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01/01/2010 at 11:17
I have just sent a response to Christmas greetings which I received from the Australian Prime Minister’s. My response covers the ground in more detail than Mark Faber in this interview but its assessments of the issues and problems which confront us nationally in Australia and all of us globally are much the same.
After greeting the Prime Minister, my message reads:
Thank you for your Christmas message. It is valuable for Australians to be able to communicate with their Prime Minister in this way – and the good wishes you have sent us, and me personally, are greatly appreciated.
In my message of 5 December 2006, I congratulated you on your election then as Leader of the Australian Labor Party.
In that message, I foresaw the difficulties which lay ahead for whatever government we might have in Australia. I wrote:
“I worked for many [Australian] Governments, always hoping that one would emerge that could compare in quality with that of the Curtin Government of 1941 to 1945 and, perhaps even more, the Chifley Government from 1945 to 1949.
“It never happened. Despite its many virtues, the Whitlam Government broke down largely – and fundamentally – because of its incapacity to handle the difficult navigation required at the turning point from economic stability and growth into stagflation in the late 1960s and the 1970s. It became a ‘Scullin Government’, foundering on an economic situation that it did not understand and could not control. In the 1980s and 1990s, the Hawke and Keating Governments let themselves become what I have called ‘slapstick politicians in the Reagan/Thatcher mould.’ They sold out to American-model ‘reform’, to Thatcher-style privatisation and to a gaggle of mostly ‘free-market’ catchcries that, however well-meaning, betrayed the cause of Australian democracy for which Curtin and Chifley had laboured so splendidly.
“Those later governments, both Labor and non-Labor, from 1969 onwards, missed the opportunity presented to them to have Australia evolve into an ‘Asian Tiger’. Instead they embraced the suicidal policies of the United States, gutting our industry and making us a dependency of a dynamic Asia. That Asia enjoyed a miracle of unprecedented growth that we, the United States and others adopting the American model had fecklessly offered them.
“Of course, we rejoice that hundreds of millions and indeed potentially billions of our Asian friends, especially including in more recent years, China and India, have been blessed with this economic miracle. We would want the full potential of their economic growth – and broader social well-being – to be realised. But how sad – how tragic – it is that we have not pursued the policies that would have allowed us to be one of them – to have enjoyed their miracle along with and alongside them.
“Now we have the prospect of a Rudd Government.
“Will it be a Curtin/Chifley Government or will it resemble the others?
“I have high hopes that it will have the vision, as well as the sensible, practical approaches of those who governed us between 1941 and 1949. As well as devising economic and social policies for the post-war years, Curtin and Chifley – and Foreign Minister Evatt – led us through the most terrifying period of our history after Pearl Harbour. They contributed significantly to winning the war and then to arrangements which would give us real hope of winning the peace.
“Sixty years later, we are again at a turning point, not only in economic but also in political and strategic terms. The next few years are likely to be critical in determining what character the transformation of the power balance will take. If our national interests are to be safeguarded and if we are to work effectively for peaceful change yielding us stable political and strategic outcomes globally, we will have to do much more serious thinking about our policies than Australian governments have done in the past four decades.”
The Global Financial Crisis
I arranged for a copy of my latest book “America’s Suicidal Statecraft: The Self-destruction of a Superpower”, published in November 2006, to be sent to you. You responded in your message of 31 January 2007, saying “I look forward to reading your book.”
Later that year, in November 2007, you led your party to victory in the general election, to become the first ALP Prime Minister in the new century.
By that time, Bear Stearns had collapsed and the tragic scenario which I had forecast in “America’s Suicidal Statecraft” had started to unfold with deadly inevitability. A year later, in September 2008, Lehman Brothers collapsed and panic – or something close to it – took hold in governments and communities around the world.
Your Government was confronted with a situation which I had clearly foreseen.
In terms of the formidable challenge you faced, your Government was like the Government of James Scullin in 1929: the unprecedented economic and financial crisis which had confronted Scullin in 1929 had deep, global dimensions of a kind comparable with those which now confronted you in September 2008.
The year since Lehman Brothers has been tumultuous – but one in which disaster seems at least superficially to have been contained. In what has been near panic, governments have thrown masses of money at our problems – in stimulus after stimulus – in the hope that catastrophe can and will be averted.
