Hedge-Fund Managers Can Pass Up a Look Down Under
For Australia, it’s all coming down to bananas once again.
The nation’s 23 million people can be very touchy about references to the yellow fruit. Many still seethe over a warning by Paul Keating, prime minister from 1991 to 1996, that Australia risked becoming a banana republic. His fear: the economy might become perilously reliant on exports, leaving living standards vulnerable and volatile.
Few economists harbor such fears today. Australia has been an unambiguous hero of the post-Lehman Brothers world, boasting average growth of 3 percent during the past 10 years as the U.S., Europe and Japan either retreat or endure middling growth. It’s enough to make a hedge-fund manager searching for the next Greece look elsewhere.
Yet there is one developing-nation dynamic that warrants concern: The Australian government is browbeating the central bank into making decisions that might compromise stable growth for the $925 billion economy. How Governor Glenn Stevens responds will offer important clues about the state of central- bank independence.
Australians have many valid gripes: Housing prices are still too high; Chinese demand for resources is creating a two- speed economy between mining cities and others; infrastructure is crumbling; high taxes leave the nation uncompetitive; education requires an overhaul; and politics have become too toxic for change to have a shot.
Yet political pressure on the Reserve Bank of Australia to cut interest rates won’t solve any of these problems. Instead, it may leave Australia more susceptible to the boom-bust cycles that Keating warned of years ago while serving as treasurer. As we’ve seen in Group of Seven economies such as Japan, lowering rates too much takes the onus off government to do its job and hinders needed change.
That gets us back to the bananas. Investors expect Stevens to preside over a rate cut when the central bank board meets May 1. Trading in inflation-linked bonds suggests additional moves may follow if consumer prices stay in the central bank’s 2 percent to 3 percent target. (Core inflation rose at a 2.2 percent annual rate last quarter.) Given the dire state of the world, deflation is as big a threat globally as inflation.
In a quirky story last week, Bloomberg News offered a hint of Stevens’s own worldview. For years, he bought his daily banana at the Fruity Blooms food stall across from the central bank’s headquarters in Sydney. He stayed away after banana prices last year rose as high as A$3 ($3.10) each, but returned in the past three months as they returned to A$1.
One shouldn’t overplay a single anecdote to convey the intricacies of monetary economics. Unlike most advanced nations, which publish inflation figures monthly, Australia’s are released quarterly. That complicates the RBA’s task. But because of the dearth of data, personal experiences at the cash register take on greater weight.
No matter what inflation really is, Prime Minister Julia Gillard should refrain from pressing Stevens into acting. The idea of central-bank independence is becoming quaint if not antiquated. The Federal Reserve and European Central Bank joined the Bank of Japan in pushing down rates to bail out dithering politicians. Will Australia’s central bank, one prized for dogged autonomy, be next?
Although Gillard has couched most of her statements on the central bank with phrases such as “if it chooses to” and “should the RBA consider it appropriate,” her intentions are pretty clear. “There is plenty of room for the RBA to move further if need be,” she said in an interview last week. That leaves little doubt about her desire for a more compliant monetary strategy.
Lower rates certainly would be a short-term boon for homeowners, who are among the most indebted anywhere; about 90 percent of them have variable-rate mortgages.
Much of the criticism of Gillard is justifiable. So far, it isn’t clear that she can fulfill her duty to leave the nation better off than when she came into office two years ago.
She hasn’t, however, been the disaster that opponents and pundits claim. She’s no worse than her predecessor, Kevin Rudd, who was no policy dynamo. And John Howard, prime minister from 1996 to 2007, was better at riding China’s coattails than making tough decisions.
When you consider globalization’s biggest challenges, Australia is subject to all of them: a widening gap between rich and poor; the effects of climate change; unappealing choices posed by immigration; and waning productivity. Gillard hasn’t done much to address these impediments to the outlook.
She also feeds into the national obsession with returning to budget surpluses, pursuing a fiscal policy that would be anything but constructive in today’s world. Australia failed to create a sovereign wealth fund to help save for a rainy day. Efforts to tax the exorbitant profits of mining companies fell flat. If China crashes, Australia will spend years explaining why it hasn’t done either.
In the meantime, the goal of achieving a budget surplus has become an ideology all its own. In a world in which credit- rating companies are downgrading the U.S. and France, Australia has little to worry about. It shouldn’t flinch at making the investments that will leave the economy better off decades from now.
Gillard’s surplus ambitions have her leaning on Stevens to ease so she can tighten the fiscal side of the ledger. Haven’t we seen the downside of this mix before? The U.S. is still shaking off the bubbles inflated during Fed Chairman Alan Greenspan’s tenure. Australia should think long and hard about the unintended consequences of easy money.
(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)
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