The Spiritual Godfather of Australian Socialism

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–What would you do today if you were deciding the price of money in Australia? Members of the Reserve Bank Board meet tomorrow to decide just that. The odds are the Board will do the safe thing, which is nothing. The cash rate should stay at 4.75%.

–The Bank doesn’t know yet how Australia’s economy will be affected by Japan’s earthquake/tsunami/nuclear crisis. Japanese manufacturing fell in March at its fastest pace in nine years. That’s about what you’d expect for a country that experienced a major natural disaster and then an on-going crisis at a nuclear plant.

–On this point, there is already evidence from William Pesek at Bloomberg that the problems in Japan are going to drive prices for manufactured goods up. Pesek writes, “Supply-chain disruptions are part of a bigger and underappreciated phenomenon: the extent to which Japan’s plight may worsen global inflation.”

–“Along with forcing executives to scramble for production options outside Japan — an effort that puts the pricing power in the hands of factory operators — this crisis places additional pressure on raw material and food prices. That’s horrible news for Asia, where central bankers have been scrambling to head off consumer-price gains.”

–But wait. The Financial Times reports that copper prices are down 8% from their all-time high of $10,190 in February. “There’s no question that Chinese consumption has slowed and we are seeing a build-up of stocks in many of the warehouses in the region,” said one senior metals banker. “The copper market is getting a bit tired at the moment.

–Armed with conflicting evidence about the short-term direction of prices, the RBA will probably take a wait-and-see attitude. This is probably a mistake. The RBA thinks the strong Aussie dollar ($1.04 and counting as we write) will contain inflation. It will keep the mining boom from overheating the whole economy.

–But what if the deflationary impact of Asian manufacturing that’s kept goods cheap for the last ten years is finally giving way to the inflationary impact of hot money financial flows driving up commodity prices? Producers finally have to pass on higher raw material prices to consumers, which means that inflation is showing up in food, fuel, and an increasing number of consumer goods.

–This is a terrifying scenario for central bankers. Asset price inflation=good. Consumer price inflation=bad. When asset price inflation leads to higher commodity prices for producers that are passed on to consumers, asset price inflation no longer equals good. Hence, as we mentioned in Friday’s update to Australian Wealth Gameplan readers, you should get ready for tough talk from central bankers about interest rate rises, and perhaps some actual interest rate rises in the U.S. and Europe.

–Because Europe and America have their own separate but roughly equal debt problems, these interest rate rises will be small and mostly cosmetic. But you’d expect stock prices to react poorly to increased rates. You might even expect a significant correction.

–A 10–15% fall in stocks and lower oil and gold prices are just what the central bankers need to justify another quantitative easing. But that could be several months away, after the correction in stock prices. That is one way of reading the tea leaves this April Monday, anyway

–Other signs of a top? Hong Kong-listed Minmetals Resources, an operating unit of China’s largest metals trader, is bidding $6.99 per share for Perth-based and Toronto-listed copper play Equinox Minerals Ltd. (ASX:EQN). Minmetals is offering a 33% premium to Equinox’s closing share price on Friday

–This is a big bet on higher copper prices. Specifically, it’s a bet that the supply deficit that’s driven copper up the last three years will last for two or three years. At stake is control of Africa’s largest copper mine. And interestingly, the deal is being financed by Chinese banks. We say “interestingly” because it would be a good example of Chinese banks using surplus cash to secure large tangible asset resources around the globe.

–Or it could be the kind of takeover you see at the top of the commodity cycle. Even more powerful evidence of that would be Glencore’s planned $60 billion IPO in London and Hong Kong. The Swiss-based Glencore is one of the world’s largest commodity traders. Its listing now reminds us an awful lot of when private equity firm Blackstone went public in June of 2007.

–Blackstone went public the same week Merrill Lynch threatened to take Bear Stearns to the woodshed. It was the unofficial beginning of the great contraction in global credit…and the end of Bear Stearns and Lehman Brothers and a long-list of leveraged firms here in Australia.

–But not the Big Four banks! In fact, we learned over the weekend that even though foreign banks accounted for 70% of the $110.7 billion in borrowing from the Fed’s Primary Credit Dealer Facility (PCDF), Australia’s banks were pretty circumspect with their emergency borrowing.

