LUCK – Labouring Under Certain Knowledge

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By David Law­son

Yesterday’s talk by RBA Gov­er­nor Glenn Stevens at the Ani­ka Foun­da­tion Lun­cheon, The Lucky Coun­try, has been well spread across the press today. While Glenn Stevens has an unde­ni­able oblig­a­tion to uphold con­fi­dence in the finan­cial sys­tem as part of the over­all econ­o­my, cred­it to him for acknowl­edg­ing the scep­tics when he said:

…we should wel­come the scep­tics. Per­haps some of their con­cerns are valid. The Reserve Bank gives a lot of thought to these issues; we cer­tain­ly do not dis­miss them. We should always be wary of the con­ven­tion­al wis­dom being too eas­i­ly accept­ed.  We should nev­er, ever, assume that ‘it couldn’t hap­pen here’.

Sug­gest­ing that:

…some observers – admit­ted­ly not the major­i­ty – still har­bour con­cerns about the foun­da­tions of recent eco­nom­ic per­for­mance and ques­tion the basis for con­fi­dence about the future. 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.

Those who have fol­lowed Steve’s research into the finan­cial insta­bil­i­ty for some time would under­stand that this so called LUCK (Labour­ing Under Cer­tain Knowl­edge) is unsus­tain­able on the grounds that con­ven­tion­al eco­nom­ic the­o­ries fun­da­men­tal­ly ignore the essen­tial role of banks, mon­ey and debt. Their over­sim­pli­fied mod­els pro­vide a false sense of cer­tain­ty around a dynam­ic uncer­tain real world econ­o­my.

Then again, if cen­tral bank­ing offi­cials were to acknowl­edge uncer­tain­ty on a cred­i­ble lev­el it would be extreme­ly coun­ter­pro­duc­tive to their oblig­a­tion to main­tain con­fi­dence in the finan­cial sys­tem. Just ask US Fed­er­al Reserve Gov­er­nor Ben Bernanke what he thinks of Black Swans?

Mean­while on the polit­i­cal front, Trea­sur­er Wayne Swan was far more bel­liger­ent to con­trar­i­an points of view. Say­ing Glenn’s speech was a:

“a body blow to the doom­say­ers and scare­mon­gers deter­mined to talk our econ­o­my down”.

For­tu­nate­ly, he has today’s CPI release on his side to pro­vide pos­i­tive news for the gen­er­al cost of liv­ing for the Aus­tralian peo­ple and grounds for the RBA to pro­vide mon­e­tary stim­u­lus in the com­ing months. Fis­cal­ly speak­ing, there is lim­it­ed room for the Fed­er­al Gov­ern­ment to pro­vide addi­tion­al deficit spend­ing with AU$238,276 mil­lion of Com­mon­wealth Gov­ern­ment Secu­ri­ties on issue, before hit­ting the AU$250,000 mil­lion ceil­ing.

We should always bear in mind is that noth­ing is cer­tain in rela­tion to finan­cial sys­tem. The RBA clear­ly states that they will not facil­i­tate an envi­ron­ment of cer­tain­ty in Aus­tralian finan­cial sys­tem, when say­ing:

The Reserve Bank’s man­date to uphold finan­cial sta­bil­i­ty does not equate to a guar­an­tee of sol­ven­cy for finan­cial insti­tu­tions…