I lectured a lot in Australia throughout the 1990s. I saw the Aussie dollar drop as low as 48 cents and go as high as 73 cents to the U.S. dollar in that decade alone. That’s crazy! On one trip, I paid $6 for a hamburger. On the next trip, I paid $12… for the same hamburger.
I toured the country, and spoke at “Secure the Future”, in 2011 to promote my book: The Great Crash Ahead. At that time, the Aussie dollar was as high as $1.08 to the U.S. dollar. I told the audience that their currency’s strength wasn’t going to hold up. “You’ll see your dollar head back down into the 50 to 70 cent range over the next decade,” I said.
It’s already back to 88 cents!
The chart below shows the USD/AUD dollar exchange rate from when I started traveling there to current day…
The average since 1990 has been about 78 cents. Obviously, there has been a very wide range — from 48 cents to $1.08.
So the question is this: What’s causing these gyrations?
For starters, the U.S. variations have a lot to do with our massive debt creation and money printing. The Aussie’s headaches have to do more with rising and falling exports and foreign trade.
Our foreign trade is around 10% of GDP, much lower than most emerging countries, like China or most European countries.
For example, China and Germany’s foreign trade have been running as high as 35% of their GDP recently. South Korea is the highest at 50% of GDP.
Australia’s foreign trade has run at between 20% and 24% of GDP in recent years. That’s as much as double that of the U.S.
When countries with high exports, like China, Germany, South Korea, and Australia, see them rise, they accumulate foreign exchange reserves and so their currencies rise in value. Unfortunately, that ultimately hurts the very exports that created such reserves and so exports tend to fall again.
Besides that, there have been two trends in particular that have driven the Aussie dollar to new heights since 2001. Commodity prices have seen a bubble that peaked in mid-2008, and China has increased its Australian imports from 6% to 30% as it inflated its massive bubble. In fact, Australia’s exports to China alone are responsible for 6.3% of its GDP.
These twin China and commodity bubbles have been the biggest factors driving the Australian dollar up, and they’ve been a big factor in the country’s strong economy, including its greater resilience in the 2008 global financial crisis.
But if the China bubble bursts, as I believe it will, then Australia could see 3% of its GDP growth suddenly disappear. That right there would put the land down under in a recession.
But, of course, there are other, indirect impacts of the China bubble bursting. For example, it would put downward prices on the very industrial commodities that Australia largely exports — like iron ore and oil — as it consumes 40% to 50% of these commodities, globally.
That’ll hurt Australia’s gross exports even more. And profit margins will shrink even more painfully, especially because their costs to mine, work, and export the commodities won’t change much.
The China bubble burst would also hurt Australia’s next two largest trading partners, namely Japan and South Korea. Next thing you know, the rising exports that helped catapult Australia’s dollar from as low as 48 cents to as high as $1.08 will see a larger crash.
If you look back to the chart above, you’ll see that the Aussie dollar dropped sharply in 2008, sliding from 98 cents to 62 cents to the U.S. dollar. That was largely thanks to commodity prices crashing.
I see the Aussie dollar falling further still… all the way back down to around 62 cents to the U.S. dollar by 2015 or 2016, and then possibly as low as 48 cents to the U.S. dollar again by 2020 to 2023, when commodity prices are due to bottom on our 30-year cycle.
And the pending bubble burst in China will only add momentum to this collapse.
I’m in Australia at the moment, again talking at the “Secure the Future” conference (click on this to find out more), and promoting my latest book, The Demographic Cliff. My advice to those who see me, and to all the rest of the Australians, is to diversify your investments outside of your country. Look to get into the U.S. dollar in particular, as it will likely benefit the most from a falling Aussie dollar.
That said, the upside to the Australian economy’s fundamentals is compelling. It’s the only wealthy country that doesn’t see demographic trends pointing down this decade, and it’s one of the few that will actually have a larger echo boom than baby boom. That will enable it to weather this crisis well, and position it well for the next global boom, when commodity prices are due to rise strongly again.
|Follow me on Twitter @HarryDentjr|
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