These efforts have been led – just as the pathway to crisis was led – by the United States and, to a significant extent, by the United Kingdom as an active accomplice. To a large extent and in varying degrees, the major economies of the European Union followed the American lead.
Your Government reacted with stimuli for our own economy, in an emergency situation in which major interventions were simply unavoidable.
However well or ill chosen, the stimuli by a variety of governments around the world were of such magnitudes that they inevitably had an impact both on the economy to which each applied and on the global economy as a whole.
This seems to have been true to such an extent that many analysts, in government and outside, began talking of “green shoots” and “recovery” in much the same way as equivalent analysts had seen the situation to be recovering or to have recovered even within six months of the crash of the New York Stock Exchange in 1929-30. At that time, even President Hoover told the world that the crisis was over and that cause for pessimism was past.
Government leaders have been more cautious this time, although in little more than degree. Analysts inside and outside government have been quick to put the best shine on any positive number in the housing market, the labour market or any other statistic anywhere else that might raise hopes of a slowing in the pace to national and global catastrophe.
Stock-market Movements
Optimism has applied most consistently perhaps to movements in stocks, especially the Dow, the S & P and the NASDAQ in the United States. Between March and December 2009 there has been a rise from a low of around 6,000 in the Dow to more than 10,000 at the year’s end. Our own stock-market indexes have shown signs of robust good health.
We do not know to what extent American stock-markets have been manipulated by, for example, the Plunge Protection Team or other devices; but, taken by itself, the stock-market rally since March has helped to provide something of a breather to enable governments and others to work out how they might turn destiny in their favour in 2010 and beyond.
We still need to recall that, in 1929, the crash of the New York Stock Exchange was followed quite quickly by a substantial recovery in the stock-market. Then, despite a series of rallies, the index trended downwards and did not reach its bottom until 1931-2, two to three years after the crash. The Great Depression did not deliver its worst miseries until around 1932, in Australia as in the United States and other countries.
So we need to be cautious about optimistic assessments of “recovery” and identification of “green shoots.” They sound much too much like the chant of “Prosperity is just around the corner” which we heard endlessly throughout the 1930s.
Caution is particularly needed since we have not yet tackled, far less resolved issues that are fundamental to dealing with the ills of our national economies and the global economy as a whole.
The massive and totally unprecedented stimuli have been devoted mainly to bailing out the banks and to putting extra short-term spending money into the pockets of consumers.
Especially in the light of the sheer size of the stimuli, the extent of any “recovery,” however defined, has to be regarded as modest.
Nevertheless, the banks have begun to come back with much of their old effrontery as well as much of their old inclination to resort to – indeed, to be addicted to – the gaming table.
The often dubious bounty lavished on the consumer and the consumer’s reaction to it are reminiscent of the story of Emperor Bokassa of the Central African Empire in the 1970s, when he threw handfuls of banknotes in the air as he strolled in the streets among his citizens. The ploy did go some way towards elevating him to and keeping him on the throne for a short time but his ultimate unhappy fate was inevitable since he provided no fundamental solutions to the problems of his poverty-stricken community.
Equally, the “helicopter drops” of Fed Chairman Ben Bernanke have provided no fundamental solutions to any of the United States basic economic, financial and social problems. Indeed, to a significant extent, they have made solutions much more challenging and terrifying for the future.
So far, United States policies whether attributable to the Administration, the Fed, the banks or the corporate community have intensified the risks of a collapse of the entire financial and economic system, not only in the United States but globally. Such a collapse of course – if it were to happen – would also destabilise the global social, political and strategic situation in ways which seem to be too terrifying to contemplate – but on which the flow of events may compel us to reflect whether we like it or not.
Basic Causes of the Crisis
In assessing what may happen in the future, we need to go back to identify the basic cause of the present crisis. Fundamentally, the cause lay in the excessively free, recklessly deregulated market and the consequent casino-like character of the leading world economies over a long period especially from the early 1980s onwards.
The accumulation of public, corporate and personal debt was on a scale unimaginable at any earlier period. Neglect of the real economy was almost total – except of course by such countries as the Asian Tigers and those such as China and India which wisely joined them later.
