Treasurer Watch: Mr Morrison can save Australia – a 3 Step Plan

Due to the sudden ascension of Mr Morrison into the position of “Treasurer of Australia”, the Glass Pyramid has been forced over the last week or so to recycle some briefing papers that TGP operatives had prepared for the previous guardian of the commonwealth coin jar:

While the TGP is confident that Mr Morrison will have appreciated the spirit in which those ‘old’ papers were offered, and will have spent many a moment highlighting them and scribbling notes in the margins while being whisked to and from the studios of 2GB, TGP operatives felt that it was time to put together a more personalised briefing note for Mr Morrison that might appeal to his preference for punchy, positive plans for action and would be likely to lift spirits across Australia – or at least from Heathcote to Tom Ugly’s Bridge.

Mr Morrison’s 3 Step Plan to save Australia

So here it is  – a simple 3 Step Plan to save Australia – economically speaking.

Step 1      Start restricting unproductive capital inflows

Step 2      Support economic activity with across the board “Debt Free” tax cuts.

Step 3      In return for the tax cuts demand reform of major markets and industries that                    are full of rent seekers and pork.

Now while Mr Morrison will be already nodding furiously, having read closely all of Mr Hockey’s probably still unmarked TGP briefing papers, for the benefit of other readers an explanation of each step will be provided.

Step 1     Start restricting unproductive capital inflows.

This is probably the hardest one for many Australians to get their head around because for decades Aussie boof head economists (and many pollies in the LNP and the ALP) have been telling everyone that endless inflows of foreign capital are marvelous and the essence of what it means to be Australian.

They think there is nothing odd at all about poor developing countries with per capita incomes a fraction of ours rushing to export capital to Australia – one of the wealthiest developed countries on the planet nor anything dangerous about gobbling down the hot money flows from the currency warriors and our mercantlist trade rivals (Hi Korea, Japan, China, Europe!).

Unfortunately, that blanket advice was and remains wrong because all capital flows are NOT created equal and there is a very important distinction between productive and unproductive capital inflows.

Unproductive capital inflows rot our economic teeth to their black stumps as they bloat the exchange rate, do little to add to the productive capacity of the economy and help close down what little productive capacity there is remaining or transfer it into foreign ownership.

At the risk of repetition – unproductive inflows do NOT add to the productive capacity of Australia as they largely consist of acquiring ownership of existing assets – residential houses, agricultural land, companies and industries – and ownership of public and private IOUs  (i.e. Foreign debt aka claims on our future income).

Sure, a bunch of apologists keen to sell off Oz as fast as possible (Hello Mr Robb! but sadly many in the ALP right wing are very keen on this as well – they seem to think it is part of being ‘economically modern’) will argue that merely having “smart foreigners” own our existing assets is likely to increase their productivity. (Note: when it comes to agricultural land this infers that our farmers really don’t know what they have been doing for the last couple of hundred years)

But the truth is, that if a foreign investor is really smart and really productive they should be quite capable of creating new assets in Australia from scratch (as ALDI and others have done) and thereby expand Australia’s productive capacity instead of just acquiring ownership of what someone else has already built and then start channeling the profits off shore.

By contrast productive capital inflows are capital flows that result in a clear and direct increase in the productive capacity of the Australian economy.  Some examples include:

  • Aldi building hundreds of new supermarkets, distribution systems and supporting local production and competition for Coles and Woolies,
  • Foreign car manufacturers building new factories so that we can build new cars in Australia and in doing so generate opportunities for hundreds of smaller companies
  • People importing and establishing new plant and equipment
  • People constructing new commodtiy production facilities – mines and ports
  • People importing new production processes – education and training systems
  • People constructing NEW housing and commercial buildings (without borrowing the money from our own banks!)

Sadly, these productive capital inflows are now few and far between.

It is worth remembering that in a rich country like Australia that already has oodles of capital, the best form of capital inflow does not involve money at all, instead it is an inflow of smart capable people keen to be productive and build a future for themselves and their families.  So let in the hungry and smart (as against rich “hot money” holders on golden ticket SIVs) if we are serious about building our productive capacity and let them loose on the abundant capital that we already have available ($2T in super remember) and is currently being sunk uselessly into existing real estate prices and/or shares issued by our bloated FIRE sector.

