Green Watch: A new leader? – An opportunity for a new Green economic agenda.


In the main quadrangle of the Glass Pyramid lies a fountain fed by an underground spring. As the waters seem likely to run forever it was decided by the ground keepers to call the fountain ‘Hope’.

That ground keeper “dad joke” comes to mind when considering the approach to economics by the ‘progressive’ Green Party. Surely a party that claims to be progressive will one day adopt an approach to economics that is truly progressive and not just a grab bag collection of ‘tie-dyed’ and ‘found’ policies that invariably catch smirks inside the metropolitan city limits (outside of inner-urban villages that is).

With Richard di Natale’s ascension into … the Green leadership suite there is a wonderful opportunity for the Greens to adopt an economic narrative and agenda that is not only truly progressive but will make it much more likely that their more organic “Nimbin Ready” policies will catch on outside the warp and weft collectives.

As an eager supplier of free unsolicited advice the Glass Pyramid “Gardening Club” offers the following program to the Greens.

Progressive political parties and other social justice organisations must understand that unproductive international capital flows are at the core of most of the problems they are seeking to address.

It does not matter what your ‘progressive’ social agenda entails you will get NOWHERE unless you understand how ‘unproductive’ international capital flows are the fundamental driver of most of the problems you are seeking to overcome.

Yes, mere mention of the words ‘unproductive capital flows’ is enough to make most eyes glaze over instantly but it is actually a very simple issue and after a few paragraphs the penny should start to drop.

“….Over the last few decades, our economic system evolved into the ultimate exploitation machine: Rich people in the West exploit ordinary people in the West who with their consumerist lifestyle exploit poor people in Asia/Africa and we all together exploit natural resources on this planet to the brink of existence…”     doctorX

doctorX nails the problem but what is the primary mechanism that has produced this outcome (and most importantly what is the method by which the average and generally well meaning voter in Oz, USA and other Western Countries etc agrees to a process that is undermining their future economic prosperity but also the sustained prosperity of developing countries).

It is simple – unregulated unproductive capital flows which are primarily about manipulation of relative exchange rates between countries and not about productive investment.  By manipulating the capital flows the relative exchange rates between countries are distorted.

In basic terms this effectively means that the cost of labour in one country is pushed below what it would otherwise be as a result of that country’s trade performance and in the second country the cost of labour is pushed above what it would otherwise be as a result of that second countries trade performance.

Only by continuing the unproductive and unregulated capital flows between countries can the distortion of the relative exchange rates be maintained.

Critically, this is not a one sided ‘currency war’ as it is simply not possible for a country seeking to manipulate relative exchange rates to succeed unless the target of the manipulation accepts unproductive capital inflows from the country doing the manipulation.

That means that you cannot be a victim of a “currency warrior” nation unless you let it happen by failing to regulate the unproductive capital inflows they use to manipulate the relative exchange rates.

A reverse tariff

When a currency manipulator exports capital to Australia it is effectively placing a tariff on all Australia exports and workers.  It doesn’t matter if they agree to reduce their actual tariffs to zero (which they rarely do anyway) if they are putting an effective tariff on every Australian worker by manipulating our relative exchange rates.

So why would a country be willing to be a recipient of unproductive capital inflows? Why would it allow another country to manipulate the relative exchange rates?

The country seeking to drive down the relative exchange rate (by exporting capital) gets the benefit of extra competitiveness because depressing their currency effectively holds down their workers income – their workers get richer slower than they should but as they are still getting a bit richer it has some attraction for those workers (but they do have a vague feeling that they are not getting richer as fast they should be).

However the country accepting the unproductive capital inflows also gets something. Its citizens get an inflated exchange rate that gives them more purchasing power – i.e they can buy more imports. But this extra purchasing power is not from a magic pudding – it comes at a cost – they must issue IOUs for the unproductive capital inflows AND/OR they must sell assets.

By now you may see where this is going.

Western politicians love a policy (or economic theory) of selling IOUs and assets off-shore because it inflates the exchange rate above what it should otherwise be and gives their citizens more purchasing power. They get to be Santa Claus without doing anything. Who wants to deny their ‘voters’ a bit more time running up the credit card by regulating the process by restricting unproductive capital inflows. The problem of too many assets being sold off shore or too many IOUs being issued is going to be a problem for your political successor.

It is no surprise that lazy Joe Hockey and the lazier Mr Andrew Robb are both extolling the virtues of households running up debts (35-40% of that is off-shore) and flogging off assets in chunks of $1B at a time and selling Govt Bonds to foreigners as quick as they can be printed.