United States policies in particular enabled and provoked unprecedented economic growth in China in the wake of Deng’s declaration of new robust capitalistic economic policies in 1979. From that point, the United States – for the most part inadvertently – gutted its industrial economy and began the abdication of its role as the world’s pre-eminent Superpower. Speculation and a fast-buck culture proceeded to destroy, in just a few decades, much of the great American heritage.
We – in Australia and Britain and many other countries – became progressively more addicted to the notion that we could get rich – all of us – by going to the gaming table and making billions of dollars by brisk and mostly highly leveraged trading in pieces of smart financial paper.
That real income and wealth depend – as ultimately they always do – on real, fixed-capital investment, growing productivity at the work-bench, and production of real consumer goods and services – as well as real producer goods and services – all for a well regulated market was, for many years, given no effective articulation.
Indeed, even now, despite the turmoil of the past couple of years, emphasis on real investment, productivity and production is not a philosophy that is given anything like due prominence in the policies and programmes advocated by most political leaders.
This failure to articulate economic and financial realities distinguished not only the United States but also Australia and many other countries. In that way, addiction to the gaming table spread everywhere and the financial collapse, when it came, affected virtually everyone.
Especially since the Lehman Brothers collapse of September 2008, there can now surely be no doubt of our failure to manage our national economies and the global economy wisely; and we must surely acknowledge just how much damage that failure has caused.
Despite that, the banks and other financial institutions which were among the principal authors of the financial crisis show a marked inclination to return to their old habits.
If this tendency were to continue, the prospect would certainly be that we would become progressively even less capable of dealing with our ever growing financial and economic dilemmas.
A real possibility would then be that the whole international payments system would disintegrate, taking with it much of the civilisation with which we are familiar.
On 29 December 2009, even the London Financial Times – rarely a sensationalist newssheet – warned us:-
Another bomb is being built,
By bankers with no sense of guilt.
It’s ticking now, will louder tick
Unless we stop it, fast and quick.
The Regulation of Banks
Against this background, tackling the size of and motivations for bank or corporation bonuses is far from enough; nor is it enough to tighten regulations on financial institutions and transactions – though this must be done.
There must, above all, be fundamental reform of the entire banking and financial system.
In the Australian idiom, we must revert to the attitude to banking which was characteristic of Ben Chifley at the Royal Commission on Money and Banking in the mid-1930s and of his policies as Treasurer and Prime Minister between 1941 and 1949. We must go even further: we must not be hesitant to adopt towards “Wall Street” attitudes similar to those which were once the trademark of the alleged “firebrand” Eddie Ward.
Ward was a member of the Curtin and Chifley cabinets and his views were often denounced as outrageous. Among other things, he resolutely refused to support Australian membership of the World Bank and the IMF because he held that they were dominated by – they were the creatures of – “Wall Street.”
In the light of recent events, that opposition does not seem nearly as “outrageous” as it did sixty years ago.
We have now reached a point at which we must re-think most carefully what should be an acceptable role for banks and “bank-like” institutions in our economy and society.
We must acknowledge that unacceptable privileges have in recent years been extended to or have been exercised by our banking institutions – including the “Big Four.” They have been allowed to wander too far from the role of trusted intermediaries between saver and investor, between depositor and borrower that is a bank’s essential role.
The basic value of the banks to the modern society as an intermediary to assist in the production of real income and wealth through real investment has been lost – not yet entirely but to an extent that has been and persists in being deeply damaging to the economy and society. The role they have played in the casino economy in recent years has been self-destructive and is unsustainable.
It may be time for an updated Royal Commission on Money and Banking; but we may not have time for that, given the likelihood that catastrophic crises may hit our own economy and other economies around the world without much warning at any time.
The Role of the IMF
Little real attention has been given by governments, by the private sector or by the global academic economic and financial community to the magnitude of the risks that lie ahead and how imminently those risks threaten the entire global situation – politically and strategically as well as economically and financially..
If little has been done to deal with FUNDAMENTAL economic and financial problems nationally, virtually nothing has been done to confront realistically problems at the international level.
Indeed, our capacity to handle these global problems has been diminished by the marked inclination of the Group of Twenty and others to fob off responsibility for dealing with them on to the International Monetary Fund.
This is equivalent to passing the management of an asylum to one of its most incurable lunatics.
We might recall what Eddie Ward thought of the IMF.
