Kevin, be careful where you bet our money

Our mobile PM may be putting our money on the wrong horse when he backs the US dollar.

At Bretton Woods J. M. Keynes was wary of creating a reserve and trading currency utilising the currency of a single country. Since the first oil crisis of the early 70s he has been continually proven right. An Australian then serving as a correspondent in France, Neil McInnes, published one of the first articles presenting an argument along those lines and the article was published in the Australian Financial Review in 1972 titled, “What do we do with these worthless American dollars”.

People will argue that those dollars still have value but do they? For 35 years governments have found ways to push out the day of reckoning, but that day of reckoning finally arrived with the present financial crisis. How many trillions of dollars of what was accepted as real wealth has been wiped out by the implosion?

People are beginning to accept that there is a real economy, and that the trading of large volumes of account balances on an international market is not part of that real economy. Our problem is that the real economy, which largely is and should be devoted to the benefit of the human community, is suffering because the lubricant of trade in real goods and services has largely been destroyed. The solution to this problem is the creation of a special trading currency, based on a basket of other currencies, for those real goods and services.

The ultimate aim must be to enforce discipline on nations which attempt to be, or are seen by others to be, consumers of last resort. Also to enforce discipline on nations which attempt to export their potential unemployment via dumping and other unfair means of trading. China’s leaders are now realising that the real assets which they own inside the American economy, and the US bonds they hold, are both at risk.

On September 19, 2000 I wrote the following to Max Walsh at The Bulletin:

Politicians are making little progress at coming to grips with the problems being caused by the acceptance of the $US as the main international trading currency and by the flood of privately created credit slopping around the world currency and securities markets. In international trade money’s only sensible use is as an intermediate facilitator for the exchange of real goods and services between market participants not as a trading commodity in its own right.

In this country our politicians are unwilling to make the decisions which are necessary to restrict activities which are in effect selling real assets such as coal and productive entities to buy imported current consumption goods which we could produce ourselves. In effect we are destroying the future of our grandchildren.

Between developed economies there are few real comparative advantages not attributable to natural resources or population spread. For example, Australia has a low density widespread population over an arid continent - a major comparative disadvantage to manufacturing. For strategic and defence needs we need manufacturing industries such as steel and other metal production industries. Such industries (and I am most familiar with the steel industry) need a base load, and therefore production of motor vehicle and whitegoods steel sheet is essential. Therefore so are the vehicle and whitegoods industries. For similar reasons we need an efficient high speed interstate rail network.

Australia probably cannot outfit its servicemen with clothing, boots, rifles and ammunition let alone fighting vehicles of any description except possibly naval hulls. I am not advocating that we should be on a war footing but our industry policies need to keep such potential needs to the fore.

The transition from the $US to a special trading currency would have to be carefully managed as each trading nation would need an initial trading balance in the new currency, say sufficient for a predetermined trade period. Those countries holding large balances of USA cash or bonds would need the opportunity to convert those balances to the new reserve currency over a long period at a controlled rate.

It should be possible, over time, to wean world trade off dependence on the Americans to simply print money to fund both world trade and America’s excessive consumption of the resources of other regions. Large trading nations or blocks must learn to live within their means.

One thing the world should have learned from the current crisis is that the age of conspicuous consumption by the favoured few has come to an end.