Providing the mechanism I have described above is not discussed by politicians (or mainstream economic commentators) the voters do not even realize that the greater spending power of a bloated exchange rate is not a magic pudding at all – they simply don’t understand that their fake ‘affluence’ has a real and serious price – they are giving up

  • local production,
  • local jobs of all shapes and sizes that suit the mix of skills and attributes of many in the work force.
  • a more balanced economy,
  • an unencumbered economic future for their children and the national as a whole.

Thus they do not resist and instead continue to support politicians who are taking the easy and lazy option and assuring them that an expanding foreign debt (public and private) and off shore asset sales and unrestricted unproductive capital inflows are no problem at all.

If you think we have a consumerist society that seems obsessed by flim flam and living beyond its means – there is a reason for that.  We have one!

The advantage for the currency manipulator nation is also clear – the owners of the export orientated industries in that country that benefit from the manipulation get to keep the advantage if the manipulation continues. Currency manipulation is NOT in the interests of their work forces nor the general citizens of those countries as it slows the growth of their incomes – which in turn prevents the development of a more balanced economy that comes with greater income in the hands of workers and citizens generally.

It is important to note that restricting unproductive capital flows designed to manipulate relative exchange rates does not prevent investment and development in developing countries as their initial lower wage rates really do give them a competitive advantage. However, that advantage should naturally dissipate as their incomes rise from trade. The problem is when their natural competitive advantage of lower cost labour is augmented or rendered permanent by ongoing currency manipulation which is achieved when their countries export capital rather than allow the incomes of their workers to naturally rise.

If you think that workers in developing countries do not seem to be earning the full income that their labour would seem to warrant – there is a reason for that. They are not.

In summary the two sides of the unregulated unproductive capital flows mechanism works as follows:

  1. Western citizens get the benefit of higher incomes than their trade performance warrants but at the cost of selling off their assets and issuing IOUs to the currency manipulators.  They are living on credit but they don’t really understand that.
  2. Developing country citizens do not get the incomes their trading performance warrants because their nations are exporting capital but because their incomes are somewhat higher they tolerate the situation.  Instead of a sandwich they are told to be happy with slightly larger crumbs.

There is simply no need for capital movements that are not productive.

Developing countries already have the competitive advantage of lower wages. When those countries export capital back to the developed world (incidentally the idea of developing countries exporting capital should immediately be ringing bells as should the loonier idea that a rich country like Australia should be importing capital hand over fist and using it to fund consumption) they are simply suppressing the rise in the incomes of their workers which should be taking place as their exports to other countries increase.

Is it a conspiracy?

I don’t think there is any real conspiracy involved here. It has arisen because western voters are easily persuaded to vote for politicians who promise a lifestyle that is paid for by tomorrow (or by asset sales) and workers in many of the developing countries have little real say in the matter or are equally unaware of the extent to which they are getting ripped off (because their incomes are rising just more slowly than they should be) when their leaders (responding to the demands of the owners of the export orientated industries) continue to export capital and manipulate relative exchange rates.

The one area which attracts the tin-foil brigade, but is really just a case of lots of people with an interest in the status quo all piling on, is the mainstream economic commentary. Most of that commentary supports unregulated capital flows or fails to promote any discussion of them, this is not surprising as most of those commentators are either paid directly by or via the advertising income received by their employers from the chief beneficiaries of the status quo – namely the Finance, Insurance and Real Estate industries (FIRE).   Furthermore, the various ticket clippers and professional service providers to those industrie are also keen to ‘talk up’ unregulated capital flows as being as natural as mother’s milk.

As is so often the case when you desperately want to prove that the thing that pays your salary is great – facile theories are trundled out by current and former bank economists via their advertising journals (aka the main stream press) to defend the lack of regulation surrounding unproductive international capital flows.

When it comes to Australia the dumbest idea that is rolled out – even by people who should know better (certain members of the ALP) – is that it is Australia’s destiny to be a net importer of capital.   Trying to turn the acceptance of unproductive capital inflows by Australia into some sort of natural law is as about as brazen as it gets.  But that is just self- interest, stupidity and ignorance rather than a conspiracy in action.


The solution is simple and entirely within our power.

Start regulating/restricting the worst and most obviously unproductive capital inflows into Australia.

As noted above the currency manipulator countries cannot manipulate the relative exchange rates unless we allow them to export to Australia unproductive capital.

So what regulation and unproductive capital inflows are we talking about?

1.       Restrict the sale of government securities to off shore parties. Buying truck loads of Australian Government securities is the simplest way for a currency manipulator to drive up the Australian Dollar.