In the early years of the Fund’s life, from the end of World War Two to the closing of the gold window by the United States in 1971, the IMF performed pretty much according to specification. Exchange rates were fixed and remained reasonably stable. There was relatively little volatility. Speculation and the migration of hot money across national frontiers were relatively modest and reasonaby contained.
It looked as though Eddie was wrong.
But the record since 1971 has gone a long way towards establishing his credentials as one of the few lunatics in the asylum who turned out – over time – to be sane.
With the closing of the gold window, the IMF moved from a system in which exchange rates were fixed to one in which exchange rates were allowed to “float”. In practice, some rates floated freely while some, such as China’s renminbi, were “fixed” or pegged to the United States dollar or a basket of currencies.
This essentially floating system – or lack of system – allowed such freedom to individual governments and so diminished or abolished one of the most essential stabilising functions of the IMF that volatility of exchange rates was inevitable. This volatility is at the heart of the massive speculation or gambling – the undisguised placing of bets – that distinguishes the foreign-exchange markets today.
In addition, in “helping” countries with balance-of-payments difficulties, the IMF has lost none of its genius for turning troubled situations into financial and economic basket-cases.
The way it destroyed Argentina, for example, some years ago is typical of the way it seems still to handle critical situations in countries today which are the victims of unwise borrowing, lending and unrepayable debt.
The only way out for these current victims seems now to be the way adopted eventually by Argentina: defy the IMF and go it alone.
But there is something even more basic than that. The IMF was originally intended to establish sound rates of exchange and to maintain stability in these rates over long periods. Rules were laid down to allow some flexibility of rates under the Articles of Agreement; but there was nothing like the degree of volatility in exchange rates either for trade or, crucially, for movement of funds for whatever purposes across national frontiers, that we have seen since 1971. As a result, trading or what is effectively speculation in currencies has grown massively as the years have passed.
Now it is billions or trillions of dollars in various currencies that are traded regularly over short periods of days or weeks – or even within a single trading day.
Some of this currency trading is essential. It is the means of effecting payment for legitimate trade. It is also the means by which the flow of funds for valuable long-term fixed-capital investment can take place easily and quickly.
But, increasingly, most of the trading has been for unqualified speculation or gambling. Among other things, the volatility of the currency markets has made a farce out of the post-war goals we had in 1945 to promote free, non-discriminatory trade in competitive goods and services. That was the sort of trade envisaged under GATT and now still envisaged under WTO.
Exchange rates now vary, with little predictability, with movements, for example, in domestic interest rates.
The terms on which trade is conducted and economies compete with each other are changed significantly and frequently according to criteria which have little or nothing to do with relative efficiency or “comparative advantage” for the production of real goods and services or relative productivity of labour forces.
The carry trade has become a major “institution” globally. It stops and starts as relative interest rates rise and fall and relative exchange rates go up or down. Hot money or cold money – money traded according to urgent need or money traded according to cold calculation of speculative profit – moves as risks fluctuate. Speculation rather than legitimate trade and long-term fixed-capital investment determine exchange rates – and, incidentally, the competitive position of products of the real economy on world markets.
In the last quite short period, the Australian dollar has moved from around 50 or 60 US cents to around 90 to 98 US cents. It has been worth 0.58 of a Euro or 0.62 of a Euro over relatively short periods. Sometimes the movement has been enough to protect Australian exports as much as or more than our tariffs once did.
Sometimes it appreciates to such an extent that we lose markets in which we had reasonable expectations of establishing ourselves as steady, long-term suppliers.
The IMF does nothing to stop this speculation or to regulate it. It shows no inclination to do it in the future.
More and more each day the sums involved in the flow of largely speculative funds internationally and the creation of more and more unstable global debt raise the spectre of total breakdown of our financial system – and collapse of our real national and global economies along with it.
We have no reliable idea when such an explosive breakdown might occur or what might detonate it.
As a major trading economy relying on the well-regulated flow of funds into and out of the economy for trade and investment purposes, Australia cannot imagine it is or will be immune from developments in global currency markets. The evidence is that we have been involved – and probably are still heavily involved – in the carry trade. I do not know just how dangerously we are exposed and what will happen to us and other participants when the music stops more finally and completely than it has so far in the several cycles of stop and go in the carry trade over recent years.