A good thing about productive inflows is that they are relatively easy to identify and monitor. A person or company keen to export productive capital to Australia should be able to produce a business plan that demonstrates clearly what capital will be exported to Australia and what it will be directed to.   Checking by the FIRB (or someone competent) to ensure that they delivered on their business plan will not be difficult as it largely involves observing ‘facts on the ground’.

How to reduce the unproductive capital inflows but continue to encourage productive inflows?

Okay so now that the distinction between productive and unproductive capital inflows is clear,  how does Mr Morrison reduce the unproductive capital inflows but continue to encourage productive inflows?

EASY – he needs to start by restricting the most clearly unproductive inflows and the top three in rough order of priority.

  1. Foreign wholesale borrowing for residential mortgages – Borrowing hundreds of billions from foreigners to bid up the prices of existing Oz housing is such a dud idea it is unbelievable that we ever allowed it. That we even offer a taxpayer guarantee for the borrowing is simply loony-tunes stuff.   Immediately direct APRA to direct the banks to wind down ALL offshore wholesale borrowing related to residential mortgage lending to zero over the next 7 years.  As the current level is approximately 35-40% (circa $300 – $400 billion) that means reducing it by about 5% per year for the next 7 years.  The reason for this measure is simple.  While relying on the saving habits (or QE funny money) of foreigners allows for lower local mortgage rates for a given RBA target rate, doing so bloats the exchange rate and makes it more difficult for local companies to export or compete with imports.  Most Australians do not have the foggiest idea that the price of a cheap mega mortgage is a car industry and many other industries heading down the toilet.
  2. Registration of ownership of Govt Securities – Introduce a system of registered Commonwealth govt securities and restrict ownership (and beneficial ownership) of them to locals (preferably resident individuals).  The best way of limiting excessive issuance of govt interest bearing debt is to force them to sell it to the people who vote for them – instead of off shore parties who are eager to use purchases as a tool for currency manipulation.  The willingness of the public (and the SMSF) to buy the bonds should be a healthy constraint on irresponsible government borrowing and any interest paid stays in Australia (again SMSF would love that). But more importantly the problem when government securities are sold to foreigners is that the sales bloat the exchange rate and therefore make it more difficult for local companies to export or compete with imports.  This one should be a no brainer for any red blooded conservative who dislikes the idea of government debt at the best of times.
  3. Mere transfer of asset ownership to foreign buyers – Direct the FIRB to block ANY foreign investment in existing assets where there is no clear business plan that demonstrates how the productive capacity of the acquired assets will be improved by the foreign capital inflows/ownership. And where that can be shown there must be supplied the KPI’s by which that improvement will be measured. In the event that the KPIs are not achieved the foreign investor will be required to divest themselves of the asset to a local buyer within a set period. Vague promises that the new foreign owners of an asset will “achieve synergies” or sprinkle entrepreneurial “pixie dust” will not cut it.  Just acquiring ownership is NOT sufficient.  Preferably they would also be limited to joint ventures with local company to ensure technology and skills transfers take place. Just like China has done for the last 40 years and Japan did during most of its economic development.

If some of these measures sound unusual, a recent example of the current government making moves in the right direction was Mr Hockey (and Ms O’Dwyer) setting up an ATO task force to police the rules against foreigners buying existing residential housing assets and limiting them to acquiring brand new housing assets.

This was an example of an Australian government regulating capital inflows to encourage more productive capital inflows. Though the loophole allowing temporary residents like university students to buy multi-million dollar existing housing to “study” in needs fixing – after all we do have a world leading investor rental market hungry for short term tenants and that should be good enough for 95% of foreign students.

What is the catch?

There is a catch and it is important to warn Mr Morrison so that he is prepared to deal with the Orc army of bank economists and their economic commentary buddies who will proclaim the end of times if any of the above is attempted.

The catch is that the above measures are likely to have two main impacts – both healthy but there will be an adjustment period.  The nature of the impact depends on the speed at which the above measures are implemented – but a slow and careful introduction is completely feasible if you are bit unsure how to start.

For example:

You might just start by telling APRA to tell the banks to reduce their dependence on wholesale lending by just 5% and then another 5% etc etc OR you could start by making a single issue of govt securities local owner registered (those SMSF votes are up for grabs!)

