"Pegs, baskets and staying afloat"

"Pegs, baskets and staying afloat"

These days most of us associate baskets and pegs with the drudgery of weekly chores. However, such terms have not always been restricted to the linen cupboard. Some readers will remember way back in the early 80s when the value of the Australian dollar was determined by a crawling peg and a basket of foreign currencies.

According to Dr Mardi Dungey, a fellow at the Economics Division Research School of Pacific and Asian Studies at the ANU in Canberra, this crawling peg regime was suddenly abandoned in December 1983 when the currency came under a great deal of pressure.

Rather than continuing the practice of periodically establishing a set exchange rate for the currency, the then Labor Federal Government allowed the relative value of the dollar to be determined on international currency exchanges.

This was called floating the dollar. In recent times it is all too easy to look at the slumping value of the Australian dollar with respect to its US counterpart and suspect it would never have happened if the dollar had not been floated in the first place.

Nonetheless, economists of all persuasions and flavours will tell you that the floating of the dollar was an essential step in the modernisation of the Australian economy.

By their very nature, fixed exchange rates are attractive to importers and exporters because they take away a lot of the risk associated with trading in foreign currencies. Yet it is not quite that simple.

The Government has two basic tools to

maintain a healthy, productive economic environment: fiscal controls like taxes and expenditure and monetary controls like interest and exchange rates.

In eco-babble, the floating of the Australian dollar freed both monetary and fiscal policy to focus on the domestic economy.

The floating exchange also helps to "cushion" the economy against international shocks like sudden surges in the value of the US dollar economy.

If our currency were pegged to the US dollar and their economy went into overdrive, we would have to put the pedal to the metal and somehow attempt to keep up with them or begin to reduce the dollar value of our exports.

Try as we might, in recent years we have not been able to keep up with the US economy, powered by 280 million people (including 274 of the world's 477 billionaires), not to mention massive industrial and financial infrastructure.

Attempting to keep up would drastically drive up prices and send our own economy into recession. Alternatively, we would have to suddenly reduce the value of our currency with respect to the US dollar, and drive our own economy into recession.

Recession is bad. Anyone old enough to read this article would have some memory of the recession we had to have. Depending on where you were sitting at the time you may have lost a job, a business, a house, your life savings or at the very least know someone who did.

Although importers and exporters are forced to gamble with a floating exchange rate, the alternative is a gamble on economic stability, which carries with it a significant risk for the whole economy.

As it stands, sudden falls in the value of the dollar with respect to other currencies puts big smiles on the faces of exporters, and concerned expressions on the faces of importers. On the other hand, when our currency is strong, importers smile and exporters frown. If nothing else, at least the pain is shared around at different times, rather than felt by everyone all at once.*NB. None of these casual musings would have been possible without the help of Dr Mardi Dungey. If in doubt, ask an academic - at the very least you will get an answer that sounds right.

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