2.       Restrict the sale of certain classes of IOUs to off-shore/foreign buyers. – The most obvious class to start with are the hundred of billions of IOUs that our private banks are issuing to foreign buyers to support their domestic residential mortgage operations. As they are also taxpayer guaranteed they are little more than a variety of Government security.  It is simply absurd that Australians are borrowing from foreigners in developing countries to build our shelters and to engage in moronic house price bidding wars.

3.       Restrict the sale of large assets to off shore buyers when the sale is a mere transfer of ownership and does not involve any real or serious business plan for increasing the productive capacity of those assets. Examples of such sales including most agricultural land where the use of the land is unlikely to change or become more productive and the sale of large industrial assets and businesses which are already operating efficiently and effectively. If a foreigner wishes to build new productive assets in Australia as against merely acquire them they should be encouraged – preferably in joint ventures with local companies as is done by China, Japan and other countries who understand the importance of only allowing productive capital inflows.

The great thing about the above measures is that they all can be introduced gradually and allow the economy to be ‘weaned’ off its addiction to a life style funded by selling IOUs and assets to foreigners and exchange rate manipulators.

Introducing a system of registered ownership of Government Securities is no more difficult than the current system for registered ownership of land. The owner of a bond is registered by the government and ownership of bonds is increasingly restricted to Australians by making the restriction apply to new bond issues.  Trading of bonds will simply will involve the notification of a transfer of title and in the age of computers that will be no issue.

APRA has more than enough power to direct the banks to start winding down their use of IOUs sold to foreigners to support their residential mortgage operations. Currently our banks are using 35-40% off shore debt to fund the great Aussie housing asset ponzi scheme.

Between our governments flogging IOUs to foreigners and our banks flogging (effectively government backed) IOUs to foreigners we are talking well north of $500B. Think about that when Joe talks about his budget deficit this week and ask yourself which foreign exchange rate manipulator will he be flogging off the bonds to.

The FIRB should ban off shore sales of certain classes of assets and for others demand detailed business plans for any proposed sale of assets above a certain value to ensure that those plans demonstrate a clear plan to increase the productive capacity of those assets.  A failure to execute those plans may involve penalties or other sanctions. If this sounds a bit radical keep in mind that the exchange rate manipulator nations generally have extremely tight restrictions on ANY foreign purchase of their assets – their logic is straight forward – there not much point trying manipulate exchange rates by exporting capital if you are going to allow imports of unproductive capital to your country.


  1. If they are concerned about attacking the root of the problem.
  2. If they are concerned about claims that we have to extract and sell our mineral and other non-renewable “assets” as fast as possible to maintain our lifestyle.
  3. If they are concerned that claim No 1 (we need to dig up resources) is why some people argue against the notion that humans have an impact on the environment.
  4. If they are concerned about claims that we have no choice but to extract and sell assets from our wilderness areas and national parks to maintain our lifestyle.
  5. If they are concerned about an economy where a range of industries and jobs that suit a broad range of individuals are rendered extinct due to exchange rate manipulations.
  6. If they are concerned about workers in other countries being denied the increase in their incomes that their trade performance warrants.
  7. If they are concerned about the working conditions of workers in countries that have a limited ability to improve their working conditions due to authoritarian government
  8. If they are concerned about the environmental impact of sending manufacturing to countries where there is limited ability to ensure that it is conducted in an environmentally safe manner.
  9. If they are concerned about an unbalanced economy dependent on debt and asset sales
  10. If they are concerned about leaving their children and their grand children a nation where critical economic assets have been sold offshore and massive foreign debts have been incurred.

There you go Mr Di Natale – a new Green economic agenda for a new leadership that directly benefits a broad cross section of middle and low income earners, is economically responsible and reduces the economic imbalances that contribute to an unsustainable model of economic development.

By the way Bill Shorten it would work wonders for you as well if you have any interest in the ALP regaining the reputation it once had for sober and sensible economic reform

In fact it should work well for any politician who considers the long term interest of Australia and its people to be their objective.

Categories: Macrobusiness

10 replies »

  1. I don’t remember if we already covered this so I apologise if we have. You you seem to be blaming the capital flows for the subsequent unproductive investments. What if the capital flows were channelled to productive uses? Things like infrastructure, education etc. Then the capital flows would be beneficial. Thus it is not the capital flow that is bad, but how the recipients use that capital which determines a beneficial or detrimental outcome.

    In Australia’s case, the restrictions on the development of land and the banking regulatory regime result in a housing bubble financed by foreign capital.

    Hopefully you can see where I’m going with this. I would blame the domestic regulatory structure and not the inflow of foreign capital.


    • Shervin,

      “…What if the capital flows were channelled to productive uses?..”