  1. Impact 1 – The exchange rate will descend as the unproductive capital inflows that are bloating it start to reduce.   This ‘impact’ is not an occasion for hysterics because all the exchange rate will be doing is moving closer to what it should be, having regard to our trading performance.    An exchange rate that is bloated by selling off our assets and claims on our future income is not something that produces a promising future for our children – even it feels good for the present generation.   As the exchange rate starts to drift downwards local companies will find they are more competitive as exporters and also more able to compete against imports – without any need for tariffs.  In fact, as exporting capital to Australia is the No 1 technique of currency warriors and our trade rivals – winding down their unproductive capital exports to Australia really means we are just reducing the effective exchange rate tariff our trade competitors are placing on our economy. Note: There is nothing wrong with a high exchange rate if it is the result of superior trade performance. But if you have a high exchange rate simply because you are selling off your assets and claims on your future income to foreigners you are on the fast track to becoming a banana republic.
  2. Impact 2 – Mortgage interest rates for a given RBA target rate will be higher – This is the one that will really upset the Orc Army as higher mortgage interest rates means less demand for the debt that the banks love peddling.  So you can expect they will wail loudly about the four horsemen of the apocalypse rushing through the glen just as they do in response to any suggestion they should have more capital backing for their Zeppelin sized mortgage books.  As the mothership for the domestic bank cartel, the RBA may also be concerned, as when the RBA says they are cutting “rates” to “support” economic activity, what they really mean is that the hunger of households for more debt is showing signs of waning and they are going to put a bit more honey on the debt contracts to get the unsuspecting to sign-up for 30 years of lifestyle management.

In fact the upward pressure on mortgage interest rates for a given RBA target rate, of the above measures, will be the toughest bit to manage and if it was anyone less courageous and determined than Mr Morrison the TGP might think the mission to be impossible. It is worth remember that it was Mr Howard and Mr Costello who started the whole “ interest rates will always be lower..” mania for driving down mortgage interest rates with massive increases in unproductive capital inflows.

Fortunately, for this battle you will not need to rely on your Shire baked intestinal fortitude alone as Step 2 of the Plan will sooth any members of the public frightened by the hysterics of the private bank bonus hunters.

Step 2      Support economic activity with across the board “Debt Free” tax cuts.

It is critical that as mortgage rates (for any given RBA target rate) rise as a result of Step 1 (kicking the addiction to foreign debt and foreign ownership), plenty of soothing economic ointment is applied and there is no economic ointment more soothing than tax cuts that are manifestly fair and equitable.  Broadly based “Debt Free” tax cuts are far more equitable than having the RBA may offsetting cuts to the target rate.

Important – This step is NOT optional as due to our fundamentally unsound debt driven monetary system rising debt is critical to economic activity and any slowing of the credit (new money) creation process or deleveraging due to higher rates will definitely slow the economy unless a substitute source of new money is created.  

The simplest approach to applying economic ointment is to increase the tax free threshold substantially as that means that everyone who gets out of bed and earns a wage will have more money in their pocket every week and they can apply some of that bounty to meeting their debts (subject to slightly higher rates).  Those who prudently stayed clear of the debt frenzy of the last 20 years will be free to do whatever they wish with their fatter wallets.

Politically this will be simply wonderful – all those happy workers will be most grateful for the extra cash.

Flawse – just in case you have read this far – re our discussion the other day concerning QE – the exchange rate will now be lower due to Step 1 so this ‘free money’ is much more likely to be spent at home as imports will be more expensive (and if they do buy some imports it will drive the exchange rate lower quickly because the unproductive capital inflows were stopped in Step 1)

Sorry I digress Mr Morrison.

In the interest of equity you should also top up income support payments for the elderly and jobless and those on disability etc.

Again politically this will be simply wonderful – all those happy grey beards and job hunters will be most grateful for the extra cash.  What’s more as the cash is spent the numbers of job less will start to fall.

What’s the bit about “Debt Free” – Where does the money for tax cuts come from?

Good question.

How that works is as follows. You will buy some quality paper stock and using a nice font print up a special bond entitled “Golden Kanga – Nation Building Bond – Non-Transferable 0%  – Face Value $1 billion “.

You (or the AOFM) will then hand this Golden Kanga Bond (or as many as you need) to Governor Glenn of the RBA and request him to top up the Treasury ES account at the RBA.  Gov Glenn then makes an accounting entry crediting the Treasury ES account for $1 billion and debiting the RBA Golden Kanga asset account for $1 billion.

A few key strokes and you can start cutting those taxes!

