The Economy: John Stone's reflections on the declining dollarNews Weekly
, October 7, 2000
Australia's rising foreign debt has hit $268 billion. It is one of the fundamental reasons for the weakness of the Australian dollar. Our manufacturing sector has almost halved in 30 years. Australia is undergoing a growing polarisation of income between the work rich and the work poor.
The single most significant economic contribution to this situation was the 1983 decision to deregulate the Australian financial system. That decision opened Australia's relatively small economy to the international markets. Inexorably, that led to a raft of other policy changes: the cutting of protection, deregulation of the labor markets, privatisation, National Competition Policy, etc. "Speculative toy"
In his book, The End of Certainty, Paul Kelly, the Australian's International Editor, describes what he saw as the reaction of then Treasury Secretary, John Stone, to the 1983 Hawke Government decision: "Stone said the dollar would become a speculator's toy; it was inappropriate for a nation of Australia's size to float its currency; the exchange rate was a weapon of policy and should never be surrendered to the markets.
"The question went to the core of national sovereignty ... He urged the Government not to be stampeded into a float but to accept, instead, in the short term, capital controls ... Stone distrusted the market's setting the [Australian dollar] price ... Stone was stunned by one aspect of the affair - the decision was being made, in effect, by just two ministers without Cabinet papers and proper documentary briefings."
Recently in the Australian Financial Review (September 20), John Stone reflected on those concerns, saying that "there is much in them which, today, gives rise to a sense of déjà vu." He said that the performance of the foreign exchange markets in setting the value of the value of the Australian dollar, and other small currencies, "is very much open to question ... Indeed, three years ago our part of the world was given a sharp lesson to that effect during the Asian crisis."
While crony capitalism was a major cause of the crisis, so too was the "financially irresponsible behaviour of major financial institutions in the great money centres of New York, Tokyo, London and Frankfurt, who were only too happy to lend funds to their fellow cronies until the music stopped".
Economic theory has it that floating exchange rates are self-equilibrating, rising and falling to offset excessive current account surpluses or deficits.
Mr Stone was scathing about the economists and merchant bankers who have preached this theory. He said that in reality, foreign exchange dealers resemble stock market "momentum investors", who keep bidding up the price of stocks so as to cream off big speculative profits. In the same way, the US dollar goes up because the US dollar is being bid up by speculators.
Gyrating exchange rates sends into disarray the plans of producers trying to trade around the world.
"We would do well to pay less attention to economic theories, (particularly when they are actively promoted by self-interested parties in the financial markets) and concentrate instead on 'what works'," he said.
He pointed to the currency controls introduced by Malaysia's Dr Mahathir when the Asian crisis started. It worked and showed even a reticent International Monetary Fund that the "one size fits all" approach to international foreign-exchange arrangements "may not, after all, have been as self-evidently correct as the international economists ... would have had us believe this past 20 years".
Mr Stone said he did not believe Australia could turn back the clock, but warned that there was little the Reserve Bank of Australia could do about the state of the Australian dollar and said that with the low value of the dollar, Australian companies were so cheap that "it can only a matter of time before some usually significant Australian assets fall into foreign hands (for example, Woodside Petroleum, BHP, the entire gold-mining industry)".
The Australian Financial Review's Geoffrey Barker, who is critical of unqualified economic rationalism, later commented on Stone's article.
Barker said "it was heartening to note former Treasury Secretary John Stone's warning ... that less attention should be paid to economic theories and more to 'what works'.
"Coming from one of Australia's most formidable economic rationalists, this warning was a welcome recognition that unregulated and unaccountable international currency speculation is not smoothly self-equilibrating and can seriously damage national economies."
Barker said that there was some international recognition of the need to have certain public goods - like a stable currency, stable property rights, legitimate political system, clean air and water - provided by governments. He said that this concept is being argued out in a recent UN Development Program publication, Global Public Goods - International Co-operation in the 21st Century.
Barker said that "nations don't have to acquiesce in the fate assigned to them by the more Darwinian economic rationalism".