I missed an opportunity to chat on ABC Radio Statewide Drive with Brad Storey who asked:
I’m working at the ABC radio and looking for someone to comment on the ‘psychology’ of finance. Why the dollar at .80 cents makes us feel good but may not be good for us.
Sadly I didn’t check the blog in the 1 hour 5 minutes and 17 seconds before the deadline. Hey I understand journalists’ time pressures. But it is a great question.
Why do we feel good about a dollar over 80 cents?
One answer is semantics. The media reports the dollar is up or down. Some tell us against the US dollar. None mention that you can’t actually get that rate anywhere. It is an indicative spot rate, but it is useful to know the general direction of the foreign currency market. So we generally feel good when things are up and bad when things are down. Of course that is when we are selling something.
Secondly there is nationalism. Australians are enormously competitive. We like having the best in the world – cricketers, swimmers, actors and currency. That’s okay, again when we are selling something.
Thirdly there is ego. Many Australians remember a Aussie dollar that bought $1.30 US or so. Some even remember when an Aussie Dollar bought nearly two greenbacks. Like fading aristocrats, we fondly recall the good-old-days and resent the conspicuous affluence of new money.
Lastly there is tangible versus intangible effects of our currency’s strength. We have interest rates higher than our trading partners. Hot money is chasing those higher returns, creating demand for our currency. Imports are cheaper because our dollar is stronger. Consumers notice they can buy DVD players for $89. That seems like a good thing to them.
Consumers don’t notice when exporters get less for their sales overseas. Most exports are denominated in US dollars. All that happens is fewer profits to those farmers, miners and bio-techs. The impact that has on the balance of payments is longer-term and disconnected.
Also we are no longer selling something, we are trying to buy Australian dollars with the Greenbacks we got for our wool, nickel and bionic ears. It’s a bit too abstract for our average consumer.
It’s like the February credit card bill – that’s when we truly pay for Christmas. We didn’t forecast that pain on Christmas eve. It seemed great to buy toys and gifts on plastic. We feel affluent and generous.
So there you are. Paulzag’s take on feeling good about bad behaviour. Cognitive dissonance in action. Of course the usual disclaimer applies Nobody knows anything – William Goldman