David Murray Says You Become Dependent on Global Banks When Importing Capital


There we were watching Lateline, waiting for the rain to stop at Edgbaston so the cricket could begin, when David Murray, Chairman of Australia’s Future Fund, began making so much sense we could hardly write it down fast enough. And it wasn’t his comments about buying non-government guaranteed corporate debt that got us so excited.

Murray addressed a point we’ve been banging on about here for a month now: when you have to import your capital from the rest of the world, you become dependent on global banks to fund your domestic economy. And if those banks don’t like what you’re doing with your borrowed money-if they think you are using it to bid up house prices rather than build investments that will generate higher returns-they may decide to invest elsewhere.

What does it mean to be capital poor? “We ask them [global banks] for the money to build larger houses…more square metres per house, year-on-year…and we ask for the money to put less and less people per house at the same time,” Murray began.

“Why in Australia is that money not going to fabulous new infrastructure…public goods…why isn’t it fuelling great companies?” he asked. We assume the question is rhetorical. The obvious answer is the country is in the grip of a housing hysteria, or at least the belief that everyone-banks, real estate, agents, government tax collectors, builders, and home buyers-can all get rich on houses.

“We’re now going to have to invent a corporate bond market because this money isn’t flowing right,” Murray added. By ‘flowing right,’ we assume Murray means that instead of funding productive investment and enterprise, Australia’s foreign borrowing addiction could eventually threaten the supply of credit provided by foreign banks.

“I think that our friends around the world who have a habit of saving and helping us with it are entitled to ask, ‘Is this the best return for my precious savings dollar?'”

Lots to think about. For what it’s worth, we think Murray is right on the money. The Chinese are already-and quite rightly-telling American officials to reduce their deficits or jeopardise the flow of credit coming from China.

This is a subject we expect to speak more about tonight. The American fiscal deficit is directly linked to Australia. The more the Chinese are worried about the value of their U.S. dollar assets, the more quickly they will look to diversify those assets or shed them outright.

That probably means increased Chinese investment in Australia’s resource and energy sector. Australia is part of China’s answer to “the resource question.” Also, the Chinese already realise that making a buck of Aussie borrowing is not a bad investment strategy either. Dow Jones news wires reports that, “China’s Bank of Communications will open a Sydney office as its first working branch in Australia.

“The move, announced by the NSW government today, underscores the growing ties in trade and business between Australia and China, a major export customer, and is part of a strategy by authorities to promote Sydney as a regional hub for financial services. The Bank of Communications, China’s fifth-largest bank, is seeking a licence from the Australian Prudential Regulatory Authority to establish a branch delivering a full array of services.”

Selling money can be a good business. China is also branching out with its global investment/expansion strategy, trying to diversify its sources of income. The profit margins in finance are probably a lot higher than the profit margins in making air conditioners (or most assembly and manufacturing industries.) If you want to increase national income, it’s a good strategy (although it’s not as good for full employment, which is also a big objective of the Chinese State).

Also, when you’ve accumulated a huge chunk of capital with a mercantilist trade policy based on keeping your currency artificially cheap so you can run a large trade surplus, you have to put that capital to work eventually and not just buy U.S. Treasury bonds. It will be interesting to see if the long-term strategy works.

But you get the feeling there IS a long-term strategy at work in China. In Australia? Murray says that under his direction the Future Fund will meet the unfunded liability of superannuation for public servants by taking a long-term view. He encourages all of Australia to do the same.

He says he is, “Taking a long-term view about saving, which is a critical problem in the Australian economy…taking a long-term view about our next generation, not just ourselves…taking a long-term view about the stability of employment and skills building…whether it’s at the Future Fund or anywhere else…and a long term view about the pride in our institutions.”

We find those comments quite encouraging actually. One of the big faults in the corporate world in the last twenty years-driven by quarterly earnings analysis and the 24/7 media cycle-is managing long-term institutions for short-term gains. To some extent, this just reflects the compression of time in a globalised world. The business cycle seems to have speeded up.

But shareholders and corporate management alike would both be better served by considering what’s best for the long-term interests of the institution…and how to make sure that particular business continues to serve customers well. This goal might not always be compatible with short-term earnings management strategies that allow executives to meet targets which trigger extra compensation.

Essentially, we think Murray is suggesting that we all need to be better stewards of capital. He’s also implying that for the last twenty years, we-the institutions of modern capitalism-have NOT been good stewards of capital. If you pursue that line of thinking, it might also mean that the expectation that you can make a lot of money very quickly without really doing any work or adding value is-as a cultural frame of mind-not very healthy for our long-term survival.

