The interest rate fixers find themselves in a pickle. On the one hand, the economy is doing well. On the other hand, the Australian dollar is on the upward march again, strangling politically sensitive businesses. So do you raise the interest rate or keep it steady?
Strangely enough, Reserve Bank of Australia officials are busy answering a different question—what effect interest rates have in the first place. To be clear, they can raise or lower rates. That’s it. But for some reason, the economists reckon they can control the effect that fiddling about with rates will have. This is a bizarre claim. It’s like saying you will pour water into far end of the bath to keep your hair dry.
Central bankers around the world have been busy messing about with monetary policy to influence their currency’s exchange rates. Michael Pascoe explains that ‘RBA officials have spelt out that they don’t cut rates to try to weaken the surging Aussie dollar – they do it to ameliorate the impact of the strong dollar on the economy. It’s an important difference, but apparently a very subtle one for some.’
So in some cases, lower rates target the exchange rate. In other cases, doing exactly the same thing is all about the economy, but not the currency. Hmmm.
Specifically, the Reserve Bank of Australia is focusing on how the interest rate affects mortgages. Central bankers in the US and Europe don’t like to talk about that much. Their housing bubbles burst when central banks began increasing interest rates. Will the same thing happen here?
Nah. If the rate cycle starts to bite homeowners, the RBA will just explain that interest rates don’t actually affect the economy through mortgages. They only affect the currency.
So how should the government go about fixing its rather large projected deficits? Using the corporate policies of Porsche and the knowhow of the US Federal Reserve, the Commonwealth Government of Australia could generate enough cash to pay for pensions at 35, top up Superannuation balances to make the pension irrelevant anyway, pay for free broadband across the nation and save us from climate change for good measure.
Sceptical? Before you get the details, you’ll need to understand where the idea came from.
So the Federal Reserve is busy manipulating the stock market to generate the ‘wealth effect’. The idea being that a government body can fix stock market prices to change people’s behaviour and make them better off. Ethical? Effective? Who cares? They’ve got to do something.
Then there’s Porsche and it’s dealings in Volkswagen shares. Back in 2008, Porsche’s head honchos were pondering a takeover of VW. They bought a rather large amount of options in the company, which would allow them to buy much of VW at a fixed price.
Meanwhile, hedge funds were shorting VW’s shares, betting on a falling price. But once they realised the size of Porsche’s options positions, they got a fright and tried to close their short trades. To do so, they had to buy VW shares. The sudden influx of buy orders sent the share price surging so fast VW briefly became the world’s most valuable company.
The share price surge also lit a fire under the value of Porsche’s options. In fact, the profit on selling the options was more than double the company’s first half car sales!
So how does all this apply to Australia? Well, if a car company can make 6.8 billion euros on a stock market trade, and central banks can control stock markets, why not let the Treasury take a punt?
The perfect opportunity is of course the controversy surrounding TPG and the NBN Co. We all know Australia needs faster internet to be more productive. But by launching its own fibre optic cable service, TPG has violated basic economic law. Doesn’t the board know that the private sector can’t supply infrastructure like lighthouses, bridges and the internet? That’s exclusively for the government to do.
Even TPG’s competitors in the private sector reckon TPG should be stopped. It’s unfair to let a private company compete. There should be government constraints to ensure competitive constraints. And you can do that by allowing a government owned business unequal competition to ensure enough constrained competition by private business. Got it? Or, as the new NBN chief Bill Morrow put it, ‘A clear majority of the industry is opposed to TPG’s plans or wants the firm to be subject to competition constraints.’ After all, competition must be constrained to ensure there is enough of it.
Anyway, here’s what we think Treasurer Joe Hockey should be doing instead of whining about the cost of pensions. He should list the NBN Co on the Australian Share Market to pay for some of the costs of building the NBN. Then, the Treasury should short TPG shares before announcing the government will close the loophole allowing the private company to compete with the NBN Co in the public service of providing internet infrastructure. After all, believe it or not, TPG is insolently planning to undercut the NBN Co in price! That would mean real trouble for the NBN Co, which is politically unacceptable. Customers must pay politically viable prices for their internet.
The share price of TPG will crash if their business model is banned, delivering a cash profit for the Treasury’s short trades. The shares of the NBN Co monopoly will surge because of the lack of competition. The Treasury could sell its remaining stake in the NBN Co for another cash profit.
Having divested itself from NBN Co, the government should buy Telstra shares in anticipation of the $98 billion revenue stream which NBN Co may have to pay for the rights to use Telstra infrastructure (which the government used to own). That’s according to a leaked report from Goldman Sachs.
Put together, all these machinations will surely pay for the huge budget shortfall in coming years.
It must be fun being a government official in times like these. Anything goes when people are scared or want fast internet. You can get a job with a bank after bailing it out during your tenure at the regulator. You can mess about with stock prices by printing money. You can engineer a housing boom by fiddling with interest rates. You can stop a private company from competing with you. Why not make money with all this power? (For the taxpayer of course.)
for The Daily Reckoning Australia