Sic Transit Gloria Bernanke

–Fruit and vegetable prices may be up 11% in Victoria since the beginning of March. But don’t you be fooled into thinking that has anything to do with inflation. It’s the floods. And the earthquakes. And it has nothing to do with exploding global money supply.

–And pay no attention to silver futures making a 31-year high either. That has nothing to do with expectations for inflation. Or actual inflation. Or any kind of real or theoretical inflation at all.

–In fact, U.S. Federal Reserve Chairman Ben Bernanke is of the solid belief that the rise in global commodity prices is a basic function of too much demand and not enough supply. Late Monday night in America Bernanke said, “Those commodity prices are being driven primarily by global supply and demand. Those prices are affecting the overall price indexes of the United States…I think the increase will be transitory, that it will pass, and we will go back to a level of inflation that is consistent with our price stability mandate.”

–To “go back” to a level of inflation that is consistent with “price stability” means the current level of inflation is not consistent with price stability, unless we’re missing something. What Bernanke is also forced to acknowledge is that consistent easy money policies at the Fed have finally found their way into rising consumer prices.

–Thus passes the glory of quantitative easing. It has produced the “good” kind of inflation since March of 2009 in the form of higher stock prices (and bank profits). But now that it’s suspected of being responsible for the “bad” kind of inflation in the things people buy every day, it will have to be sent to the policy naughty corner…at least until stocks fall far enough that the public is keen for more “stimulus”.

–Uh oh. What’s this? The market for trading credit default swaps on Australian government debt has doubled in the last year to $2.7 billion, according to Bloomberg. Credit default swaps are sold (by anyone) to anyone who’s willing to bet on the credit worthiness of sovereign debt. The expansion of the market for Aussie sovereign debt is noteworthy, but what does it mean?

–Well, according to the prices of the contracts, it does NOT mean Australia’s government is a bad credit risk. The contracts are priced somewhere between Germany and the U.K. This means speculators are not yet betting Australia is headed for any kind of sovereign debt crisis. So why is the market for credit default swaps on Aussie debt growing?

–It’s probably because more and more people are realising Australia’s growth is closely hitched to China’s growth. If China catches cold, Australia’s economy will freeze. Thus, the credit default swaps might be one way for speculators to profit on a China crash.

–It seems like an awfully elaborate and derivative way of betting on a China crash. It would be a lot simpler to go short BHP Billiton or Rio Tinto with some CFDs. But aside from the actual investment tactics, the important thing here is the strategic observation that China is Australia’s largest bi-lateral trading partner and accounts for $37 billion in annual commodity and energy exports.

–Paul Bloxham of HSBC says, “There is no getting around the fact that Australia is now far more beholden to the turn of fortunes in China.” With 27% of Aussie exports going to China in the month of January, he has a point. And with China trying to contain inflation in its own economy, any slowdown in China is going to mean a slowdown in Australia.

–What we need to fight inflation around here is a really hawkish central banker! This brings us back to good old HC “Nugget” Coombs, who just so happens to be Australia’s first central banker. The more we read about Coombs, the more we learn about Australia. So we’ll share some of what we’ve learned with you today. But don’t be in any hurry. This could take awhile. If you’re going to get to the bottom of a country’s attitude towards things like money, fairness, justice, and authority, you have to be patient and thorough.

–At Coombs’s funeral in November of 1997, former Prime Minister Gough Whitlam said one of the worst things we reckon you could say about a man. He said that, “Nugget was destined to be a central banker.” Maybe Whitlam did not subscribe to the maxim that one should speak no ill of the dead.

–Or maybe Whitlam did not think it evil to say that a man was destined to be a central banker. After all, Coombs didn’t seem to have a problem with it himself. In fact, he viewed himself the right man at the right time for Australia’s central banking needs. In his own words he said:

It is true that my social values were indelibly formed in the thirties. I had been brought up in Western Australia which was largely unindustrialised at that time. There was not much stratification in society and although the onset of the depression brought hard times there was no desperate poverty. The weather was pleasant and people didn’t need many clothes. We all had enough to eat.

And then I left for England to study at the London School of Economics. Suddenly real poverty, hardship and social injustice struck me for the first time. I was appalled by it. If ever I dreamt of changing the world, it was then.

