Good policy matters. Now watch the Australian dollar take off.

Over the eleven years I’ve been in Australia, I’ve noticed that Australia tends to get (on average) good, frank and fearless policy advice from its treasury departments and Productivity Commission – the latter having perhaps the best economic analytical skills in the world.

Unfortunately, a lot of this advice is rejected. There is only slightly greater than 50 per cent probability that this advice is followed by politicians. (Prior to 2000, this probability was perhaps even lower, leading to an extremely weak Australian dollar (AUD) when I arrived.) 

The urge towards mercantalism is very strong on both sides of the political spectrum in Australia. The liberal party is not quite liberal, and the labor party not as bad on policy as its name would suggest. The urge to over-regulate in every area including labour and “climate change” is found equally on both sides. 

Bad policies are risking Australia’s future in a big way. But the world is all about relativity. With other countries adopting even worse policies, Australia has turned out to be one of the few Anglo-Saxon nations that is doing well despite its squeakily small population.

It is in recognition of this relatively good policy environment that the AUD has been steadily increasing in value over the past ten years. The AUD remains very volatile, though, since the market rushes towards the “security” of the US dollar each time the US does something really bad! This is, however, only a temporary emotional response, driven more by fear than by hope. Each time things stabilise a bit and rationality prevaails, the AUD regains its strength, and more.

And now, from February, Russia will start diversifying its foreign exchange holdings and buy more AUD. Just like gold prices shot up by more than six times in less than ten years, the AUD could potentially double from its current value in the coming decade, as “good economic policy countries” are bought, while the USD and Euro are downgraded in foreign exchange reserve porftolios across the world.

Even India is well advised to buy the AUD and cut down the USD. It is true that India has already started diversifying and using other currencies, which is good.

Downside of all this? The higher AUD will damage Australian industry (including mining). Solution? The Australian industry must move overseas. I’d recommend moving to China (NOT India), Vietnam, or other high work-ethic and tolerably well-governed nation. I don’t think industry needs my recommendation, though. That shift is already happening. Tens of thousands of jobs will necessarily be lost, but Australia will become considerably richer due to the higher AUD, and will be able to help these people re-adjust to the new situation.

Lesson for India? Follow good policy and see the value of your rupee shoot up within a decade. Continue with FOOLS like Congress and BJP who follow the world’s WORST economic policies and suffer more humiliation on the world stage.

Read more at Sanjeev Sabhlok’s Occasional Blog-Economics