28/10/2010 - 00:00

Europe stumbles, set to take a big tumble

28/10/2010 - 00:00


Save articles for future reference.

The Aussie dollar may be enjoying rare strength against world currencies, but beware the downside.

A FOOL and his money are soon parted, as many Australians will discover over the next few years when they fall for two traps triggered by our strong dollar.

The first trap is to follow the advice of some stockbrokers who are telling clients that now is a perfect time to invest in foreign companies, especially in recession-hit Europe and the US.

The second trap is to imagine that the strong Australian dollar will buy you a perfect European holiday, where you can roam free as a visitor to great cities such as Paris, Rome and London.

Trap one has been explored before, but is worth a reminder because anyone suggesting that you broaden your investment portfolio by snapping up a few bargains on the London or New York stock exchange is leading you up a blind alley.

The Australian dollar is strong against the pound, euro and US dollar for several reasons, not least being the weakness in those currencies, a weakness that will continue for a while before strength returns.

What that means is that the crisis in the advanced economies of the Northern Hemisphere will get a lot worse before it gets better, and the bargain you see today will cut off your financial fingers as cleanly as a falling knife.

Far better to wait until you can see the bottom of the northern crisis before sending your hard-earned Aussie dollars into markets which will takes years, possibly decades, to recover; if ever, when you consider the demographics of a rapidly ageing region.

The second trap is that holiday you might be planning, because while it might look cheap – and Bystander, currently sitting in the centre of the West End theatre district of London, cannot remember when it was cheaper – dark clouds are rolling in for the locals and visitors.

Older readers will remember back to the Christmas of 1978 when Britain entered its ‘winter of discontent’, a time when pay cuts were enforced by the British government leading to widespread strikes, leading to the election of Margaret Thatcher and her right wing government.

History has a funny way of repeating itself because 31 years later Britain is on the cusp of a re-run of its winter of discontent with the only differences being that a debt mountain rather than rampant inflation is the bogeyman, and a right wing government has just been elected.

Last week, in a savage attack on the nanny-state of bloated bureaucracy that is the Britain of today, a series of harsh budget cuts were announced designed to eliminate 500,000 public sector jobs and balance the budget within five years.

The economic theory behind what’s happening in Britain is Thatcherism Mark 2, with the inevitable consequences of widespread strikes, public service disruption, and a shut-down of essential services, including transport.

France is a precursor to what’s about to happen in Britain, and possibly across Europe, as austerity measures cut into government spending and a region of the world addicted to handouts from the state while offering zero encouragement to wealth-creating business, sinks deeper into recession/depression.

If you insist on travelling to Europe to capitalise on the strong dollars that are burning a hole in your wallet, allow plenty of time for travel, and get ready for third-world services, because the planes and trains will not run on time (or at all, in some cases), rubbish will not be collected, and all government services (including medical) will decline sharply.

Australia’s strong dollar is a deceptive beast. It makes us feel rich, until you take it overseas and discover that what you feel might not be what we get.

Thanks, but no thanks

FIRST exposure to what’s about to happen in Britain as the budget cuts bite came for Bystander at the British border when a friendly immigration officer said it was good to see some Australians arriving – at least we spoke English (or a form of it).

Then came the dark side of the welcome. “Why are you here?” Business. “What do you do?” Journalist? “Oh, are you going write about the job cuts”. No. “Pity, because we’ve just been told that one-in-three of us are going to lose our jobs.”

At that point it’s hard to not feel sympathy for a woman who has taken on the thankless job of vetting who comes into her country. Not only is it an important job, it’s the sort of government job which (a) doesn’t pay much but (b) in return might offer a reasonable expectation of security of tenure.

Now, magnify that experience 500,000-fold and you get the picture of a country that is all-but bankrupt thanks to its over-reliance on debt and a single industry (financial services), and which is being asked to repay the money it borrowed, sack workers who can no longer be afforded, and embark on a bold rescue mission called ‘tough love 101’ – a variation on ‘take this medicine, it tastes awful but it’s good for you’.

No golden egg

FEELING smug after that little dissertation on broke Britain? Well, consider what might happen if Australia makes the same mistake of putting all its eggs in the one basket – the one marked ‘mining and oil’.

Our good fortune has little to do with some clever plan hatched in Canberra. It’s all about China’s industrial revolution and its thirst for commodities.

If/when that thirst diminishes, what then? Does anyone really believe that this resources boom will last forever? Of course not. We are simply enjoying our moment in the sun, a moment which could as quickly be dimmed as it arrived.

Moral of that story; try not to spend every dollar you earn because it is savings that represent long-term wealth, not spending.

Circle turns

IN a nutshell, the problems of Europe and the US can be described in one word – consumption. The wealth of China can also be described in one word – production. Australia is lucky to be part of the production and wealth creation part of the great circle of economic life.


“Pessimism leads to weakness, optimism to power.”

William James



Subscription Options