1st December 2003 revised 5th December 2003
- TREASURY'S DOUBLE BIND -
Our dollar is rising an unconscionable amount. It is pricing
many farming products out of the market. Strangely enough, metals
especially gold, are untouched. Not ecstatic, but comfortable.
The tried and tested exchange rate control lever is the treasury
interest rate. To lower the dollar, treasury reduces interest
rates. This means currency will flow out of Australia, as
international superannuation funds seeks higher returns. It also
causes local business to boom, as consumers can borrow more to purchase
When a company becomes more profitable, the company makes a larger
profit. That profit leverages the company's price upward out of
all proportion to the profit. So if a company makes an extra
profit of AU$2.00 per share, the price increase of the shares will be
somewhere in the range of AU$20 per share. It's a bit like the
housing market, where value is determined by what homemakers can afford
to pay. In stocks, value is determined by the yield.
Our political masters, (or should I say their advisers in treasury) are
unable to make the obvious connection. (Then again, it took the
gutsy Hawke and sidekick Keating to see the obvious connection twenty
years ago, when we floated the dollar against treasury head Stone's
All this looks like economics 101. But now let us show how it all fits together.
Australia is a major farming and metals power. Overseas investors
can not directly invest in our farming, but they can invest in our
metals, especially gold. Australia is a major gold
producer. So are South Africa, and the USA. We can produce
gold at around AU$550 - AU$600, so our dollar is driven upwards by the
gold price, as overseas investors buy gold (and other metals) shares to
maintain their yield. South Africa likewise is a gold (and
metals) currency, and the Rand is currently at an all time high.
It is that inflow of money that causes the AU$ to rise. The US
economy is so large and multi-faceted that a resurgent gold sector only
has limited exchange rate effect.
If our government wished to cause the AU$ to fall, all it has to do is
levy a gold tax, of say $100 per oz. That would cause the $AU to
fall substantially. (It might also cause the price of gold to
rise somewhat, but that is Economics 201, and too hard for politicians,
let alone treasury.).
The other problem we have is what is being termed the "housing
bubble". This is the term used to describe home prices that have
been driven upwards by the low interest rates set by treasury to keep
our dollar low enough to help our farmers.
Once again, the solution is obvious. The government must levy a
universal land tax (no exceptions, based on assessed value) on all
land. If that tax is high enough, then the price of land will
fall. In fact, a sufficiently elastic responsive land tax could
eliminate the need for a capital gains tax, because capital gains in
real estate would become a thing of the past.
Of course both of those solutions have political costs. Gold
mining companies contribute to party funds, so taxing gold to produce
exchange rate constancy would not help re-election chances.
Increasing land tax looks to be completely untenable to the incumbent
political parties. However, there are a lot of advantages,
including affordable land and greater egalitarianism of income I
will not detail the logic, but refer the interested reader to the
excellent treatment of the subject by Henry George in his book
"Progress and Poverty". It would like to add that GST and income
axe should be reduced by the same amount that land tax is increased.
Sooner or later in the Internet era I believe that a political party
will arise that does not source it's funds from incumbent wealth and
power, and so will collect it's revenue from a tax on land.