–Commonwealth Bank borrowed $75 million from the Fed on July 17th, 2008. It borrowed another $25 million on November 12th. But in public statements, the bank said it only borrowed the money to make sure it could. You know, sort of the way you test an emergency key to your front door, to make sure it works when you actually need it.

–Which brings us back to last week’s subject: the Reserve Bank of Australia. It won’t have to deal with any embarrassing revelations when it meets tomorrow. It can focus on fixing the price of money in Australia. In this respect, anyway, it functions the same way as the U.S. Federal Reserve.

–The Fed, of course, was established as a cartel of private banks back in 1913. The U.S. government contracted out the management of nation’s money, and the government’s banking, to a cartel of private banks. Those private banks have been using this arrangement to their advantage ever since.

–By contrast, the RBA didn’t formally come into existence until 1959 as part of the Reserve Bank Act. Its mission is nominally similar (and unachievable): price stability, full employment, general economic prosperity and welfare. But its board is not, at least at first appearances, entirely beholden to the banking sector.

–In fact, section 17 of the Reserve Bank Act stipulates members of the RBA’s board can’t be employees, officers, or directors of an authorised deposit-taking institution. This would, again at a casual glance, appear to make the board more independent of the Big Four. The Fed is controlled by its member banks. The Reserve Bank appears to keep Australia’s financial industry at an arm’s distance.

–Is that really the case? Hmm. We’ll see. You may have noticed last week that Donald McGauchie and Warwick McKibbin have not been invited back to serve on the Reserve Bank’s board once their terms expire. Both men have been critics of the RBA at times. Jillian Broadbent’s term will be extended five years. And later this month the Board will welcome Queensland-based Catherina Tanna, who is currently an executive vice president for BG Group and managing director of QGC.

–But the big question is this: whose interests does the RBA serve? The banks? The corporations? The government? Or Australians? To answer that, we’ll have to head back to the founding of the bank itself and the spiritual godfather of Australian socialism, Herbert Cole “Nugget” Coombs. Stay tuned…

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.
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7 Comments on "The Spiritual Godfather of Australian Socialism"

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Ruth K
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….staying tuned with bated breath

Ross
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If you want to see false dichotomy in action then read this from socialist spruiker Stevens and then talk to someone on the street in Adelaide http://www.economist.com/node/18486183

And where did the liquidity come from that drove down the prices of flat screen tvs and increased the prices of commodities? After old USD funny money justified by a bodgey version Friedman came new funny money after a bodgey version of Keynesianism
http://www.zerohedge.com/article/how-fed-sourced-834-treasury-cash-needs-start-qe2

Scott
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Haha. “…the bank said it only borrowed the money to make sure it could.” I love these stupid statements. Almost makes me want to exceed my credit card limit “to make sure I can”.

Have they repaid the money?

smallcap
Guest
Sure prices might go up, but there are alot of devloping countries who would see this a as massive opportunity to expand production. Alot of ‘Japanese goods’ have/are manufactured in China and other overseas factories. The clever money would want to turn any new temporary sources of production into very permanant ones, and the only way to do that is to undercut and outperform mainland Japan. As for local consumption being hit, surely this is a very temporary downturn, for instance, in Queensland surely the on-going re-building of infrastrcture and replacement of destroyed property will take 10 or 20 years… Read more »
Ross
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@smallcap. The post WWII party didn’t last long. Then there was the Korean War boom, and then the world fell flat on its face in 1960. From 1960 onwards debt and government unfunded liabilities and inflation took off. If you believe in never ending QE readers might believe your story, otherwise your view of the last half century of “normal” achieved by bodgy accounting that will never catch up with us is doomed.

mike
Guest

…primo banker “if’a she ain’t broke,we no gonna fixa”….secondo banker “if’a she go too slow, how are we gonna do?”….terzo banker “hmnnn”…quarto banker “somabody’s a gotta do something”…cinque banker “butta bing, butta bang…butta BOOM”…

rob williams
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maybe we could run a 12 step group for citizens who are in denial.
The Reserve bank IS a private bank, it only serves the guys that own it and corporations, (Remember the bailout). The members of the board do not have much input in policy this is up to the CEO no one else. this is a sham bank, parasites, and the people should tell them to shove off. They so happen to be in every country(-3) in the world, run by the same parasitic organization.

wpDiscuz
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