But it is a high-risk situation; and the reasonable prognosis must be that significant damage could be done to individual national economies and the global economy if there is a sudden breakdown. That damage could be painful for the domestic economy – housing for example – and especially for those parts of our economy, including financial institutions, linked more directly to our external trade and payments.
The Lang Saga
Perhaps this is a good point to recall the attempted default on NSW State debt by Premier Jack Lang in the early 1930s. There is a chilling similarity between the way in which New South Wales and, more generally, Australia teetered on the edge of national “bankruptcy” at that time and the situation as it could develop now in Australia through “bankruptcy” or financial difficulties of other countries.
The last couple of years have demonstrated how difficult it is to forecast how the financial dominoes will fall once the process of collapse has begun.
In 1932, we owed much or most of our overseas debt to Britain and Britain in turn was heavily indebted to the United States. As the pressures mounted from one creditor and another, Lang tried to default rather than cut State spending. He was dismissed by the State Governor, Sir Philip Game. The Commonwealth – Australian – Government intervened to meet the State Government’s liabilities.
At that time, we had no effective central bank. In effect, the Bank of England seems to have “supervised” much of our financial management. If need be, it sent out such “advisers” as Sir Otto Niemeyer to help us toe the line.
We would like to think of ourselves as more independent and “mature” in our financial management these days.
Furthermore, my understanding is that we are this time not seriously in hock to the United Kingdom; and probably not to the United States although the carry trade, for example, seems recently to have had us actively borrowing low interest-rate currencies, including Japanese yen and United States dollars to make higher-yielding Australian “investments.”
Whatever the current situation, we need to reflect on what the impact would be on the global economy and on our own national economy if the massive and complex web of global debt were to suffer any breakdown – major or even middling to minor – over the next few weeks, months or years.
In most respects, my understanding is that the debts of the Commonwealth and States are not so large now relative to population and GDP as they were at the start of the Great Depression; but the last figure I saw for our private commercial external indebtedness suggested that those “private” debts were of the order of $A500 billion – or about half a trillion. (Household debt in Australia is said to be now more than total GDP at well over a trillion dollars.)
In any event, our external indebtedness in various forms is substantial and is mostly in currencies other than our own. If we were to have difficulty in meeting payments on those external liabilities, would we:
(1) Follow the Lang line and default;
(2) Follow the Niemeyer line and impose such harshly restrictive policies on government spending, social welfare, infrastructure investment and growth and employment as might enable us – or be thought to enable us – to pay our debts?
(3) Follow policies of growth and full employment through public and private investment which would enable us to recover and eventually, if we had had to suspend debt repayments, repay our debts rather belatedly but in full?
All of this is of course to reflect rather morbidly on what might be no more than an implausibly worst-case scenario.
At the moment, the Australian Government and people have handled the crisis with relative calm. The Australian Government has taken swift action more efficiently and convincingly than most others.
(One of the positive features of our policy has been the valuable emphasis on public investment on a wide range of infrastructure projects. A more negative feature has been rejection of the idea that we should create or acquire a major public bank – perhaps on the model of the now privatised Commonwealth Bank of Australia.)
Despite our record so far, we cannot afford to be in any way complacent and we need to keep in mind that the worst-case scenario might be more likely to emerge from the policies, faults, fecklessness and ultimately the financial collapse of other countries rather than that of Australia.
Such a collapse by one relatively small country and economy could be alarming enough but a collapse by more than one of those countries which seem currently to be seriously at risk could be devastating, not only to Australia but the whole global community.
At this stage, it is hard to define the nature, size and complexity of the risk from a possible financial default or series of defaults but certainly it or they could have global repercussions which then in turn might have a serious, even devastating impact on economies even as robust and resilient as, so far, Australia seems to have shown itself to be.
That is the background against which we must view the downgrading of some economies by some of the more prominent international rating agencies.
Admittedly, the agencies which have been rating debtors – whether individuals, corporations or national economies – have no great reputation for efficiency or integrity themselves.
They have recently downgraded Greek sovereign debt and the rating even of the United States and the United Kingdom as sovereign debtors might well be questioned at some time during 2010.
Several lesser economies are suspect, particularly in Eastern Europe. Default by Eastern Europeans could be serious for Austrian banks and any Austrian difficulties could have an impact on the wider European Union. In this way, there could be a snowballing of financial troubles through such relatively small economies as Iceland, Greece, Latvia, Hungary and other Eastern European countries to Austria and then perhaps major economies such as Spain and Italy.