We’ll have to leave it at that today! Tonight is the big night of the Debt Summit at the State Library of Victoria. We’ll be back with a full report on Monday. Until then!

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. I too was watching for the Cricket on SBS last night.
    Please that Ricky Ponting won the toss.
    It’s about time Australia won something on this tour ….

  2. Very pertinent, Joe. Can I suggest you try : http://www.cricinfo.com/ ?

  3. Murray was criticising his old pre-float CBA boss Keating and all his economist mates. He won’t last long in his job unless he has some reason to think that Garnault and Henry and all the other Keating era travellers are for the spear.

  4. “Why in Australia is that money not going to fabulous new infrastructure…?”

    Uh – because the State governments are technically bankrupt;

    the banks are massively risk averse ( where they actually understand the risk – not where they get blindsided ); and

    the instos don’t know or care how to value for more than three months ahead in this country ??

    Anyone else here old enough to remember when MIM defaulted on the project debt for the Newlands coal mine and Abbot Pt coal terminal, and handed the keys back to the banks ? Think uber-jungle mail.

    And the banks simply did not know what to do and eventually passed it all back to MIM ?? Now all in the loving care of Xstrata and partners.

    No bank or fund in ‘stralia knows what to do with a worst case default situation of winding up with the keys to a mine, port, smelter, power plant or railway.

    And that before the sovereign risk element of a potential uniquely Australian CO2 crap-and-trade plan was layered on.

    Much, much easier to sate the risk management types with leverage over bricks and mortar. Dead easy to re-possess and on-sell.

    Back to the 19th century here we come !!

  5. Why would you give any credence to someone who lead the CBA into a highly-leveraged balance sheet?

  6. Between Kev and Freddy we have our Herr Dr Schubert as the banking -mining sector supreme strategist, he that was the most useless head of the BCA that ever was and who rose trashing the long for the short like the worst of them ever has and has even tethered up all the trash out of the old Ansett/Air NZ/Labor rookery as minstrels and is now on the shortlist to chair BHP no less.

  7. Uh oh … off on a tangent re “skills building…” (a.k.a. retraining)

    I’m in my 74th orbit of the sun and no job in years but my son came to live with me (oh joy!) last year. In his adult life, he’s had three jobs. each of which lasted seven years. He’s an IT person, last working for a hospital overseas. But to Centrelink, he (a) has no job and (b) therefore no skills and therefore needs retraining … one option he was offered before they decided on “work for the dole” was ‘literacy and numeracy training’ … ?!

    So he completed his “wftd” make-work, learning to mix concrete and other vital skills. I suspect the out-of-work conccretor is the person running the Centrelink computer system … so much for Donald Horne’s “lucky country” or the “smart country” or other bulldust shibboleths.

    There is capital and capital. ‘Human resources’ wasted by Centrelink et al (Neato, Job search, Community service orgs) serve neither the nation nor the individual.

    Two months ago, I attended the ‘human rights consultation’ meeting in Townsville. I submitted a seven-page document about the above. I didn’t conclude that the country would be better served by gutting Centrelink et al — but it would save money. Let those who prefer the dole have a go, and let the HR experts, social workers, psychologists, and facilitators for “fruit picking, tree planting, bottleshop attendants, etc.” find a REAL job instead of their government dole.

    As for Australia which once “rode on the sheep’s back” we now have two options, the housing market — and mining. Bear in mind that China recently, so they say, discovered what might be the biggest iron ore site in the world …

  8. Novista, if China has just discovered the biggest iron ore site in the world, California will look positively prosperous compared to most of Oz and WA is about to become like Ireland in a potatoe famine.

  9. Yeah it looks to me like the housing and mining bet are both about to burst..big time.

    July 31, 2009
  10. Good news beyondtool – The deposit seems to be lower grade than what Oz has to offer and is in China’s northwest (which makes it isolated I’d guess?) and the big bonus (not that I’m any mining engineer) is just possibly that the ore body doesn’t kick in until about 1,200 metres which sounds deep to me for a cost effective open pit operation(?) But thoughts like this should certainly be a big wakeup call to Oz to diversify our economy. Some major “black swan” event re mining and our economy is toast.

  11. The issue with have with the mining sector is that we may face stiff competition in the years ahead if China can get some payback for the billions they have poured into Africa. Also there are other resource rich nations that can start supplying (to some extent) our main markets of Japan and China. Russia is one that springs to mind.

  12. Russia – Tough country to crack I think Greg. Loads of land. Loads of potential. With no need to hurry. But a chip on its shoulder at the national leadership level.

    Spent three months there last year (pre GFC) and bounced around some potential thoughts re business opportunities. Tough as I said:

    * Low end electrical appliance sales – Taken by the big boys as part of their larger electrical appliance sales market – People who have creative ideas about ways to get in on that game lose.

