Deciphering Treasury’s Red Book

Delusional Economics highlights an important Business Day scoop in which they have gotten their hands on parts of Treasury’s Red Book for the incoming government.

It includes the following passages: “A key risk for the Australian economy is our reliance on short-term external debt, largely intermediated through the banking system … Among Australian financial institutions there has been some shift away from short-term funding since the crisis, but exposure to financing risk remains significant.”

Business Day goes on to state that, “The following paragraph was blacked out, but later on the Red Book also highlighted the dangers of the property-led surge in household debt.”

This blogger is unsure but will hazard a guess that the Red Book is prepared under the aegis of David Gruen, Executive Director – Macroeconomic Group.

Assuming that’s the case, from some of Dr Gruen’s public comments after the GFC, we can speculate at what terrible secret has been blacked out in the Red Book.

At a 2009 ANU forum available in video at Slow TV, Dr Gruen admitted:

“If there is a global financial crisis in which the New York and London capital markets effectively close down and we are in a world where our banks borrow large amounts in wholesale markets, if that world exists, and the government has to come in and guarantee those debts in extraordinary circumstances, then that changes the debate about the consenting adults view of the current account.”

In short, Gruen is abandoning the Pitchford Thesis, the theory that current account deficits don’t matter if driven by the private sector in the time of a floating currency. At the same event he went on to acknowledge the importance of tracking asset bubbles in macro-economic management, though he did not endorse the use of interest rates to prevent them.

So, returning to the Red Book’s missing paragraph, any one of the following would slot in nicely:

‘If global markets freeze again, the Federal Budget may again be called upon to guarantee the bank’s wholesale debts. Given the Budget is already carrying $157 billion in contingent liabilities from the 08/09 guarantee, we foresee difficulty in bailing out the banks a second time around.’


‘Despite the 2008 Reserve Bank extension of the rules on the collateral it accepts from banks in return for cash (known as “repo” transactions), there is the possibility that the bank’s short-term funding needs will again call upon a Budget guarantee. We suggest that the Budget return to surplus sooner rather than later.’


‘If global markets freeze again in the next five years, bend over and place your head firmly between your legs then kiss your butt goodbye.’

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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