The tectonic plates of Australia's economy are shifting, as the mining boom generates the kind of ebullience common to all booms.
But cracks are appearing that could quickly overwhelm the gains made by the boom. These expose the Reserve Bank of Australia's flawed management of Australia's financial system.
It is worth reminding ourselves that the RBA's role (according to the 1959 Reserve Bank Act) is "to ensure that the monetary and banking policy of the Bank is directed to the greatest advantage of the people of Australia … to the maintenance of full employment … and the economic prosperity and welfare of the people..."
We need to bear that in mind in light of the RBA's recent policy stance. First the policy to set the highest official interest rate in the developed world. Second, the policy that permits the Australian dollar to rise to unsustainable levels. Third, the policy that allows Australia's banks to go abroad to raise funding in international capital markets.
The RBA should fulfil its mandate by providing Australia's banks with finance - just as the US Fed and the Bank of England do. The process is a virtually costless way of injecting finance into the system, at very low rates of interest. However the RBA has chosen not to.
The cost of borrowing in foreign markets has risen recently because of the crisis in the eurozone. Australian banks' credit costs in international money markets have increased by more than 1.00 per cent in less than three months.1 In addition these banks face exchange rate risks - risks that could be avoided if the RBA was fulfilling its role.
But these are not the only risks posed by this policy. Foreign bankers lend to Australian banks by borrowing from their own central banks – at rates of 1 per cent or less. When they collect the prize of lending at 4.5 per cent, they do so by raiding the coffers of the RBA for hard currency. In other words, foreign private bankers are leaning on their taxpayer-backed central banks to make a quick and lucrative buck at the expense of Australians. The RBA turns a blind eye to this form of daylight robbery.
It gets worse. By borrowing in global capital markets, banks attract funds into Australia - $100 billion this year. These, added to inward investment flows into mining sectors, force up the exchange rate, the cost of Australian labour, products and services. Indeed there is a direct causal line between a very high rate of interest; banks borrowing abroad, the rise in the dollar, and the collapse of Bluescope Steel.
The ability of central banks to create cheap, but carefully regulated finance is intended to encourage and support sound private and public investment to guarantee the prosperity and welfare of Australians. The RBA has outsourced this role to foreign private banks.
Some might say that the big four Australian banks are very profitable indeed; that they survived the tsunami of the GFC – and that there is little to worry about.
Except that one small 'crack' has appeared in the system. International market players have taken out insurance against Australia's big four banks defaulting on their foreign loans – Credit Default Swaps (or CDSs). CDs's are 'premiums' taken out by speculators that do not own the underlying asset insured. (Something forbidden by regulators on normal insurance, because if we were allowed to take out insurance on another's asset e.g. property – the incentive to burn it down would be very great. But hey, this is the global financial system where anything goes.)
The 'premium' on the likelihood of the four Australian banks' defaulting has climbed by 50 per cent over August – indicating that speculators are losing confidence in these banks.
The noise around the mining boom means that this 'crack' appearing in the Australian economy is not audible to most. Nevertheless it poses a grave threat to Australians: one that the RBA would be wise to address before the onset of Credit Crunch 2.0.
1. Satjayit Das, author of Traders, Guns and Money in The Big Picture: From Green to Red - is Credit Crunch 2.0 imminent?
Ann Pettifor is a British Economist who co-founded the global Jubilee 2000 Campaign. She visited Australia last week on a speaking tour.