    * Importing secondhand cars from Western Europe – A possible goer then but minimal bucks in it – Definitely not a goer at all now I’d think.

    * Exporting partially processed timber product – Sounded promising. Oodles of top quality resource. Huge inefficiencies in the industry. But on looking closer at existing forestry leases they pretty much all seemed to be held by someone with the same surname as the local mayor. They presumably like the inefficiencies they have in the industry – Smile!

    * An adventure/activity centre for children – Great idea – Russians are nuts about their kids! And the options in the city in the very long winters are limitted. Novel even for Russia? But way too easily duplicated. With heaps of downside “risk” re costs – Bureacratic re establishment, up front equipment costs with lousy resale on plastic and foam stuff for a kids business that didn’t quite work out, liabilities re any potential legal action with any potential exposure to the legal system being a big worry – The country’s judges maintain their standards – They cost a lot to bribe – Even for the innocent – Smile! Warm and fuzzy business. But potentially very messy.

    * Teaching English – Again, taken. The mayor’s uncle’s cousin’s wife (or some such?) has a death grip on all the private English tuition centres in the city.

    * OK a laundromat or three then – They don’t have any and heaps of them (middle class included!) don’t have enough money to afford a washing machine and do their washing in the bathtub by hand. Nope, it’s a cultural thing – They might be poor but they ARE proud so would sure never admit to being poor in public by walking into a laundromat.

    Fascinating country though. With huge potential. And I’m slowly rethinking my ideas in light of what I learned.

    None of that had anything to do with your minerals comment … Smile! But I recall that many months ago I said I’d mention some of my impressions to you re Russia.

  13. Ned S, just for the record, Russia does have some impending problems, particularly with inadequate population growth to staff its military. Also much of the land is classified as an environmental disaster area – low farming yields and so forth. For all its corruption though it seems to have a functioning political system and as you say, a lot of potential, but they have some huge problems facing them in the next twenty years which certainly puts a bit of time pressure on Putin & Co. to make their major regional moves. If war was just a waiting game, the US would probably be able to out-wait Russia at this stage.

  14. 1200 metres? That is no open pit I am afraid – also the grade seems like crap. So underground, low grade, might be big tonnes but the cost would be horrendous.

  15. Ned S, Dan there are quite a lot of joint ventures starting up now between Russia and Japan that have the potential to tap into the vast natural resources in the country. The Japanese bring the know how and technology, the Russians provide access to their raw materials. It just might work out good for both parties.

  16. Dan/Greg – Dan, Russian is definitely not a developed Western nation – Despite what they might prefer to pretend out of pride. The life expectancy is low – maybe 62 for males and 72 for females? – So it is really very different to “us” is my take on it. I can’t see Russia experiencing any problems with an aging population anytime soon – Unlike the developed nations. Their challenge is to simply keep their birthrate reasonable. Staffing their military? – Again, probably achievable enough providing the population doesn’t crash and the bulk of the population is young? But the US and NATO could be seen as keen to add pressure in that regard – By such things as putting missiles in Poland and involving themselves in Georgia – All just part of the international oil and energy game play I have to suspect?
    Greg – Yes, that is the path I’ve been led towards too – Put no real capital into Russia – Just some smarts – And hope you don’t get stiffed too badly too quickly.

  17. AUD is up again today. And the debt issuance figures hitting records in both AU and NZ. On the weekend I had a look at the long term 10 year CAD-USD, it suggests that funny money has been back as the global leader with a false start through May that retraced in June and but another run up starting in the 2nd week in July that hasn’t abated. The AUD is on the same curve but didn’t retrace as much in June.

    If funny money debt is back for the taking by the riskiest the bulls should keep running on resources but I find it interesting that it has been the largest of our banks (as opposed to the lagging wider XXJ) that have had their stock prices run up the steepest in this same May-Aug period. So even if I am not on top of the process and I won’t put a cent into the 4 pillar + MQG/CGF long economy wreckers there are capital gains in the surrounds.

    I am sure it will turn on inventories and bad debts respectively at some point but the market making Goldman’s will drive the timing ahead or beyond the point of logic in the manner that profits them.

  18. “And it wasn’t his comments about buying non-government guaranteed corporate debt that got us so excited.”
    No Dan, and it seems it wasn’t his comments in other areas that got you excited either. Rather his lack of comment, combined with your interpretation of his open-ended statements.
    I guess that’s how they work at the big end of town; make statements that are easy to misinterpret and expand on by the already converted. Waffle on to people eager to expand slim pickin’s and come up with a well-rounded precis.


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