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Leithner Letter No. 10
26 October 2000

Olympic Ecstasy and Currency Agony

Wonderful Olympic Games were staged in Australia’s centre of culture and commerce. The pre-Games torch relay, which visited far-flung points across the continent, elicited great interest. Visitors, participants and officials marvelled at Australians’ hospitality and eagerness to cheer athletes from all nations. The host country’s participants distinguished themselves in myriad ways – conspicuously but not only in the medal tally – and thereby reinforced Australia’s reputation as a young and virile nation (and, not incidentally, an eminently desirable destination for migrants). At the Games’ close the organisers, facilities and supporting infrastructure were praised effusively.

To be sure, political and other controversies, some self-inflicted and others beyond the hosts’ control, preceded and attended the Games. But nothing could distract attention from the central fact that Australians – organisers, volunteers and participants alike – outdid themselves. In a way that had seldom occurred before, the host country basked in plaudits, accolades and admiration from around the world. Indeed, more than one VIP reckoned that these Games were the best ever; and several journalists added only half in jest that they should be staged permanently in the Land of Oz. From many perspectives, then, the Melbourne Games of 1956 stand out as one of the finest episodes in modern Australian history. 

The Melbourne Olympiad deserves to be regarded as the more successful of the two staged in Australia. This is because Melbourne 1956 possessed three attributes which Sydney 2000 most conspicuously lacked. First, the 1956 Games did not cost heaven and earth. They were preceded by neither billions of expenditure for opulent sporting and other infrastructure; nor hundreds of millions of extravagance for athletes and hangers-on; nor tens of millions for corporate élites to “network” and lavishly entertain one another. Second, as noted by Brian Toohey in The Australian Financial Review, the Melbourne Games were not followed by extraordinary outbursts of false premises, invalid logic, disingenuity and sheer babble with respect to their “meaning for Australia.” Finally, and most symbolically, the timing of the 1956 Games did not coincide with falls to record lows of the purchasing power of the Australian currency vis-à-vis its American counterpart. If Melbourne 1956 characterised the restrained sobriety of its day, then Sydney 2000 epitomises the overextended distemper of ours. 

Exporters and Importers; Creditors and Debtors; Investors and Consumers

The impact of a change in the price of one currency with respect to others is not a straightforward matter. This is partly because it depends upon things which nobody can know (although a fair few seem to pretend that they do), i.e., how considerable the change will be and whether it will be ephemeral or enduring. Its impact is also less than clear-cut because it depends whether one is an importer or an exporter, and therefore upon the foreign currency which one must buy or sell in order to transact business; whether one is a debtor or a creditor, and therefore upon the currency which one is borrowing or lending; and whether one is a consumer or an investor, and therefore upon the currency with which one accumulates or fritters assets. Many Australians simultaneously wear several of these hats. They also wear them in assorted shapes and sizes and for different periods of time. It is likely, then, that the type and severity of the impact of the $A’s fall will vary – perhaps considerably – from one individual and company to another.

That said, two points can be made. First, it is apparent that as individuals, Australians – and, for that matter, Americans, Britons, Canadians and New Zealanders – have demonstrated repeatedly that they are capable of importing and consuming prodigious quantities of goods and services. Second, in recent years they have not, by and large, demonstrated the resolution required in order voluntarily to accumulate sufficient nest eggs to finance this high level of consumption. Accordingly – and thanks to the spendthrift habits developed during the second half of the twentieth century – despite the superficial appearance of wealth and prosperity their pockets (net of accumulated debt) are often surprisingly shallow. Without secure and well-paid employment, ongoing forbearance from creditors – and, in no small number of instances, the disposal of assets – few can support the habits of consumption which they increasingly regard as their birthright. 

These points have an important consequence. To the extent that creditors ultimately prevail over debtors (citizens and their governments are a glaring exception), and to the extent that a bear market restores wealth to its patient and rightful owners, then the depreciation of the $A vis-à-vis the $US, if it is sustained, will pose challenges to consumers, importers and debtors. It may thereby present opportunities to creditors, exporters and investors. Indeed, irrespective of any change in exchange rates the gulf between psychological expectation and financial reality fostered by easy access to credit and celebration of debt is creating significant strains in many individual Australians’ finances. There are signs (interest-cover ratios, gearing, comments by ratings agencies and other indicators of creditworthiness) that the quality of Australian corporate debt has also deteriorated during recent boom conditions.

These developments may create significant opportunities for individuals and companies who possess much cash, a bit of acumen and no debt. To borrow Warren Buffett’s words, “when much of the rest of the investing world, burdened by debt, encounters some crisis forcing a panic, [they] are standing there with no debt and a loaded gun of cash ready to bag rare and fast-moving elephants,”

Two Interviews With James Grant

I owe these last two phrases to James Grant, publisher of Grant’s Interest Rate Observer. I’m a great admirer of Grant’s theoretical rigour, historical perspective, contemporary relevance, trenchant style and mordant but engaging wit. These virtues appear in abundance in his books Money of the Mind: Borrowing and Lending in America from the Civil War to Michael Milken and Minding Mr Market: Ten Years on Wall Street With Grant’s Interest Rates Observer.

Good books transcend time and place. Although it was published in 1996 and its subject matter is mostly American, it seems to me that a careful reading of Grant’s The Trouble With Prosperity: A Contrarian’s Tale of Boom, Bust and Speculation tells us more about debt and credit, asset values, interest and exchange rates in Australia today than any Australian source, author or publication does. Grant speaks as fluently as he writes. So if you can’t find the book or don’t want to spare the time to read it, the transcript of an interview originally published in the Winter 1996 Austrian Economics Newsletter provides the next best thing. Further insight into Grant’s sharp mind and turn of phrase appear in abundance in a 31-minute audio interview conducted with Wall Street Uncut on 28 January 2000. Happy reading and listening.

Chris Leithner


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