John Howard's bottom line

When the United States ended the dollar's connection with gold and the IMF collapsed as a regulator of stable exchange rates in 1971, we entered upon the era of what the prime minister calls "free-floating exchange rates". It was a momentous step.

In December 1972, the brand-new Whitlam Government appreciated the Australian dollar to near parity with the US dollar. It has been a bumpy ride since.

This is not the place to describe all the ups and downs of the Australian dollar against a variety of the world's major currencies. However, it can fairly be said that there have not been many periods of any great length that have seen "stability" in the value of the Australian or most other currencies.

Against the US dollar, the Australian dollar has experienced a low of just US$0.50 - even a little below for a while. In what the prime minister calls "the early part of the 21st century", it has recovered to a large extent against the American currency - at one time to US$0.80 and at the present moment, to around US$0.76. Those are formidable swings.

Against European currencies, the volatility has been even greater. To take the fairly typical example of the Austrian schilling, the Australian dollar was at one time, in the 1970s and 1980s, worth about 25 schillings. Later, over the years, it slipped way down to below 7 schillings and, against the Euro, its value was not a great deal higher. However, just in the last few weeks, the Australian dollar has moved up in value from €0.59 to more than €0.63 and is likely to go still higher. That is an appreciation of around 7 per cent, with probably more to come.

These large and frequent, indeed never-ending changes in exchange rates cannot fail to have an impact on trade flows and, even more important, on speculative capital flows. Indeed, the latter are not really capital flows at all, but simply waves of cash changing its identity as it seeks a more profitable and very temporary haven. These days almost all money is "hot." The days when "hot" was a rare exception to "cold" money have long since gone.

During the last several months especially, there has been a keen international debate about the value of the Chinese yuan-renminbi and its peg to the US dollar. Some other Asian currencies are also believed, with substantial justification, to be undervalued. The thinking is of course that a revaluation upwards of the Chinese and several other Asian currencies will improve the balance of trade by protecting domestic industry in the United States and elsewhere and improving the deficit countries' competitive position in export markets.

The extent to which this will happen, given especially the destruction of the manufacturing sector, is uncertain; but what is certain is that the protection - or not - provided by currency movements actually or potentially dwarfs that customarily conferred by tariff barriers.

It is in this context that we must view the WTO. In relatively stable growth situations, with relatively stable exchange rates, tariffs will provide all that is needed to manage a modest regulation of trade. However, when currencies fluctuate wildly, under free-floating currency arrangements, tariffs lose much of their relevance.

The lively and persistent volatility of exchange rates over recent years has inevitably led to financial speculation on a massive scale. That has meant that exchange rates and, to an important extent, interest rates are determined more by financial speculation than by the underlying strength or weakness of individual, real national economies.

The Australian prime minister applauds the changes that have taken place; but there are dangers in what is inherently an unstable, highly speculative world economy. The bursting of any of a whole array of bubbles could set off a world financial and economic crisis of unprecedented dimensions.

Mr Howard says, "We have reformed our taxation system, we have a far more open industrial relations system", but even these features of our current society carry risks. The taxation system now bears relatively much more heavily on the poorer and middle classes and much less on the wealthier and higher-income groups. The financial rewards going to the latter are now too frequently obscene and those groups make too small a contribution to the society from which they derive their income and wealth.

In addition, the "far more open industrial relations system" has severely diminished the strength and authority of the trade unions and of others, including political institutions that have traditionally given comfort to the "lower orders". An argument can be adduced that the trade unions, despite their propensity to err, were a built-in insurance for peaceful change by steady evolution in the Anglo-Saxon and some other countries, rather than through violence and revolution. That was the case until the later decades of the 20th century.

With the decline of the unions and other support institutions for the lower-income and less privileged, the society is likely to be less secure and much less predictable, when - rather than if - a major collapse of the financial system and with it the general economy occurs.

Australian Prime Minister John Howard shows no awareness of any such "bottom line". He sees only blue skies above as far as his complacent vision can see.