      Well then they would not be unproductive capital inflows. A capital inflow that is directed to increasing the productive capacity of the economy is not an unproductive capital inflow. The unproductive qualifier is critical because there are at least in theory productive capital inflows. Just not nearly as many as people think and in recent times they are the exception and not the rule.

      Most of the examples you give – infrastructure, education etc require little or no capital inflows at all. They are simply matters of allocating existing economic resources like labour and domestic materials to those tasks. Capital inflows do not increase the amount of those inputs. Certainly there may be some specialised items of equipment that may need to be imported to undertake some projects but they are chicken feed and in any event could easily be funded by export income.

      You identify one massive destination of unproductive capital inflows yourself. As you note Australian residential housing has been the destination of hundreds of billions of dollars of unproductive capital inflows that have done little other than to raise the prices of existing houses. Even if housing supply was less dysfunctional it is likely that unproductive capital inflows would still have pumped up prices more than they should be.

      I think in one of my earlier posts I mentioned an example of a good capital inflow. The development of the ALDI supermarket chain in Australia. ALDI, a German company has poured hundreds of millions of dollars into Australia but the key difference is that they built an entire chain of stores and distribution system, largely from the ground up. That investment clearly adds to the productive capacity of the economy – even if one remains stunned that Australian retail professionals were incapable of walking through a few ALDI stores in Europe and working out how to build a chain of successful discount grocery stores down under.

      So ALDI is both an example of a productive capital inflow and an example of just pathetic Australian have become at building new capital assets after decades of living off a diet of IOUs and asset sales (capital and non-renewable minerals)


      • It looks like we agree that the use of capital determines the productivity of the capital. It is not about the source of that capital (i.e. in this case foreigners saving more). Let’s say those polices you suggested were adopted. Restricting sale of government securities to offshore parties will reduce pressure on the exchange rate but it will also drive up interest costs for the government. Either higher taxes or less government spending will be the result.

        Restricting sale of bank IOUs to offshore/foreign savers – the banks would probably face higher interest costs but this would just mean domestic savers buy these bonds at better yields. Maybe the higher interest costs would reduce some of the unproductive investments but for the most part, the unproductive end-use does not change.

        In summary, the policies suggested would lead to a lower exchange rate, increase borrowing costs and little change in unproductive investments. Domestic savers are now financing the unproductive investments instead of foreign savers.


        • Your summary does not follow from your observations – unproductive investments of the type I have described simply will not arise.


      • To expand on that (i was on the move earlier).

        Yes we agree that that if capital is used productively it is productive.

        Yes if the government was to limit the sale of government bonds to Australian citizens it is likely that the proceeds of the auction of those bonds will be lower (higher yield). But it does not follow that higher taxes or less government spending will be the result as the government does not need to sell bonds to finance a deficit.

        The only constraint on the government directing the allocation of resources is the availability of unused capacity in the economy (labour and materials). With unemployment already at 6% and with prospects of rising as the mining CAPEX winds down a capacity constraint on government resource allocation is unlikely.

        However, as our government pretends that it is constrained in this regard the higher rates resulting from limiting bond sales to locals will mean that only the more productive potential projects by the government will remain viable. Less productive ‘investments’ are likely to reduce as a result. The inverted commas are required because a quick glance at the what the governments spends money on reveals most of it is consumption and not investment at all.

        Forcing the government to borrow from the people who elect it is much a healthier and more democratic approach than allowing a government to issue IOUs to foreign exchange rate manipulators who have an interest in using the purchase of government securities to distort exchange rates.

        If the banks ability to issue IOUs to offshore parties was restricted it would likely make it more difficult for them to hold down the interest rates on home mortgages but this is only because of the CAD. Without that the RBA could continue a low interest rate policy if it wanted to do so – at least until inflation started to rise and there remained demand for debt. As we have a CAD the effect of restricting certain types capital inflows will be higher interest rates but the result of those higher rates will be reduced unproductive investment in residential real estate.

        Yes the policies would lead to a lower exchange rate, at least until our export industries and importing competing industries re-establish themselves but as noted above the effect of restricting the unproductive inflows of capital is that the amount of unproductive investment is also reduced.

        And that assumes that government funding consumption spending with bonds sales or banks supporting, with IOUs sold offshore, mortgages applied to bidding up the prices of existing houses can rightly be called ‘investment’ at all.

        Keep in mind that the point of the exercise is not to drive the exchange rate down.

        The point of the exercise is to prevent the exchange rate manipulators from erecting an effective tariff on all Australian industry and workers.

        Australian workers and business will still need to work very hard to compete as many developing countries do have low cost labour and other factors as competitive advantages. What we are talking about is simply limiting them to those advantages and not allowing them to add exchange rate manipulation to the list.

