In houses and credit â€“ not in savings accounts accruing interest. So approvals of new houses and general prices in some areas start to wane, as now is not the time to risk a loss. On top of this, general confidence data falls, retails sales fall and unemployment begins to rise because that same sentiment in the western economic powerhouses (worries for the future, higher relative borrowing costs, lag effects of those high prices) are hitting home.

But what about those terms of trade â€“ doesnâ€™t that cushion things for a while? Well, no not really. Although itâ€™s a great number taken in isolation, this breadbasket economy has still accrued a huge current account deficit and household debt is enormous â€“ and that has been in the good times. In addition, the amount of money this economy now has to pay all those overseas investors who lent them money in those good times by buying their assets is actually twice the amount (as a percentage of GDP), when compared to that overseas economy where house prices have fallen so heavily. So could things actually be worse here than overseas?

So what to do and what about the currency â€“ where is that likely to go? Well, that comes down to your perception of the global economic picture? Itâ€™s all a balancing act as to which countries will be hardest hit and what the knock-on effect will be in the economic food-chain, but I donâ€™t think talk about strength of domestic banks is the issue here at all. Ultimately it comes down to the breadbasket issue. How much bread will be sold, who will buy it, at what price and which loaves (the tastier but more expensive. or the cheaper but quickly filling stuff).

Personally, I think the aussie is going to be hammered as a cross rate. As someone else said thereâ€™s more room to move rates here, although they could be creating big inflation problem for the future. In answer to your question of whether a lower currency is a good or bad thing? I think you need to look at the rate as a price that responds to global events â€“ so it will always depend on whether any market participant is a buyer or a seller, so isnâ€™t a general good/bad issue as such. Itâ€™s all about supply & demand really. Right now, the roles have switched and the buyers have the upper hand in term of exports â€“ in the same way buyers have the upper hand in the uk house market. I donâ€™t know how it will pan out but Iâ€™m not very optimistic, although maybe itâ€™s time we all learnt a harsh lesson about credit? But in the meantime, a falling aussie doesnâ€™t necessarily mean the aussie economy itself will be â€˜hammeredâ€™. It has seen the benefits of several years of record commodity prices so a downturn is only a downturn - for nowâ€¦

But saying all that that I donâ€™t have a crystal ball and bought some at 2.62 if only because I waited patiently for the 2.60 level and it was a lot better than 2.02â€¦