In today’s weekly wrap, we make reference to freshly released research from Canada’s RBC suggesting that China looks to hold an approximate 20% share of all Australian government and semi-government bonds. There has been much media discussion about the liquidation of China’s US denominated debt and the implications thereof in recent times and many of those arguments are now largely applicable to Australia. China’s willingness to utilise foreign reserves in support of their currency and in support of their continued gold acquisitions has been amply demonstrated of late. We reported on the latter just yesterday. In an even larger indication of China’s financial importance to Australia, if considering only the bonds that are held offshore, China represents a 1/3 holding. What’s of additional interest is the fact that at around 3.5% of total reserves, China’s AUD holdings are disproportionately high when compared with those being held by other central banks which generally target the 2% mark. This could indicated a greater risk of AUD denominated liquidation if China attempts to shift its portfolio allocation towards global norms; a point illustrated by noting the current liquidation of their reserves plotted against the value of the Aussie below. In early September we reported on analysis that predicts a steeply lower Aussie dollar in the future and this revelation adds support to such suggestions as a lowering in the value of the Aussie is a potential consequence of any further liquidation of China’s $US3.7 trillion foreign reserve pool. At the time, we surmised that such currency movements could see significant gains for Australian bullion holders as they benefit from the weakening currency demand. See Monday’s news article for a better understanding of the benefits of holding bullion in this environment. Higher yields on Australian bonds should also be expected as a key source of demand begins to falter. This is based on the premise that large institutional investors will be unwilling or unable to compensate for any large scale repositioning in China’s foreign reserve allocation. The low yield debt environment has been of key assistance in maintaining Australia’s moderate deficit and has eased budget pressures federally. According to the ABC, “the Australian Office of Financial Management (AOFM) needs to borrow around $70 billion a year to cover maturing government debt as well as a federal budget deficit which is forecast to be around $25 billion next year.” Such figures highlight the importance of the availability of Australian debt demand to our political and economic landscape; both of which are not known for their stability at the present time.
Using the AUD/USD ratio in the chart above doesn't mean a thing. It has ten times more to do with the U.S. currency than the Australian. Since Australia stands at the margin of China's expansionist plans, the Chinese are unlikely to antagonize them. The Australian dollar has declined in line with decreased demand for its commodity exports, which three years ago, looked both secure and predictable. Not so. In my opinion, Australia would be better off boosting its food production, not its mineral exports. The only problem with that -- how do they get paid when everybody's broke?
How inflation works -- On 1 October 1908 Henry Ford introduced the Model T car at a cost of $825.00 or 39.909 ounces of gold, worth $44,499 today. Even the Government's understated BLS inflation calculator says that 1908 price would be $19,860 today. [courtesy of www.the-moneychanger.com]
1908 $825 Model T Ford mint condition 1908 Gold $20.67 per troy ounce (officially $20 per ounce?) 1908 Silver $1 per troy ounce officially? To simplify the math, I'm just going to use the official measures rather than the exchange rates. 1908 Model T Ford mint condition = 825 troy ounces of 1908 silver 1908 Model T Ford mint condition = 41.25 troy ounces of 1908 gold 1908 Model T Ford = $121,000 2015 Sept auction hammer 825 troy ounces of silver = Give or take $12,000 today 41.25 troy ounces of gold = Give or take $45,375 today The point is, there is no point, just like the OP's post.
That's a little optimistic. In 1908, silver dollars contained 0.773 Troy ounce of silver, so the Ford cost more like $635 worth of silver. There was no sales tax, and no income tax. You could buy a fine 2-story brick home in many small towns of the Midwest for less than $1,000. This economic climate persisted until World War I. My great-grandfather's house in Lewistown, Illinois, built in 1907, cost $1235. Shown below, immediately after completion, before landscaping and fences. As it looks today, 108 years later; rarely can you visualize the changes and loving care for a home over an entire century. Note the VERY muddy street, and the concrete hitching post at lower right.
Great, so where am I gonna park the horse I rode in on? Nice home, and thank you for flying that flag!
I don't live there, but sometimes wish I did. You park the horse at the hitching post; the whole system was geared to horse and buggy (or wagon), not automobiles. Probably less than 5% of the nation's roads were asphalt-paved, although respectable cities tended to have brick streets. Horses liked mud, it kept the flies from biting their legs.
