Real deficit with climate change

Terry McCrann

Herald Sun - June 06, 2007 12:00am

THE continuing huge current account deficit and ever-rising even more humungous foreign debt renders utterly surreal the frenzy over climate change.

That they coincide with a seemingly inexorable rise in the value of the Australian dollar takes it all into a place that not even the combined sub-conciousnesses of Salvador Dali and Hunter S Thompson at his most drug-assisted could have come close to concocting.

Or in more local vernacular, you call that a deficit; this is a deficit.

The 'this', if we as a world actually succeeded in dramatically reducing carbon emissions. Hopefully, not anytime soon.

We have this huge current account deficit - $15 billion in each of the last two quarters, $44 billion in the financial year so far, heading for close enough to $60 billion for the full year.

Most of that deficit is on the 'income' account. In the latest quarter the trade in goods and services -- from fridges and cars and minerals, to tourism and transport - was 'only' $3.3 billion in deficit.

For the year so far, $8.5 billion in deficit; heading for perhaps $12 billion of that $60 billion total for the full year.

All the rest of the deficit is 'income' - actually negative income. And what is that? Mostly interest on the existing $530 billion of foreign debt.

And how was that debt built up? By all the previous current account deficits, which we then, mostly covered by borrowing.

Now we have anything but a 'virtuous circle'. Most of our current deficit is the interest on the debt, that's to say past deficits. And we cover it by borrowing more - locking in future deficits.

Except in recent periods, much of the deficit has been covered not by new borrowing, but by selling shares to foreigners.

Shares in what? Our listed companies generally, but a healthy slice in resource groups like BHP Billiton and Fortescue Minerals.

Why have they been attractive? Because of the China-driven commodities boom.

Indeed Australia has been so attractive, that more money wants to come in than we 'need' with the huge deficit.

That extra demand has the effect of pushing up the value of the Australian dollar even after the Reserve Bank provides more dollars by selling them to hungry foreign investors.

It's now at 20-year highs. Pretty much the exact reverse of unemployment at 30-year lows.

Is this mix of rising deficits, debt and dollar problem? Yes and No?

In times past I would have said we were heading for hell in a handbasket; at some point the foreign debt bill would be presented.

And a former treasurer named Paul agreed as well.

But it was (more than) 20 years ago today, his famous 'banana republic' warning was issued. And while yes, we have had no bananas, so to speak, there's no sign of that republic. Either republic, actually.

Why not? Because the world has changed in a whole host of ways. The narrowly most important for us, is China and its insatiable demand for what we produce.

That said I can't be completely insouciant about all that red ink. And the bit that matters is the servicing cost of the foreign debt.

In the latest quarter it took a decade-high 10.8 per cent of our - inflated - export earnings. That in itself is not dangerous, but it is up from 8.9 per cent barely a year and a half ago.

Up to this point I would be alert. Enter climate change. Or rather, proposals to dramatically cut carbon emissions.

If they succeeded, they would also dramatically cut our exports. Both volumes and even more so prices.

A huge part of our exports, but much more critically the increase in our export income is directly carbon-energy related. Either coal for power or iron ore feeding into dark satanic mills.

We would head towards 'this' deficit. And our dollar would plunge. And I mean plunge - 50 would look like Everest.

That though would incidentally be a great help in getting our emissions down. I guess when petrol went through $4 a litre, we'd be cutting back a tad on driving.

So why is our dollar rising inexorably? Short answer, because the US dollar is going down.

The longer answer parallels the puzzle of why people are still paying extraordinarily high prices to buy beachfront property despite the absolute consensus among the experts of global warming, and the threat it poses to Luna Park.

That these experts don't believe that China is going to cut back its consumption of our resources anytime either soon or later. We'll keep pumping iron (ore); they'll keep pumping carbon.

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