Et tu, economy? Then fall, Aussie Dollar!

A Facebook friend recently posted a note declaring his economic ignorance, and pleading for someone to explain how the Aussie Dollar has gone from near-parity with the greenback to South Pacific peso territory.

I am no economics expert, and struggle often with understanding the global financial crisis we find ourselves in. But dealing with the subject every day in the newsroom, I am constantly trying to improve my own knowledge and comprehension.

So I cobbled together an explanation...

The Aussie dollar used to be fixed. In the 1980s, it was "floated", so it became like a share or a stock, able to be bought and sold at varying values.

But if the US dollar, pound or euro are a "blue-chip" shares - ie, less risk, then the Aussie dollar is like an ostrich farm project - ie, riskier, but a good potential earner if the eggs hatch. The economists call it "high-yielding".

Over the last couple of years, the Aussie dollar has been strong against the greenback, because there's been strong growth and high demand for Australian goods from overseas - mostly raw materials that we dig out of the ground, chuck on ships, and shoot off to China. Also, America’s economy has been slowly slowing, but more on that in a minute.

You need to spend cash to grow the economy. But spending too much too quickly can lead to too much growth, meaning higher prices for everything (higher inflation). So the Reserve Bank of Australia put interest rates UP over the past few years, to try to stop people spending as much. Of course the biggest impact that has is making it more expensive to pay your mortgage. But from what I understand, higher interest rates at home, help make the dollar stronger. So basically - it sucks to be a home-owner, but it's a fine time to be a traveller, particularly if you’re heading States-side.

Now this year has seen a collapse on the share markets, primarily because a bunch of US banks lent money to people to buy houses who really shouldn't have gotten loans. It was OK while the economy was still growing. But then the economy slowed. I don't really know why, but it meant a bunch of people suddenly couldn't afford all their repayments. All of a sudden the big banks that had all this invisible money found themselves like Wiley E. Coyote standing in mid-air after the cliff has fallen out from under them. Whooosh, smash, meep meep, that's all folks.

The likely result of all this is a recession - meaning people lose jobs and consequently have less cash. So they need less stuff. Turns out the stuff they don't need is the stuff Australia has. So they sell off their Aussie dollars, heading back to the "blue-chip" US dollar.

A whole bunch of people getting the hell out of Dodge generally means prices go down. It's like if you found out your house was on a radiation dump. You'd want to sell out, and you'd eventually take a price, even if it was way lower than what you paid.

On the home front, the Reserve Bank has started cutting our interest rates, to help people start spending again. If overseas people aren't buying our stuff, we'd better get more people at home spending up. But essentially we're left in the opposite position, which is that it's much better to be a home-owner (pay less on your mortgage), but sucks ass to be a traveller, because all of a sudden nobody wants your currency and a milkshake in London costs the equivalent of a day's salary.

The bottom line is in tumultuous times people aren't going to branch out into buying Aussie dollars, making them less in demand and therefore worth less.

The upside is our exporters might catch a break once the dollar stablises, and we might get more tourists here exchanging their sweet pounds and euros. But if you want to go overses, or buy fancy TVs or posh European cars, then it's going to suck the big one for the next year or so.

Am I in the ballpark? I'd welcome any feedback or corrections!