Low interest rates – the magic pudding myth of a chronic CAD Country

This comment was made at Macrobusiness  (link may be locked – but there is a free trial available)


“…The point is that none of it is aimed at getting production aimed at a Current Account in critical condition….”

It is not about aiming anything – as that involves someone doing the aiming and as you regularly note the people doing the aiming are part of the problem. So hoping for someone to aim infrastructure where it is needed is wishful thinking. However, get the environment settings right and you can then let the system adjust.

Adjust them gradually and the system will adjust with less shock.

Gradual adjustment is clearly possible because the major sources of unproductive capital inflows are transactions that APRA and the government can control closely.

Wholesale borrowing off shore for mortgages can be wound down over a number of years.

Likewise the sale of govt securities off shore.

Likewise the sale of capital assets and land off shore.

We agree that the settings that need adjustment are capital controls as without those unproductive capital inflows all the dumb allocation decision become much much harder and more sensible options become possible.

You can’t buy a bunch of crap from overseas if you cannot borrow from overseas to buy it !!

Regulate and wind down the borrowing over a period of years and the economy will be weaned and will adjust and become the productive flexible economy it will need to be.

It is not a difficult message to sell

“Foreign Debt matters – private as well as public – the nation nor a household should borrow money from off shore that we can easily save ourselves”

“Unproductive borrowing will be wound down to zero over the next 10 years”

“Transfer of ownership of Australian assets to off shore parties will only be permitted when that transfer is a part of substantial new investment in productive economic capacity.

The problem is that no one has been pointing out the damage and hidden costs of John Howard’s campaign to drive household debt with interest rates subsidised by off shore borrowing.

Low interest rates continue to be sold as the cost less economic magic pudding which is complete rubbish in a CAD country.

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