Monday, March 07, 2011

Free floating currencies - a burden?

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Julia Gillard has come out in sympathy for those struggling Australians who she acknowledges are 'doing it hard' because of the strong AUD. We must acknowledge a number of things:
1. These 'strugglers' or 'straglers' if you prefer are benefiting from a strong economy in terms of strong capital inflows, strong business investment, strong domestic sales & confidence; most particularly compared to other countries. The country has low unemployment after all.
2. These people are benefiting from lower-priced imports, i.e. Higher import penetration, and the corresponding greater competition. Mind you, in a global market which is increasingly 'free', the currency factor is less significant. i.e. All produce is priced to global pricing parity, plus or minus a premium for transport costs.

This is of course one of the problems with a floating currency regime. It is a relative rather than an absolute standard of value, so you might wonder whether its a good idea. It induces competition in countries, demanding those who struggle to get better, whilst those who excel can relax. Importers are doing well now, but manufacturers might have a harder time if they are using local produce, otherwise they are forced to switch to imported produce. Its a balancing act. At the end of the day, it is a good thing.
The notion of Harvey Norman workers losing their jobs is a disruption; but its actually a good thing because its a wealth creation process called 'Creative destruction'. Australians are too skilled and over-priced to be working in a shop-front. They ought to be managing a process or setting up an online store, not doing things which some call centre agent in NZ, or even in the Philippines can do for 30% to 70% of the price, even if with some quality loss. When we retain people in Harvey Norman, there is a huge opportunity cost in several respects:
1. People are paying too much for products than they need - thus Harvey Norman is retaining high profit margins, but this gives him no incentive to compete, so he doesn't. People have fewer financial resources to spend on other things, i.e. The efficiency of their spending has fallen. Some disparities in pricing make a joke of inflation calculations.
2. People are performing inefficient process or production routines which ought to be done by less capable, less skilled people
3. People are remaining safe, when they should be encouraged to be aspirational, so they are not a drain on the rest of the economy.
The biggest drain on our economy are middlemen. The greatest drain is the 'unconditional' support you are forced to give to incompetent political leaders. Don't vote them out! They set up the system so you always get a dud. Push them out! Get in the streets and campaign.
Andrew Sheldon

ConvinceMe.Net - Anyone up for a debate?