Australia’s Currency and its Economy Will Benefit from China’s Stimulus Package

In today's Daily Reckoning we take up the question of what happens when the central bankers decide to ramp up quantitative easing in order to ward off a deflationary depression or simply prop up the domestic housing market. But before we get to that, we suppose we should deal with the possibility that everything's gonna be alright.

"The bears are throwing in the towel, and the Aussie [dollar] is undervalued," Paresh Upadhyaya, a fund manager in Boston, tells Bloomberg. "Asia is still going to expand, and China and India will have growth above 5 percent. That's fuelling demand for commodities, so Australia's exports are holding up much better than the rest of the G-10 countries."

Paresh was also referring to the 21% rise in the Aussie dollar versus the U.S. dollar since February 25th. That's the Aussie's fastest rise against the greenback since the currency floated in 1983. Some analysts are taking this as evidence that Australia's currency and its economy are going to benefit more than any other Western nation from China's nearly $800 billion stimulus package. So China and Australia have decoupled from America and recoupled together, you might say.

All of that may be true. Or it may be a heaping helping of wishful thinking. But for today, anyway, it doesn't seem to matter at all. Today, the Aussie share market is dealing with the resumption of covered short-selling on financial stocks. It's also dealing with the possibility that the deal between Rio Tinto and Chinalco may be scrapped.

That's a lot to deal with. And when you've got the Dear Leader cooking off nuclear bombs in North Korea, it's enough to be a rally killer. Shares are lower at today's open.

What about the economy? Is it getting better? Are structural fiscal deficits a good thing? RBA director Warwick McKibbin warned yesterday that deficit spending driven by political ideology is not a good cure for recession. "The danger is you add too much to the fiscal deficit," he said. "Sure, some of it is temporary, but a lot is structural because it is based on ideology."

He was referring, we assume, to the idea of borrowing money that you then give a way to be spent because you think what the economy needs is "stimulation." It doesn't increase productivity. "Most fiscal policy doesn't do anything except switch spending from one period to another," he added. When you change fiscal policy, all you do is stimulate the economy today out of future possible growth."

Dan Denning
for The Daily Reckoning Australia

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