        The hard part, as our discussions illustrate, is that it is difficult to explain why we need to discriminate when it comes to capital inflows between those that are productive and add to the productive capacity of the country and those that do not.

        When it comes to easy money and clocking up a bills that others will have to pay (future generations of Australian) it is easy to just say “more please”.


      • I largely agree on restricting foreign ownership of government securities given that most of it finances consumption. Another solution is taxing foreign purchases of Australian assets (an idea from Pettis. A wonderful read here:

        “As we have a CAD the effect of restricting certain types capital inflows will be higher interest rates but the result of those higher rates will be reduced unproductive investment in residential real estate.”

        Not just unproductive real estate investment but also productive bank lending. I don’t see how higher interest rates (due to restricting foreign investment in banks) would ONLY reduce unproductive investments in real estate yet leave productive investments unscathed.

        “we need to discriminate when it comes to capital inflows between those that are productive and add to the productive capacity of the country and those that do not.”

        That’s my point. It’s not the foreign investment that determines the unproductive use, it’s what investments the banks decide to finance. If the goal is to reduce unproductive investment, isn’t it better to change banking regulations (e.g. macroprudential tools) rather than regulate foreign capital flows?

        For example, if macroprudential tools were used to mandate all residential property loans require a 20% deposit or a more equitable option – if the risk weightings on mortgages were increased and risk weightings on business loans were decreased. Then is there any need to restrict foreign capital? (excluding the benefits from a reduced exchange rate)


      • Yes, that Pettis book is an excellent read, Thanks for the link.

        “…isn’t it better to change banking regulations (e.g. macroprudential tools) rather than regulate foreign capital flows?…”

        Well we are now in the same neighbourhood if not the same street.

        Macroprudential is effectively a form of capital controls. MP seeks to regulate (reduce) certain types of demand for credit and by doing so it may reduce the desire/need for banks to borrow off-shore. Where as highly selective capital controls of the type I have proposed (there are only three – govt bonds sold offshore, private banks IOUs relating to residential mortgages and certain types of asset ownership transfers) attack the problem more directly by restricting a couple of large but specific categories of transactions.

        The reason I prefer the idea of directly regulating the banks ability to borrow offshore for residential mortgage lending rather than allowing the ‘cheap money’ to continue to flow and trying to ‘manage’ who gets the cheap money is that you are likely to encourage an industry of lawyers and accountants who spend their time trying to find ways of allowing their clients access to money they are supposed to not have access to. Or worse the ‘management’ process actually limits access to the people who should have access. Considering there is no good reason why Australia needs to borrow off shore to for residential housing or government financed consumption I think the better approach is to simply stop doing it.

        Once the RBA target rate drops below 5% the idea that the price of debt is a barrier to productive investment (rather than asset price speculation) is debatable. Especially when the ‘price’ of obtaining those low rates is to effectively allow exchange rate manipulators to effectively erect (by inflating our exchange rate) a substantial tariff barrier across all Australian industry and workers.

        Plus I think you are over looking the point that the controls on unproductive capital flows I am proposing are very selective and are only targeting the three (and it is really only two as the banks borrowings for residential lending are effectively another form of government security due to the taxpayer guarantee) worst types of unproductive capital flow transactions. I am not proposing at this point that other forms of unproductive capital inflows be regulated so there will still be access to ‘cheap’ money for some – hopefully productive purposes.

        I hope that the measures proposed will be more than enough (due to the amounts of capital involved) and any additional controls on other classes of transactions would be a long way down the road.

        Simply weaning the country off the hundreds of billions of dollars borrowed for government consumption spending and for residential housing (especially just bidding up prices) and flogging off major assets (are there many left?) will take time as the adjustment may be slow (5-10 years).

        Thanks again for the comments – they are always a good opportunity to expand on and work through the issues.


  2. A lot of reading there for the typical Green – generally have preference for soundbutes and solemn faces.

    I think you’d have been good mates with BA Santamaria on matters of the economy. For mine the real problem is how to unwind the existing and partially exit global sphere. Too painful for the now living I reckon, understandably they’re the decision makers.


    • I am not across the BAS position on economics and international trade and capital movements but I doubt he would have been a man alone if he was skeptical about the ‘advantages’ of unregulated capital movements. I suspect that there would have been a quite a few who would now be saying “We told you so” if they are still walking the planet.

      In terms of sound bites I recommend:

      Competitive trade not the Free Trade myth

      Stop the exchange rate “tariff” on Australian workers and industry

      If Governments want to sell debt sell it to the people who vote for them.

      Leave the credit card at home tonight Australia


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