1st December 2003 revised 5th December 2003


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 goods.

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 advice.)

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.