A German Guard in Rome?

More on the man with an outside chance of replacing Mervyn King at the Bank of England...

SO NOW Glenn Stevens is courting disaster, writes Dan Denning in his Daily Reckoning Australia, reporting from Melbourne...

The Sunday Times of London reported at the weekend that the 54-year old governor of Australia's Reserve Bank is an outside shot to replace Sir Mervyn King as the next governor of the Bank of England. Stevens would become the most powerful colonist in the British civil service.

It's not a small job, either. The head of the Bank of England isn't only responsible for monetary policy. He's in charge of monitoring the health of British banks. He also has the small task of heading off any systemic crises in the future, whether it's in the financial system or the economy. Whoever gets the job, he's sure to be busy.

Maybe the British are on to something by hiring an outsider to run their money. Ancient Roman emperors often had a 'German Guard' in the palace to counter the power of the Praetorian Guard. The Germans were foreigners and personally loyal to the Emperor. The foreigners wouldn't quibble about following orders or inflicting pain on Romans. Roman soldiers might be less compliant.

Stevens isn't a German name, though. And he may not even want the job. For starters, he'd have to take a 50% pay cut for the privilege of printing the Pom's money. The British are offering $478,240 a year for the job. Stevens had a base salary of $815,735 last year as RBA governor, or about 466 ounces of gold at current prices. He's already the world's highest-paid central banker, and that doesn't include over $180k in super contributions.

Some people are outraged that Stevens makes nearly a million Dollars a year fixing the price of money in Australia. But he also oversees the printing of banknotes, which we'll get to in a minute. And in any case, you have to respect Stevens for his understanding of inflation. The fact that he's the world's best-paid central banker proves beyond a doubt that that he knows the value of money.

Stevens knows better than anyone that polymer biaxially oriented polypropylene bank notes aren't real money. They're instruments for making it impossible to break the government's monopoly on issuing currency. You may as well get as many of them as you can for as long as people continue to take them seriously. This is how people at the top of the monetary system benefit from control of the money. They get to spend it before it loses purchasing power. Inflation is only a problem for the little people.

That said, Stevens may have a few problems of his own when he fronts a Parliamentary committee today. He's trying to put to rest accusations that the RBA covered up bribery allegations at two of its subsidiaries for nearly two years. Again, we think the story is just the sort of thing a central banker would put at the top of his resume. But what happened?

Well the scandal is old news by now. But we'll give you the short version. The RBA has two subsidiary firms that design and print counterfeit-proof money as a for-profit business. The first firm, Securency, promotes its 'Guardian Substrate' as a cutting-edge bundle of technologies that make government money nearly impossible to counterfeit, and also breathtakingly beautiful!

The 'Guardian Substrate' is basically a plastic note with a see-through window, metal inks, multiple colors, and some other bells and whistles. The original technology was developed by CSIRO. It was launched in Australia in 1993 with the $5 note. Securency says its technology helps, 'restore public confidence' in notes.

But when the money was first launched in Australia, the marketers realized people didn't like the idea of plastic money. They began calling it a 'polymer note' instead, and the rest is history. The plastic money is used in Australia, New Zealand, Romania, Vietnam, Brunei, and Papa New Guinea.

Note Printing Australia (NPA) actually prints the notes, as well as passports for the government. It's the second firm owned by the RBA. NPA's job is to go out and find customers for the plastic money designed by Securency. The whole set up is a way of turning Australia's plastic money intellectual property (IP) into a kind of money printing product you can sell for fun and profit. Who needs a mining boom when you can export plastic money?!

Now, we should point out there's a bit of a contradiction starting a business based on longer-lasting, counterfeit-proof money. If notes stay in circulation longer and are harder to circulate, the governments that issue them may not need as many notes over time. The quality of your product guarantees that you'll sell less of it.

Someone needs to teach the civil servants at the RBA about 'planned obsolescence'. You create constant demand for your product by issuing new and improved versions all the time. Ask Apple how this works. Then again, maybe the folks at the RBA correctly anticipated the amount of money printing to be done in a world where currency isn't tied to gold.

In any event, the trouble with RBA's little money printing operation seems to have begun in 1999. NPA became involved in negotiations to replace Malaysia's paper ringgit with a plastic one. Over the next seven years, NPA would pay over $3 million to a Malaysian arms dealer who advanced their cause with Malaysian officials.

In the world where the law applies to normal people, these payments are called 'bribes'.

The question before Glenn Stevens today is when did the RBA know about the bribes? The governor and his associates claim they first become aware of the bribery when it was reported by media outlets in 2009. The trouble is, a whistle-blower at NPA brought it to the attention of the RBA as early as 2007.

That's as much as we're comfortable saying without a more precise understanding of Australia's defamation laws. But none of this should disqualify Stevens for a bigger, better-paying job in England. His 7-year term expires in September of next year, so he's clearly eligible.

More importantly, Stevens has demonstrated a first-class of understanding of the idea of perceived value. Plastic notes that are hard to duplicate preserve the central bank's monopoly on money printing. That is job number one of a central banker, to physically defend his turf.

Beyond the physical, though, money is about belief. If people don't believe in money, they won't use it. Pretty plastic notes with lovely colors are reassuring. They look valuable. Therefore they must BE valuable. There's a fair bit of psychology that goes with modern central banking, and Stevens seems to understand that.

We should all encourage him to take the British job. Then the next governor of the RBA can increase its official gold reserves from 80 tonnes (about $4 billion worth) to something more substantial. That way, Australia's monetary stability would be based on real money and not pretty plastic.

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