Joe turns Glenn into dollar hedge fund

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An interesting observation from the Pascometer today:

…it was very nice of the Treasurer to write the big cheque (and blow out this year’s “Labor” deficit to nigh on $40 billion). Lowe thought it “a prudent, sensible decision” and the Reserve was in a much better position to deal with unpredictable events that might occur, yet it seems the Reserve didn’t share the Treasurer’s sense of urgency.

But the Reserve board probably isn’t as interested as the Treasurer is in playing the foreign exchange market effectively to make “his” budgets of the next couple of years look better.

Hockey is betting on the Australian dollar weakening over the next couple of years, which would mean big, fat Reserve profits from the value of its foreign reserve appreciating.

By stumping up $8.8 billion now, Hockey will be able to take nearly all of those profits as dividends. As previously suggested here, it’s a classic piece of deck clearing designed to make the previous administration look as bad as possible and the new mob look good. And the odds are that Trader Joe has made a very good bet.

Lowe spelt out the Reserve’s position while answering questions after his prepared speech. The rapid rise of the Australian dollar had resulted in valuation losses of more than $5 billion.

“We had been saying publicly for some time (that) it was the board’s intention, desire, to rebuild that capital over time.”

Hmmm, well, the RBA still has to buy the foreign reserves with the $8.8 billion in timely way but point taken! Now all the RBA need do is front run the cash into US dollars and deploy macroprudential tools for super profits!

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Crikey adds more:

In an attack on Labor on the ABC last night, McKibbin accused former treasurer Wayne Swan of “economic vandalism” for continuing to request dividends from the RBA when its Reserve Fund had been depleted by the strength of the Australian dollar. The Reserve Fund, which includes extensive holdings of foreign currencies (dominated by US dollar), is designed to act as a capital buffer to enable the Bank to respond to operational requirements and, if need be, financial emergencies. Joe Hockey this week declared that it was too low and needed $8.8 billion as an immediate injection.

…But McKibbin’s role as board member means his take on the $9b mystery payment is important — and whether he meant to or not, he has confirmed Swan’s response to Hockey’s announcement yesterday, in which the former treasurer said that if he had ever been asked to make a capital contribution to the RBA Reserve Fund, he would have done so.

McKibbin labelled this a “bizarre statement” but then went on to confirm its accuracy, saying: “It wasn’t that he may not have been asked to put more money in but he was certainly asked not to take money out.”

So, McKibbin appears to confirm that at no stage did the RBA ask Swan to top up its capital reserves, even when the ratio of the reserve fund to assets at risk was at 2.1%, nearly half its current level of 3.8%. What McKibbin also does is gloss over the fact that in 2011-12, the RBA paid no dividend to the government at all, unlike all of the Howard years, when dividends of up to $3 billion were paid to government year in, year out.

As Stephen Koukoulas correctly notes today, if former Liberal treasurer Peter Costello had taken dividends from the RBA at a similar average to Swan ($1.5 billion a year rather than Costello’s average of $3 billion a year), the RBA’s Reserve Fund would be extremely healthy.

Put another way, if Swan had taken dividends from the RBA at the same level as Costello, the Reserve Fund would now be empty.

I would have thought that the germane point was not how much was removed but how much left behind. It is a “reserve fund” after all. Here is the Kouk’s table:

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I’m no expert on the RBA’s balance sheet but that rather looks like the Reserve Fund has been empty much of the time before 2008. Presumably so because there was never any currency crisis for there to be the need for it. That rather suggests that the level of the reserve fund is at any given time is a matter of judgement about the need for it and it does rather support The Pacometer’s analysis.

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.