The tumbling of the euro in recent weeks whereby one $A buys 80 euro cents is another effect of government intervention. Free market economists need to go on a very long holiday or go back to university and extend their studies into psychology.
It is always fascinating to watch economists grapple with reality. Today the Australian Government announced a $100M support package for the Australian Automobile Industry as part of its long term assistance plan to compensate for cutting tariffs. The reaction of “free market” economists is that this is a waste of tax payers’ money. They argue that the Australian auto industry should die a natural death and that Governments should not be interfering with market and economic forces. Really – well let’s smell the roses!
These arguments conveniently forget the following:
- The US Federal Reserve has created over $3T of liquidity to keep the whole US economy afloat with the US Government cranking up $4T of deficits in 3 years. The result is a sharply depreciating $US;
- The European Central Bank has just offered 0.5T euros of funding to European banks to keep them afloat with the European Governments collectively having fiscal deficits of 7% of GDP to keep the zone growing. This too has weakened the euro to historical lows; and
- China continues to peg its currency to the weakening $US as a means of sustaining export and economic growth.
>> Click to read the full report on the ongoing European debt situation
