Governor Glen Stevens and the Art of Central Bank Speech-making

Earlier this week we asked whether Australia had blown the mining boom. It’s a question we’ll attempt to answer today. In doing so, we’ll also take a look at a recent speech by Reserve Bank of Australia governor Glenn Stevens. He called it ‘The Lucky Country’. Hmmm…

Let’s be honest Glenn Stevens’ recent speech contained nothing ground breaking. In fact, when Mr Stevens’ got down from the podium we’re pretty sure he would have plucked some splinters from his backside.

The art of central bank speech-making is to talk a lot but not actually say much. Your demeanour must be sanguine and ice cool. You need to throw up some uncomfortable questions, then come to the rescue with soothing answers.

It’s just the way it is. Financial markets want reassurance from their central bankers, not personal opinions grounded in common sense…and a little dark realism. Which is where the Markets and Money comes into it.

So, what exactly did Stevens say in his recent speech? As far as we can tell, he set out to debunk the concerns of the ‘glass half empty’ crowd. He sets it up by saying:

‘There are several themes to these doubts, but the common element is that recent relative success owes a certain amount to things that will not continue — to luck — and that our luck may be about to turn.’

He then asks a series of questions that he proceeds to provide detailed answers for. To give you a summary, let me give you the questions and (short) answers in brackets below:

  • How much of the recent relatively good performance was due to luck? (Not much, apart from geography and natural resource endowment.)
  • To what extent did we improve our luck by sensible policies, across a range of economic and financial fronts? (A lot.)
  • Are there signs of any of the things going wrong that people typically worry about? (Risks yes, but no immediate signs.)
  • And if there are, or were to be, such signs, could we do anything about it? (Yes.)

The key point to note about all this is that the answers to any economic question, especially in this day and age, depend on which lens you view the world through. Central bankers view the world through the lens of the post-1971 monetary system. You know, the one with the US dollar as the world’s reserve currency…the one that has produced a never-ending debt pile that is now beginning to nudge the ceiling of its natural limits.

Central bankers don’t see this ‘system’ as a problem. They don’t see it as ever ending. So their analysis assumes that what has worked will go on working. For example, since the 1970’s Australia has run a current account deficit. We have consumed more than we have produced. On the flip side we have a capital account surplus, which means we import capital to plug the gap in the current account.

After running consistent trade deficits for nearly 40 years, Australia’s economy swung into a large surplus during 2010 and 2011. But so far in 2012, we have slipped back into deficit. Was the surplus just a momentary benefit from China’s credit and infrastructure boom? Was it just the bubble in iron ore and coal prices, like the pig in the python, moving through the system?

If so, where does that leave Australian economy now? Iron ore and coal prices look like reverting to some kind of normalcy. It won’t happen straight away, but a long correction in these prices, and consequently our terms of trade, looks likely.

Does benefitting from the China boom mean Australia begins to produce more than it consumes (and thus run consistent trade surpluses) and reduce our reliance on foreign capital?

Along with an increase in living standards, that should be one of the major benefits. Because if we are right about the coming demise of the debt-based system of finance that has existed and sustained debtor countries like Australia since the 1970s, then living within our means is exactly what we will have to do.


Greg Canavan
for Markets and Money

From the Archives…

China’s Coming Assault on the Western Financial System
20-07-2012 – Greg Canavan

Has Bernanke and the Fed Discovered a New Invention in Wealth Creation?
19-07-2012 – Greg Canavan

Why You Should Watch Your Blind Spot For An Oil War
18-07-2012 – Dan Denning

Flexible Investing to Become a Relaxed Investor
17-07-2012 – Murray Dawes

China’s GDP Figures… Lies… Damned Lies?
16-07-2012 – Dan Denning

Greg Canavan
Greg Canavan is a contributing Editor of Markets and Money and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails. For more on Greg go here.

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