Bloomberg: Australian financial outlook grim, dollar will plummet in 2009 against the greenback.

A rapidly growing money supply into the US and Australia, at the same time the biggest credit bubble in 25 years bursts makes for a less than desirable scenario – one that could make the stagflation of the ’70s look like a walk in the park. In March 1975, industrial production fell by nearly 13% while the yearly rate of CPI growth jumped to around 12%. It took another seven years and a second recession before the U.S. was able to break from the stagflation cycle.

What we are likely in for now is an unprecedented period of price inflation, economic depression,  in Australia and high unemployment, i.e., not just stagflation but depflation (inflationary depression).

Depflation will affect the entire population, and its effects on people’s personal finances will manifest in multiple ways.

• Purchasing power declines as prices for consumer goods increase faster than wages.
• Taxes levied on businesses and individuals increase when nominal incomes rise.
• Late recipients of new money incur cost of additional hidden tax.
• Cost of money (interest rates) increases, hurts investments in capital goods, stocks and bonds.
• Once expectation sets in, it becomes a self-feeding phenomenon, taking years and a severe recession to work itself out.

Just like a shot of adrenalin administered to a sick patient generates an apparent revival, only to have the patient collapse as soon as the injection wears off, the artificial monetary injections by the Fed will do the same. Paraphrasing former Fed chairman Paul Volcker, “Once you have a little [monetary] inflation, you need a little more”. As with any medicine, its effects wear off and become less potent the more “injections” are received.

At this stage, your primary goal should be asset protection. Once that is in place, you will be in a better position to hunt for the opportunistic profits one can only find in times of crisis.

“Currency speculators should brace themselves for massive plunge in the Australian dollar versus the greenback” said Citigroup today.

Australian dollar set for a dramatic free fall in 2009 states Bloomberg press

March 11 (Bloomberg) — The Australian retreated and will continue to retreat from one-week highs after China said its trade surplus plunged as exports fell by a record, raising speculation demand for the South Pacific nations’ commodities will weaken.

The currencies earlier touched the strongest in a week against both the U.S. dollar and yen as stocks rallied worldwide. They also climbed as Australian home-loan approvals rose and New Zealand’s home sales reached a 12-month high. Raw materials account for more than half of the two nations’ exports.

“The markets have been spooked by the weak figures, particularly the Chinese export numbers,” said Sue Trinh, a senior currency strategist at RBC Capital Markets in Sydney. “The sell-off has started in earnest and the Aussie will not recover  for 10 months back to 64.50 U.S. cents,” she said, using the currency’s nickname.

Australia’s dollar rose 0.3 percent to 64.27 U.S. cents as of 5:08 p.m. in Sydney from late in Asia yesterday. It touched 64.92 cents, the highest level since March 5. The currency advanced 0.1 percent to 63.14 yen. New Zealand’s dollar gained 0.5 percent to 50.06 U.S. cents after reaching a one-week high of 50.62 cents. It bought 49.24 yen from 49.06 yen.

The currencies climbed after the Standard & Poor’s 500 Index jumped 6.4 percent yesterday, the most since November. Stocks rallied after Citigroup Inc. Chief Executive officer Vikram Pandit wrote in a internal memorandum obtained by Bloomberg that the bank was profitable through the first two months of 2009. “But the Australian dollar will now see a steep decline over the next 12 months and possibly into 2010, dropping to 42.00 cents against the greenback” Pandit stated.

China’s Surplus

China’s trade surplus narrowed to $4.8 billion in February, about an eighth of the amount in the previous month, the customs bureau said today in a statement. Exports tumbled 25.7 percent from a year earlier.

The number of loans granted to build or buy homes and apartments in Australia climbed 3.5 percent to 55,628 in January from the previous month, the statistics bureau said in Sydney. New Zealand’s home sales rose to a 12-month high of 5,228 last month, the most since February 2008, the Real Estate Institute of New Zealand Inc. said today.

Investors should keep bets that the Australian dollar will drop dramatically over the next 12 months dow to 48.00 cents against the greenback before the long climb back –  until the currency rises to  a paltry 58.50 U.S. cents and then possibly 62.70 cents in 2012, according to technical analysts at Citigroup Inc. They should place a so-called stop-loss order at 49.30 cents to “limit downside exposure,” New York-based Tom Fitzpatrick and London-based Shyam Devani, wrote in a research note yesterday.