The struggle for economic literacy goes on. At the Age Ken Davidson points out, again, the nonsensical thinking behind the use of “net debt” as a policy target. Meanwhile, at the SMH, Ross Gittins gives a good explanation of movements in the exchange rate, pointing out that the $US/$A rate fluctuates around the “purchasing power parity” value of $A1.00 = $US0.70 and that an appreciation in the exchange rate is not good for everyone, particularly not for exporters.

I have two small quibbles with Ross. First, he misses the chance to point out that the $US/$A rate is not “the” exchange rate, or even the most important one.

Second, he says that we’ll never see a return to parity ($A1.00 = $US1.00) noting that the PPP rate of $A1.00 = $US0.70 is below parity because Australia had higher inflation than the US in the 1980s. But when it hit $A1.00 =$0.48, the $A was about 40 per cent below PPP. It’s just as likely, in the long run, to fluctuate 40 per cent above PPP which would reach parity. (I confess that I took a small bet on this some time ago, at long odds, but, as I often do, underestimated the time it would take to return to, and overshoot, the long run equilibrium value).