Forebodings about these issues are not likely to go away because of such distractions as climate change.
My own feeling has been that climate change can be more effectively dealt with by confronting specific problems such as, for example, the use of cleaner and alternative energy sources, finding solutions to national and global water shortages and preserving our remaining forests and embracing effective policies of reafforestation.
These more focussed policies might serve us better than grander and less practical ambitions to halt or slow everything which we include under the banner of climate change, with complex processes such as those involved in emissions trading and unfocussed aid to developing countries.
Even if we find solutions to problems of the planet and its environment, the problem of debt – and increasingly the problem of sovereign debt – will still be there to haunt us and put at risk everything else we might otherwise be rationally inclined to do.
Given that the problem of debt – personal, corporate and sovereign – is massive and that it will not go away any time soon is the Government doing enough to confront it – domestically or globally?.
Is there anything that individuals, corporations and especially the Australian Government and Government leaders personally can do to confront what is a highly challenging situation?
Can we afford to stand by and watch the global economy and the global financial system – and ours as part of it – tumble into the abyss?
The first thing is that we must not fall for our own hype about recovery being on the way – and Australia being out of recession and back to being one of the luckiest of lucky countries once more. So far, the Asian economies on which we have come to depend so heavily have continued to grow – though at a slower pace than a few years ago.
We need to be constantly mindful that they – or most of them – have achieved their continuing growth only with the aid of stimuli that have been just as big if not bigger than those of the old developed economies, including ourselves. Their economies, based on real investment, productivity and production rather than smart financing, are likely to continue to do better than the United States and others; but there is no guarantee. We must acknowledge that we must work for more stability by whatever means we legitimately can.
The second thing is that we must look to real, fundamental reform of our banking and financial system – domestically – as quickly and energetically as we can. The banks and other bank-like institutions are not going to regulate themselves. If we continue to let them do what they like, they will do what suits them best and that is what lines most extravagantly the pockets of those who run them. They have taken full advantage of their freedoms and their privileges in the past two or three decades in ways that more than justify the society – the ordinary men and women of Australia – taking realistic steps to curb their conduct and practices so as to be in at least broad harmony with the society’s reasonable needs and aspirations.
Just as one example among many, we must put a stop to loan-shark rates by the “Big Four” banks as well as others. Their own statements show that they charge 19% or more on debits in customers’ accounts while paying something like 00.01% on customer credits. That must stop.
One of the inexcusable mistakes of the past couple of decades was the “privatisation” of the Commonwealth Bank of Australia – a public bank that was one of the great achievements of King O’Malley, Andrew Fisher and the Australian Labor Party, way back in 1913. Chifley built on this achievement through the Banking Act and the Commonwealth Bank Act of 1944. We should create a new public bank fundamentally on the model of the old Commonwealth Bank of Australia as a matter of prime urgency.
The third thing we should do is seek to initiate urgent talks on dealing with sovereign debt. We should not use the IMF which is an institution which has failed in its purpose – in ALL of its original purposes. It is unlikely to change its spots sufficiently to help reform the global financial system in acceptable ways now. Perhaps the Group of Twenty could be used to get the process to create a new international financial institution going but how soon will it meet again? And how effective will it be as compared with a group of Sherpas drawn from, just as one example, Australia, Brazil, Canada, China, India, Russia, Germany and the United States?
As one possibility, we should give thought to reviving the activities envisaged under the Economic and Social Provisions of the United Nations Charter. The Australian Government, led by Ben Chifley was a prime mover in having these provisions adopted during the negotiation of the UN Charter in 1944-45. We should never have allowed their implementation to decay into almost total misuse as we have done in recent decades.
These are great and urgent issues confronting Australia and the whole global community right at this moment. It will be a miracle if we achieve complete success in dealing with ALL of them; but we must try to deal with them in a way that, though less than perfect, will get us safely through the next few months and then, having set a rational process in motion, through the next few years, with whatever safety and security we can manage.
Food, Interest Rates and Credit
I do not pretend I have dealt above with all the issues that confront us.
^ For example, as a major world exporter of food, Australia must be concerned with global food production and shortages in both the short and longer term. We have an immediate problem of massive global short-term malnutrition and starvation and a long-term problem of rapidly growing world population, expanding demand for food as living standards rise in such countries as China and India and limited arable land available anywhere on the planet to bring into production.
