In Good Hands

August 25, 2011

FOREX, RBA and Interest Rates

While the world awaits Fed Chairman Bernanke’s speech at Jackson Hole on the 26th, with hopes that he’ll wave his magic wand and create some panacea or quick fix to the globes economic and market woes, it’s worth remembering that it was the failure of these same central bankers and their misguided belief in free markets and the so-called “great moderation” that got us in this mess.

It is also worth remembering that Australia is in a very different place economically. The past 22 years without a recession is testament to the excellent stewardship that the Australian Treasury, RBA and to a certain extent Governments of both persuasions have given Australia and our economy.

I have believed for many years that it is the strength of Australia’s Mandarin’s at the Treasury and RBA that has the key driver of our prosperity. So it was with interest that I read the speech overnight that Martin Parkinson, the relatively new Treasury Secretary, delivered on the 23rd at the Ed Shann Memorial Lecture. It was titled “Sustainable Well-being -An Economic Future for Australia”.

It is a great speech and the full PDF is attached, but what I found interesting, as a behavioural finance/economics guy, is that he and Treasury truly get the “human” element of what is going in the economy at present in a way that sometimes RBA communications, if not actions, suggest they don’t. Secretary Parkinson set up the speech nicely by saying,

“Once again we face a period of great complexity, requiring decisions which will fundamentally shape the future wellbeing of Australians -what we in the Treasury think of primarily as a person’s substantive freedom to lead a life they have reason to value, a concept found throughout Shann’s writings”.

That is a brilliant summary of what we in Australia -“lead a life they have reason to value”. Perhaps this alone explains why the Australian experience is different from what we’ve seen overseas -the economists at the pinnacle of Government have people in the equation not just as rational actors but as real people leading real and valuable lives. Clearly they are not overly enamoured by the primacy of markets either and this itself may set our Mandarins apart in the developed world.

Secretary Parkinson says of the current instability and impact on the Australian economy,

“The lack of credible medium term fiscal and structural policy strategies to address the underlying competitiveness and debt issues on both sides of the North Atlantic, along with evidence that the US recovery has been much weaker than previously thought, is generating considerable uncertainty and volatility in global financial markets. Unfortunately, recurrent episodes of volatility are likely to be a feature of global financial markets over the next few years. Such is the sense of concern over the lack of credible policy responses, repeat episodes may be triggered by apparently innocuous events or pieces of information. This risks adding a dimension of macroeconomic instability into the Australian economy of a sort that we have not experienced for many years. As we know from our past history, and from experience in other countries, such instability makes economic management considerably more difficult and results in more volatile growth and fiscal outcomes. These current risks need to be set against a backdrop of longer-term trends influencing the Australian economy, trends that offer huge opportunities for Australia and which will influence the sustainability of the wellbeing for future generations. Indeed, I believe the theme of sustainability will need to shape the approach to policy development of this generation. While there is a growing awareness of sustainability issues, these are often cast in terms of the environment and, more specifically climate change”

Yep, life is likely to be less easy than it was. But what is sustainability and what did Secretary Parkinson mean by this?

“Sustainable wellbeing requires that at least the current level of wellbeing be maintained for future generations. In this regard, we can consider sustainability as requiring, relative to their populations, that each generation bequeath a stock of capital -the productive base for wellbeing -that is at least as large as the stock it inherited.

As wellbeing is a multidimensional concept, going beyond material living standards -and even the environment -we can see that the stock of capital, or the productive base for wellbeing, should include all forms of capital:

physical and financial capital -the value of fixed assets such as plant and equipment and financial assets and liabilities;

human capital -the productive wealth embodied in our labour, skills and knowledge and in an individual’s health;
environmental capital -our natural resources and the eco-systems which include water, productive soil, forest cover, the atmosphere, minerals, ores and fossil fuels.

In other words, all the natural resources that support life and other services to society; and social capital -which includes factors such as openness and competitiveness of the economy, institutional arrangements, secure property rights, honesty, interpersonal networks and sense of community, as well as individual rights and freedoms. These stocks create flows of goods and services which contribute to the wellbeing of all Australians.”

Secretary Parkinson goes onto identify and discuss 4 major long term trends,

“These are:
continued globalisation and the development of emerging market economies -particularly the rise of China and India as global economic superpowers;
continuing rapid technological innovation;
demographic change -the ageing of the population; and
environmental pressures -including climate change and water. This complex mix of long-term trends will have significant impacts, both positive and negative, on Australia’s productive base and, therefore, the wellbeing of future generations.”

I am not going to quote the whole speech but please, if you have the time read and assimilate the message in it.

He is posing questions for us all. For the Boomers, what is the legacy of their life cycle for the generations behind them. For the miners, are they giving enough to the overall economy. To all of us are we capturing enough of our current prosperity which will in time wash away to ensure the sustainability for the future.

While the world waits for Bernanke and his magic wand the story of Martin Parkinson’s speech is our prosperity is ours to lose. Just posing the question tells me Australia and our economy are in safe hands.

Greg McKenna – on the road
Khao Lak – Thailand

Martin Parkinson – Shann Lecture

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