To read the original version of this comment in the original context at Macrobusiness.com.au click this link. (link maybe locked – but there is a free trial available)
While the woeful performance of the Treasurer (Q&A Monday Exhibit 1), the generally incoherent ramblings from the government on economics and the often opportunistic “small target” mutterings of the ALP, are a major cause of despair for anyone with an interest in the economic future of Australia, there are some reasons to remain on the sunny side of the street .
The Glass Pyramid remains optimistic for the future and it does not involve the government picking winners or fortune tellers looking for the next ‘big thing’ in the remains of a pot of Earl Grey. Sorry to disappoint the swarms of futurists who make their living from predicting ‘smart industries’, ‘ creative hubs’, ‘knowledge hot spots’ etc but predicting the future, of something as complex and organic as an economy, is for the birds.
All it takes is a moderately paced withdrawal of the unproductive capital inflows that have helped twist the Australian economy into a housing mal-investment extravaganza, population ponzi, and giant quarry.
What are those unproductive capital inflows?
- Borrowing off-shore by our taxpayer guaranteed banks to support residential lending transactions secured by existing residential housing.
- The sale of commonwealth and other government securities to off-shore buyers.
Why are they unproductive?
Because, contrary to urban myth, they are not bringing ANY money into Australia, they merely bloat the exchange rate as off shore investors seek the $AUS necessary to lend for housing or to lend to the governments. Off shore lenders do not have bags of $AUS in their strong rooms that they are keen to return home to the land down under (at the right price).
The idea that we need foreign assistance to build our shelters or to hand over to the government bags of $AUS that are already here in Australia is simply daft.
Furthermore, those transactions are the key methods used by our trading rivals to export capital from their economies and by doing so wage ‘Currency War’ on Australia. By allowing those unproductive capital inflows we are cutting holes in our borders to assist attacks by currency warriors (Japan, China, USA, UK just to name a few). Don’t get me started on Mr Robb’s reckless campaign to open the holes wider with a series of massive unproductive capital inflow facilitation agreements misleadingly described as Free Trade Agreements. Suffice to say they will be talked about for generations.
Remove the easy credit future eating option from the smorgasboard of policy choices and the country will start to repair itself and much more quickly than most think. As to what that will look like, finding out as it happens is what makes life interesting, but my bet is that it will involve a lot more manufacturing than many think possible.
Are there any productive capital inflows?
Yes but they are rarer than you think – after all Australia is a modern developed and large economy (one of the top 20 in the world) and if anything Australia should be exporting capital not clinging to capital imports.
An inflow that directly adds to the productive capacity of Australia is productive. Trillions of dollars of inflows directed to bidding up the price of existing houses or lending $AUS, that is already here, to the government to spend on pork just doesn’t cut the mustard. Nor are transactions that involve nothing more than transferring ownership of an asset to a foreign buyer.
If a foreigner invests by building new shops and new distribution systems (Aldi), plant and equipment, new railways, new mines, new buildings (including residential) then the associated capital flows are likely to be productive. But these types of capital inflow transactions are in the minority.
How do we stop the unproductive capital inflows?
No different to quarantine on dangerous physical imports.
- APRA directs the private banks to wind down their off shore wholesale borrowing for residential mortgage lending to zero over a period of years.
- Government introduces a systems of registered government bonds and restricts registered ownership to Australian citizens. This will provide a natural limit as a government that cannot convince its own citizens of the merits of a bond sale should not be borrowing at all.
For a period, when our exchange rate reflected our trading performance and not currency war, a once in a life time over the top and uncontrolled mining boom/orgy, or unproductive debt binges, we were exporting car parts and a variety other manufactured goods – low and high tech, educating kids from around the world, pouring beers and entertaining tourists and making movies as a back lot film set.
I say moderately paced withdrawal because a lot of those of little faith think the muscle tissue of the nation has been completely rotted away by the easy credit lifestyle and ANY attempt at rehabilitation is doomed to failure. Slowly reducing our reliance on the unproductive capital inflows described above will allow us to strengthen our flabby hind legs and docile brains, get up off the couch (purchased on credit extended by some trade rival central bank) and start doing things that off shore people are interested in paying us to do.
So what is the catch?
Apart from the general cluelessness of our policy makers the major problem is that they are convinced that the Australian public refuses to take part in an adult discussion about the problems or take responsibility for a cure.
The Glass Pyramid believes that is bull dust as a much more likely explanation is that our political leaders and policy makers are a bunch of lazy chumps that simply bought the neo-liberal economic utterances of economists paid for by the dominant Finance, Insurance and Real Estate (FIRE) sector and their hangers on in the law and accounting professions. Ticket clipping capital flow related transactions and the selling of Australia off-shore is supported by plenty in academia as well.
They are all quite easy to spot – they generally reckon that free international flows of capital are as natural as mother’s milk and should be subject to NO regulation or control. They also run scare campaigns on how reducing our dependence on foreign capital inflows is just too hard. They often make claims that suggest it is Australia’s destiny to always import more capital than it exports. Basically, the sort of arguments you would expect from people who make a buck from the business of selling off assets and taxpayer guaranteed IOUs to foreign citizens and governments.
To correct the impression that the current future eating model is supported by the average Australian who is concerned about the future of the country they will leave to their kids, everyone should contact their local members at state and federal level and their senators and explain in words of one syllable or less (grunts will do) that you want the drug of unproductive capital inflows controlled and put on the list of prohibited imports.
Categories: Glass Pyramid Exclusive, Macrobusiness
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