Bundesbank confesses plan to poach Australian industry

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Find below a comment masquerading as a story from The Australian celebrating a Bundesbank plan to help German firms poach Australian industrial capacity (the crossed out parts are The Oz and the bold is what should have been written).

GERMANY’S Bundesbank, one of the world’s most powerful central banks, is considering adding Australian dollar assets such as bonds to its foreign currency holdings in a historic dangerous move that would reaffirm Australia’s emerging status as a safe haven harbour for investors amid growing disquiet in Europe and threaten the nation’s most important automatic stabiliser.

In a dramatic sign of Australia’s rising position as a financial powerhouse a victim of Dutch disease, thanks in large part to the supercycle commodity boom on the back of rising Asia prosperity, officials from the Bundesbank have stepped up meetings in recent months with major Australian banks to discuss the possible change in foreign currency strategy, sources close to the meetings said.

The German institution’s interest in the Australian dollar is now “very serious”, said one of the people involved in the meetings with Bundesbank officials.

The report of the German bank’s interest boosted the Aussie dollar in European trading, pushing it close to parity with the greenback. The dollar dropped back in early Australian trading on Moody’s decision to slash Spain’s credit rating by three notches, confirming that it remains a risk currency not a safe haven.

One of the most cautious ideologically purist central banks in the world in terms of its foreign asset allocations, the Bundesbank has since 2010 discretely been reviewing whether to add Australian dollar assets to its portfolio and has held preliminary talks on investing in the currency with officials from the Reserve Bank of Australia.

The RBA prepared a briefing document for the Bundesbank in 2010 that detailed the nature of Australia’s debt markets and the economy, said a former central bank official with knowledge of the study.

The heightened interest in Australian dollar assets comes amid a rush by global investors for new safe havens that has, along with economic weakness arising from Dutch disease, already pushed Australian bond yields to record lows. Investors are worried that Europe’s debt crisis could trigger a global recession.

The move comes as the RBA continues to signal warn Australian business and the political class that Australia is at risk of an overly concentrated industrial base and needs to get used to an exchange rate at what are historically high levels a policy that acknowledges the reality of a global currency war since the dollar’s float in 1983.

And on it might go if we lived in the world of long term national interests and realpolitik.

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Perhaps such loaded reporting, not to mention policy, can be out down to another dimension of Dutch disease reported by Business Insider last night under the endearing title “The mining boom is making Australian dumber”:

The disparity in salaries creates distorting incentives in career preferences as workers are drawn to the resources sector. Throughout the 2000s, there was a chronic shortage of teachers in Western Australia that was only resolved after the 2008-9 financial crisis slowed the rate of resignations and after the government shipped in foreign graduates. But other sectors kept losing bodies. Western Australian manufacturers lost 17,300 jobs in two and half years ending in August 2010, while the mining industry added 16,900. Perth’s five universities are full, but largely with Asian students who will take their acquired knowledge home with them. Meanwhile, local students are drawn to fields tied to the resources boom—mining engineering, geology, surveying—while other programs of study, including medicine and science, are less popular. At some point, there will be a glut of geologists in the city. Perth is getting richer in aggregate, but it might also be getting dumber.

The upside of the Bundesbank move is, of course, that central banks have history of shifting into asset classes just as they turn. In gold earlier last decade and the Australian dollar earlier this year, central banks rang the bell at the top. The commodities boom may be having deleterious effects on brain power more widely than Australia!

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About the author
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.