When I was at the London School of Economics it was economically largely a conservative institution dominated by Professors L. Robbins and F. von Hayek. I was writing a PhD thesis on central banking. At that time Australia, being a federation of states, neither had nor had felt the need for a central banking policy. I guess I came in at the right time because the Scullin (Labor) Government had been forced to realise that monetary policy was important but little was known about it.

At that stage the Commonwealth Bank issued notes but was rather unprofessional in its lack of policy. Of course central banking wasn’t highly organised anywhere except in European financial centres and in America ‘

–Not many men hope to change the world by becoming a central banker. But Nugget Coombs was one of them. And in fairness, he did not become the first governor of the Reserve Bank of Australia until 1959. That’s when the RBA officially took over the central banking functions previously handled by the Commonwealth Bank

–There was a lot more to his life than being the RBA’s first governor. He was a Fellow of the Australian Academy of the Humanities, the Australian Academy of Science and the Academy of Social Sciences in Australia, an Honorary Fellow of the London School of Economics, a patron of the arts, and one of Australia’s earliest advocates for reconciliation. It would be unfair and unjust to diminish a whole life based on a man’s beliefs about money.

–But that doesn’t mean his beliefs about money and authority and justice can’t tell us something about the man. And because Coombs had such a huge influence on public life in Australia—he served as an advisor to seven Labor and Liberal Prime Ministers in a row—he played a key role in shaping the institutions and attitudes that now govern Australia.

–We haven’t been able to locate a copy of a copy of “The Dominions Exchanges”. That was the title of Nugget’s thesis for which he received his doctorate from the London School of Economics in 1934. It was on central banking. According to at least one account, Coombs the student used to dine with Keynes the economist near Piccadilly in London.

–For today’s purposes, we simply want to point out that Coombs’s attitudes toward the government’s role in the economy were formed during a time when capitalism itself appeared to be failing. Even though the depression, by his own admission, was not that bad in his native Western Australia, the human suffering and sadness of the times seemed to cultivate in him a desire for the quality that’s become part of Australia’s cultural identity, “fairness”.

–For Coombs, there was a direct relationship between fairness and socialism. He said, “If you define socialist as someone who believes that everyone should have a fair deal in life and reasonable equality of economic opportunity, then I am a socialist. But I regard matters such as public ownership of companies and facilities as an entirely different matter. I think they are purely practical issues – not a matter of belief. I see such matters as a question of the most efficient and practical manner of doing things.”

–That is an interesting statement because it combines a bedrock belief in social justice (fairness) with a belief in the practical, technical, public policy. As an interloping American outsider, we’d argue that this double-barrelled formation—a passionate belief in fairness coupled with a practical faith in the competency of public servants to make sensible policy—is pretty much where Australian politics is today…sprung straight from the heart and brain of Nugget Coombs.

–Is that a good thing or a bad thing? Well, you certainly can’t blame a man for having his heart in the right place. The desire to relieve suffering and improve equality of economic opportunity for everyone is worthy, and even admirable. But the real question is whether you can re-organise and centralise public life in order to achieve what you consider to be desirable aims.

–Obviously—based on his role at the RBA and his advisory role to John Curtin, JB Chifley, Gough Whitlam, Robert Menzies, Harold Hold, John Gorton, and William McMahon—Coombs believed government and well-trained public bureaucracy could be a positive force for good in Australian life. He was a strong advocate of centralised institutions designed to build this vision of Australia, from the RBA to the Australian National University (ANU), which he was involved in the foundation of.

–Coombs eventually served as Chancellor of the ANU and his remarks about the conditions of its foundation are telling. Coombs said “The depression and the war brought about a strong spirit of nationalism, and a desire to change things for the better. It was a creative time and social planning seemed the first essential of the new life. I greatly enjoyed the challenges of that period.”

–He added that the very name—the Australian National University—was a calculated decision. “Firstly ANU got considerable government support because of its title. Because it was to be a place where the ideas and facts on which policies to remodel the world (another chuckle) were to be based, the government was generous in its support powerhouse for social reconstruction.”

–Now it’s hard to imagine what Australia must have been like in the years immediately following World War II. The population was just over 7 million. The War had put an end to the Great Depression. But it may have alarmed Australians about the ability of the country to defend itself, much less compete, in an expanding world. Coombs’s advocacy for strong national institutions is probably natural for a country like in Australia in 1945.

