Kamis, 08 November 2012

Australia is expensive, and the U.S. is cheap

For those considering an escape to a less-unfriendly business climate such as Australia's, an important caveat: the Australian dollar is very expensive and the U.S. dollar is very cheap. Selling here to move there is therefore an extremely expensive proposition.

The above chart compares the Aussie dollar exchange rate to my calculation of its Purchasing Power Parity with the US dollar. (PPP is the exchange rate that would cause US visitors to Australia, and Aussie visitors to the US, to conclude that most prices in the two countries were roughly the same.) I estimate that the PPP exchange rate today is about 0.66 dollars per Aussie dollar. But since the current exchange rate is 1.04, that implies that, from the point of view of a U.S. expat or a U.S. tourist, the average price level in Australia is more than 50% higher than in the U.S. Ouch. Moreover, the Aussie dollar has almost never been so strong. Lots of things are going to have to continue to go right for the Aussie dollar to remain at these lofty levels.

This next chart of spot commodity prices suggests that a big reason the Aussie dollar is so strong is that commodity prices—commodities are Australia's major export—are very strong. There is a very strong tendency for the Aussie/US exchange rate to track changes in commodity prices. Rising commodity prices bring a flood of new money into the Australian economy, and that tends to bid up the value of the Aussie dollar.

As this chart of the real, trade-weighted value of the dollar shows, the US dollar has almost never been so weak. It's not hard to understand why: monetary policy is extremely accommodative, the U.S. economy has never experienced a weaker, more disappointing recovery, federal deficits are extraordinarily large, entitlement programs are long overdue for reform, and regulatory burdens are very high and rising (e.g., ObamaCare). In contrast to conditions in Australia, lots of things need to continue to go wrong in the U.S. economy for the dollar to remain this weak.

For the time being, leaving the US for greener pastures overseas is in general a very expensive proposition.

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