The crash you won’t see coming

The crash you won’t see coming

Currencies don’t crash overnight.

When you do see a currency plunge without warning, it’s the result of political bumbling and central banking conditions.

Turkey is an easy example.

The Turkish lira has lost some 70% in value against the US dollar in a little over five years.

But that didn’t happen by accident.

The Turkish government has mismanaged its foreign debt obligations, told international creditors what they want to hear, and used monetary policy to influence the value of the lira. 

It’s a similar story for the Argentinian peso, too.

Succussive governments destroyed the value of the peso, set policies that created massive inflation…and then sought bailouts from the International Monetary Fund.[1]

But these are extreme examples, right?

It couldn’t possibly happen with the Aussie dollar…

Could it?

Other people’s problems

We think of crashing currencies as other people’s problems.

Something that happens with tin-pot dictators in emerging markets.

Basket-case economies that rely on handouts from the IMF they can’t possibly pay back anyway.

Many countries like to take out international loans. But then they default and devalue their currencies via rampant inflation, as well as the little wealth their people have.

Venezuela. Zimbabwe. South Sudan. Libya.

Aussies would never consider our country having a triple-digit inflation rate.

We may not.

However, what we will see is our wealth eroded through stealth.

Over the next few years, we will witness our government and central bank unleash policies that will drastically reduce the value of the Aussie dollar.   

Perhaps they’ll even crash it…


Zero to hero

Prior to the financial crisis, the Australian dollar was a backwater currency.

Having spoken to many foreign exchange traders over the years, no one gave a rat’s behind about the Aussie dollar.

In 2001, Aussie dollars moved by FX traders accounted for only 4.6% of the value of all global currency trading. Well outside the top 10 of the world’s most traded money.[2]

Today, the Aussie dollar/US dollar cross rate is the world’s fifth most traded currency by value.[3]

The full history of how that happened is complicated. And something I’ll touch on in the future.

The short version is that the US dollar weakened thanks to several quantitative easing programs.

Then China spent billions and billions of dollars buying our dirt. Suddenly, the Aussie-US dollar currency pair suddenly became the hot trade.

Compounding all of that was our high interest rate.

In the wake of the financial crisis, the US Federal Reserve had its cash rate sitting at almost zero.[4] In contrast, the Australian cash rate rose from 3% in 2009 to 4.75% in 2011.[5]

Meaning money parked in Australia was earning more interest than it would in the US.

Traders seized the opportunity. As a result of the sudden demand for Aussie dollars, it pushed the currency from a low of US$0.63 to US$1.09 within three years.

The point is, the financial crisis put our currency on the map.


The high value of the Aussie dollar was great for overseas travellers. And just as good for imports for us here in Australia.

In simple terms, buying stuff from overseas got cheaper, because the Aussie dollar was worth so much more than other currencies.

Of course, all of this caused a problem for the Reserve Bank of Australia.

If our currency stays too high for too long, our exports become less attractive to other countries. That’s because it costs too much to buy our goods using their money.

To its credit, the RBA didn’t panic or intervene when the Aussie dollar was at parity with the greenback. It allowed the free markets to determine its worth.

The problems for our central bank began two years ago when the Aussie dollar sat around US$0.80.

There are numerous notes from our central bank about how money was quite high in value, and perhaps reducing demand.

Still, the central bank didn’t intervene. It talked about the problems of an overvalued currency for the Aussie economy.

But the important point is, the RBA sat back and allowed the free market to function.

Then Aussie house prices started to tumble.

And you can bet the last few Aussie bucks in your wallet that the RBA is about to take the wheel…

There is no manual for this

We are now entering a new phase of the Aussie economy.

When it’s talked about in the mainstream, it will be referred to as ‘preventing a crisis’.

But this economic phase should be referred to as ‘the shit’s hit the fan and there’s no instructions in the manual on what to do next’.

So, what will our central bank do to protect the economy?

Prop it up, of course!

The RBA has two choices.

Allow the economy to crash…

…or prop up one sector of the economy and try to prevent a crash.

Which path do you think it will take?

The tumbling of Australian house prices is starting to poke holes in the rhetoric that we have a strong economy.

Simply put, we don’t have a strong economy. We have official statistical data and a high immigration policy that has acted like a Band-Aid on an open wound.

Furthermore, as house prices fall in Sydney and Melbourne, people are spending less and less money.

The RBA needs to figure out a way to prop up the housing market and consumer spending at the same time.

Unfortunately for us, the tool it will rely on will be interest rates.

Lowering interest rates is a blunt way of trying to get people to spend more in order to keep our consumerist economy functioning.

The problem with dropping rates is that it actually erodes the value of the currency.

In our case, it means the Aussie dollar is about to fall.

So in the future, you’ll need more money to buy the same thing.

Cutting rates even further means even less interest from any cash held at the bank.

It reduces your ability to save for the future…as well as your long-term purchasing power.

Excluding the majority of our food, few goods are made in Australia. A lower Aussie dollar means we need to import the same stuff from overseas at a higher cost.

The interest rate policy decisions made by the RBA this year are going to sink the value of the Aussie dollar.

Remember, currencies don’t crash overnight. A series of decisions made by a select few inevitably lead to the crash.

And over the next few months, the Reserve Bank of Australia is going to put the Aussie dollar precariously close to the edge of the cliff.

Until next time,

Shae Russell Signature

Shae Russell,
Editor, The Daily Reckoning Australia