–But what’s striking about most of what we’ve read of Coombs so far is how little the word liberty appears in his writing and his thoughts. Democracy and equality get a lot of attention. But they always seem to be goals achieved best, by Coombs’s reckoning, through more centralisation and better planning.

–As we said, it’s not surprising that he would have had so little confidence in the free market during and following the depression. But it’s also possible that as a Keynesian socialist, Coombs simply disagreed with the ideas of free market liberalism, to the extent he understood them. His long career of influence over Australian public life was grounded in the belief that government, at heart, is a force for good.

–Naturally, as someone who believes government is, at heart, a force for coercion or at least not the best way to build a just and prosperous society, we find Coombs’s intellectual point of departure…deeply repellent. But we’ll get to that in coming days.

–For today, we just wanted to point out how much of the current political and economic approach to liberty in Australia has been shaped by a Keynesian Socialist from the Great Depression who was born to be a central banker. From bad little ideas, bad big ideas grow.

–The view that modern Australia has as its spiritual godfather a technocrat is at odds with popular icons like Ned Kelly, Banjo Patterson, Don Bradman, Rolf Harris, Kylie Minogue, Paul Hogan, Cathy Freeman, and Steve Irwin. The laconic, good-natured larrikin is what we think of when we think of “Australian”. But in practice Australia’s political culture seems to owe a lot more to HC “Nugget” Coombs. And we’re pretty sure—although not certain yet—that is not a good thing. More on prosperity, liberty, Nugget Coombes, and the RBA tomorrow.

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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6 Comments on "Sic Transit Gloria Bernanke"

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James Campbell
Deeply repellent is rather strong, especially in the circumstance; I think you might be confusing the governments of now, with the job at hand then, at lot has changed since then in the public and private sphere. Government is a force for good, it just makes many, many mistakes. It needs to know when to get out of the way. Something that seems not to occur at the moment. I think you’re failure to understand where Coombs was coming from is telling and look forward to your coming articles to see what you are getting at here. To give an… Read more »
I respect Dan’s approach path and conclusions. Everybody loved Nugget as Australians do people with their hearts in the right place. In parallel Dan should look at the nutter end of the brigade including Billy Hughes and Doc Evatt to get a broader view of aspiration and prejudice. Another subject that would more directly inform him on the interplay of corporatism and private industry is competition policy that matched private oligarch’s interests to public enterprises. Ansett-TAA, Murdoch-Packer-ABC, Com bank and state banks vs private banks, Ports etc etc. What is missing so far from Dan’s analysis is a contention that… Read more »
Very true Ross. Australia might be relatively well off (although to be honest the majority of Australians are totally in the dark as to how much they are being sold short). The current situation is a far cry of how wealthy Australians would have been, had our economic policies not been corrupted by politicians who were bought by big business the way they have been. There are so many examples, such as in Victoria, with bizarre conditions (and secrecy) on State Government contracts with private companies preventing blindingly obvious and urgently needed infrastructure upgrades so as not to impact on… Read more »

Mt Gibson and Chinese partners are cancelling their offtakes again too (said to be on a price basis and implied to be insufficiently biased toward rising prices). I’m no longer a shareholder but I would beseech analysts to watch their USD positions. The Chinese now have board control and some of those offtakes are with related parties … mmmmmm.

I find it interesting that “belief” features so largely in the last few paragraphs of Dan’s article, and becomes the defining point of difference between he and Coombs. Isn’t this a telling reflection on the parlous state of economic theory? Doesn’t it say that economics is, at its very core, a matter of belief rather than science? The competing schools of thought in economics have a great deal in common with competing religious faiths – a reliance on dogma, a stridency of advocacy, and a pervading sense that everything would be fine if only the other side would “see the… Read more »
Peter Forde of OzUnited
Peter Forde of OzUnited
Thank Dan, for your enlightening piece on Nuggett Coombes. As a ‘foreigner’ (in Australia a word often preceded by ‘bloody’ – or worse)settled here thirty years ago, there atill are many finer points about Australia’s history that I still haven’t caught up on. Your essah certainly provided a short-cut for someone like myself, who had limited knowledge on the matter. Perhaps that is why it took me some three decades of wrestling with the question to finally conclude recently that Australia is not just inclined towards socialism, but in fact is a full-blown communist state-only it would be highly politically… Read more »
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