Australia can and will want to play a key role in debating and resolving these problems.
At the more technical financial level, I believe that for the last forty years at least, we have failed adequately to understand how our interest-rate and credit policies should be crafted to meet our reasonable requirements for stable growth and high and stable levels of employment.
Central banks have inadvertently promoted inflation instead of managing it. In some cases – and this is threatened globally right at this moment – our interest-rate and credit policies have caused severe deflation and killed growth. The Japanese experience has been a chastening example of how wrong our policies can be; and the dangers are real that we could slip into a similar deflationary depression globally. Such a depression could be more debilitating and last longer even than that of the 1930s.
A Possible UN Role
We must try to understand such fundamental issues better. Resort to the economic and social provisions of the United Nations Charter might be one approach.
The United Nations Economic and Social Council might be revived and reconstructed as a global “supervisor” and analyst of economic and financial problems and policies. It could meet in permanent session, as the United Nations Security Council does.
Australia was one of the most active participants in the Council’s creation and in much of its early work.
When a major recession threatened in the United States in 1949, the Council appointed a distinguished international group to report on “National and International Measures for Full Employment”. The group was chaired by an Australian, Dr. E. Ronald Walker. Its report is a valuable document, still relevant to many issues which confront us today.
If we do not revive ECOSOC itself, another approach might be to institute a process for pragmatic global analysis by having ECOSOC commission “Sherpas” for specific tasks. Those “Sherpas” might include some government analysts but the groups would go beyond “official” and “expert” groups who have failed us so miserably in the past – and who continue to fail us right now.
At least, what we do not want is to continue with meetings of the Group of Twenty or of such bodies as the Organisation for Economic Cooperation and Development (OECD) which meet without adequate preparation and end with laboured communiqués of useless generalities and clichés. They are reminiscent of World Economic Conferences and other meetings during the Great Depression which achieved as little in economic benefit for us as the League of Nations achieved in slowing down our drift to world war.
Social, Political and Strategic Aspects
That brings me to the point that I have dealt essentially with financial and economic problems in this message. I know that I do not need to say it once again to you, but I emphasise for others that our financial and economic problems have social, political and strategic aspects of the highest importance. If we solve – at least to a reasonable extent – the economic and financial issues, we might have some hope and even expectation that we will be able to handle our major social, political and strategic concerns too.
At the same time, we in the developed world might help resolve our financial and economic problems by reforming and expanding our support for the developing countries. Those countries have received inadequate support for decades, not only in volume but – except inadvertently for such countries as the Asian Tigers, China and India – in its effectiveness. Now might well be an opportunity to solve problems of demand, employment and growth in the highly developed countries by setting the poorer countries more effectively on the road to real and sustained growth in the years ahead.
How important is it that we adopt policies along these lines?
If we do not resolve the major financial and economic issues, then the outlook for our global community will be grim. The Great Crash of 1929 was followed by the Great Depression of the 1930s and the Great Depression led directly to – and was in some respects “resolved” by – the greatest war that we have inflicted on ourselves until now.
If that tragic course were followed again this time, the even more terrible war which could be unleashed could bring civilisation as we know it virtually to an end.
We already have a world armed to the teeth. Through regular national armies, terrorists, militias and even some private armies, we are capable of delivering much more death and devastation than ever before. Quite apart from nuclear weapons, there are weapons in the hands of all sorts of formal and informal forces which make the arms we used in the Second World War seem almost like childish toys. Those “childish toys” killed about 20 million people.
How “efficient” will our modern weapons be?
We do not control the production and merchandising of those weapons. Certainly we do not do it effectively. To that extent, we cannot claim to be doing anything to slow our mad rush to self-destruction, either through our economic and financial policies or through our policies of “disarmament”.
“Civilisations,” Toynbee wrote, “die from suicide, not by murder.”
We could scarcely have done more than we have done in recent years to prove him right.
The sort of peaceful change which is crucial to human survival at least at a quality of life which is even remotely acceptable by the standards of our present civilisation, can be achieved only if we think, plan and act together now.
That is our task for the years ahead.
My very best wishes to you personally and to your Government, in 2010 and beyond.
James Cumes