This comment was made this week at http://www.macrobusiness.com.au  (link may be locked)

http://www.macrobusiness.com.au/2015/02/apra-must-rein-property-1890s-time/#comment-1084405

The answer to that question is that they will not but then none of the IOUs issued by Australian banks have the names of Chinese workers on them.

Those workers have no idea that their govt has driven down their income – by exporting capital – to keep their currency low.

In any event a debt jubilee is an inherently unfair concept.

Why should debtors get a free hand out?

The appropriate approach is for APRA to direct the banks to wind down their borrowing off shore and for the government to stop selling bonds off shore.

Existing debts are honoured but new ones are not permitted.

This of course will increase local interest rates and encourage deleveraging. That is not a problem providing there is sufficient money supply to allow it.

In addition it will cause the currency to decline which will discourage imports. There are heaps of things we import which should be made here and are not simply because our trade competitors are smart enough to know that a productive country is critical to economic health.

At the moment there is the problem that control of the money supply is in the hands of the banks and people are getting reluctant to take on the trailing commissions the bankers demand.

The government can fix that by cutting tax (not increasing expenditure) though of course the standard rules apply – create too much and you get inflation – so there are limits – but with lots of people paying off their debts inflation is not likely to be a major problem and the solution is straight forward if it does – increase tax.

• fitzroy

  February 11, 2015 at 5:36 pm

  I think the idea advanced by Steve Keen is compulsory payment of loans for debtors and deposits for non-debtors for fairness

• Pfh007

  February 11, 2015 at 7:15 pm

  fitzroy,

  That would work but I would prefer that they just increase the tax free threshold as that avoids the easy political target of govts handing out “money for nuthin”.

  At least by creating a deficit by increasing the tax free threshold it encourages people to work knowing that the for the first $XXX they pay no tax.

  Encouraging the debtors to apply the extra cash in their wallets towards debt reduction (and discouraging new speculator leverage) is achieved by the higher rates resulting from reducing the hot money inflows and /or RBA increasing the target overnight rate.

  Having said that if the deficit is large enough and the propensity to save is higher the rise in interest rates will be more modest than otherwise.