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Should We Expect To See An Australian Currency Crisis

As the world worries about the early stages of the coronavirus outbreak last year, the Aussie Dollar responded by plunging in value, hitting a 17 year low in March 2020, when it went below US 60 cents for the first time since 2003.

In ordinary circumstances, a cheaper Aussie dollar can help boost sectors like tourism, retail and hospitality as overseas consumers get more bang for their buck. Of course, that didn’t happen last year because no one was allowed to travel, hospitality outlets were closed and retail was affected by delays in the supply chain, plus the hit to consumer spending as people began to bunker down and refuse to spend their money (except on toilet paper of course).

It was a bleak example of how weak our currency had become when exposed in such a way.

More than a year later, at the time of writing this article, the Aussie dollar is back up to US 78 cents and some forecasters believe it will end the year as high as US 80 cents. However, the underlying issues have not changed. A currency collapse is a real possibility in this country.

So what does a currency collapse look like?

Using Turkey as an example, in March, the Turkish lira tumbled by 15% after the president sacked the country’s central bank governor… the third person to leave that job in under two years.

That bank governor had been raising interest rates in a bid to get inflation under control, which had been met with praise by many in the investment world. However, Turkish President Recep Tayyip Erdogan believes high interest rates actually fuel inflation, a view that is in contrast with conventionally accepted economics.

At the moment, Turkey’s official interest rate is at 19%, while inflation is sitting at 15%. But this didn’t happen overnight, currency collapses are linear; they occur in stages.

In recent years, Turkey has had one of the world’s biggest current account deficits. With imports, exports and international transfers of capital taken into account, they were behind by $51 billion in January, 2018. This meant the country had to find $200 billion a year to service its debts, with just $85 billion in gross foreign currency reserves.

Analysts saw the situation as a currency and debt crisis, which had been seen many times before, but lamented that in such cases, quality economic leadership was needed, while President Erdogan served up the opposite, actively interfering with central bank policy and stopping it taking the required action.

The result was that corporations weren’t able to service debts with Turkish lenders due to losses in earnings in Turkish lira. The asset quality of Turkish banks deteriorated and they continuously raised interest rates for consumer and business loans. This then saw a decline in home sales and mortgage sales and a huge surplus in unsold housing stock.

The country’s economic ratings were slashed down to junk status by ratings agencies and Turkey entered recession. The expected recovery in the following years was disrupted by the COVID lockdowns and Turkey remains in a rubbish position.

What’s that got to do with Australia?

Even if the AUD rebounds and strengthens further against the US dollar, it doesn’t change the fact that our currency is becoming more worthless all the time.

The RBA decided to pump an extra $100 billion through the economy this year in quantitative easing and the federal government has continued printing extra money in the form of stimulus payments to incentivize us to prop up the economy with spending.

But with interest rates so low, the cash you have in the bank is not gaining any kind of return…in fact it’s diminishing in value in real terms as more is printed and circulated.

And our government is unlikely to raise interest rates anytime soon…they can’t because even a small increase would see a huge percentage of the population facing a default on their mortgage and the economy getting smashed again.

Meanwhile, the price of consumer goods are on the rise and your cash is falling in value against assets. That’s why the best way to make the most of the current environment is getting a piece of those assets. Holding quality debt on assets like property is the best option for getting value growth and returns out of the money you’ve got right now.