As it is non-transferable, Gov Glenn cannot sell the Golden Kangas to anyone and as it pays no interest it doesn’t matter when you pay it back.  Although technically it would be a ‘debt’ as a bond is an obligation, the fact it pays no interest and does not compel payment at any point renders the issue somewhat moot.  But as everyone will feel much better knowing the RBA bought a “bond” rather than just gave you the money, please take the time and draw up a nice Golden Kanga bond – could be a nice project for your kids after school or some unpaid intern in your office.

Now of course you cannot get carried away – if you cut taxes too much and cause too much money to fatten citizen’s wallets and they start buying too many lattes, yoga classes, renovation seminars, beard trims, kale shakes, dinners, school fees, holidays in Bundeena etc – there could be a problem with inflation as economic activity (and employment) takes off.

And yes!  We know you believe we have a spending problem not a taxing problem so feel free to knock your self out cutting the abundant pork and waste from govt expenditures. It will mean that you can print a few less Golden Kanga bonds for Governor Glenn if you make some solid savings but don’t kid yourself that cutting expenditure will be enough.  The savings will be no match for the Debt Deflation rays that will be emitted as the process of deleveraging the massive household and interest bearing public debt gets underway.  Plus how much fun is it cutting dole checks and pensions anyway.

But let us not get ahead of ourselves and jump at shadows. Remember the Orc Army will be wailing loudly about the economy being crippled by higher mortgage rates. So for the most part it is likely that much of the additional money in the economy as result of your splendid tax cuts will, accordingly to the logic of the Orc Army, be used to pay down mortgages (as nothing encourages people to pay down their debts faster and avoid new ones than higher mortgage rates combined with the cash to pay them).

What is likely is that the higher mortgage rates caused by Step 1 will induce some deleveraging or slowing credit creation and thereby absorb a good chunk of your splendid tax cuts. So for the most part they will allow for a rapid deleveraging of the household debt levels without driving the economy into a debt deflation spiral.  The tax cuts combined with higher mortgage rates will help get households off the “debt” junky lifestyle without causing a recession.

But not all people are debt serfs so there will still plenty of tax cut money sloshing around producing employment and encouraging confidence in business. If inflation does become a potential problem the RBA are more than capable of helping out by raising the target rate and pushing up the mortgage rates even higher and thereby soak up a bit more cash and thus also speeding up the deleveraging process.

The best way to think of the process outlined above is that Step 1 is the withdrawal of the drug of addiction (unproductive capital and foreign “hot money” interest rates) and Step 2 is the application of methadone to reduce the pain of withdrawal.

Oh and in case you think that this sounds like “printing money” to fund a fiscal deficit then remember it is not that much different to what already happens when a government runs a deficit in an interest rate targeting regime like the one we have.

Although the process is concealed, the RBA effectively prints most of the money required by a fiscal deficit already (by doing OMOs when banks buy AOFM issues) as otherwise the AOFM selling government securities to fund a deficit would mess up the RBA target rate.

Why tax cuts and not a huge program of pork / “infrastructure”?

The advantage of tax cuts is that it allows people the freedom to decide how to spend their own money without the know-alls of the political and public service trying to pick winners.  Plus tax cuts means there is little risk of being called a big government socialist by the extremists in the party room.

Sure if you have some wonderfully useful bit of infrastructure in mind (say housing related infrastructure to boost new housing supply) you could spend a bit on that but remember Mr Morrison, you are a conservative and you don’t like big government so don’t go blowing cash on a few extra submarines or new uniforms for Mr Dutton’s Night’s Watch

Getting the banks on the leash.

Probably one of the worst public policy decisions ever made was to give private banks, who engage in the fraud of lending deposits, for term, that they have accepted after giving a promise to the depositor they would be available at call, the protection of the taxpayer (in the form of the RBA).

A much more sensible solution, than turning them into Too Big Too Fail bonus hunters, would have been to require that banks simply DO NOT engage in the fraud that throughout history has resulted in bank runs – as depositors (hearing a rumor on morning radio) all turn up at the branches seeking to withdraw their “at call deposits” only to find they were not available “at call” at all.

While curing that particular problem should be high on your “Save Australia” bucket list for the purpose of this paper the TGP simply recommends that Step 2 would be an excellent opportunity to put their banks back on the leash by re-introducing reserve requirements.

Plus if you get concerned that you may have got a little carried away with the tax cuts or you find that people are getting a bit light headed you (or APRA) can crank up the reserve requirements by a percentage point or two and force the banks to extract some of the extra money floating around the economy.   As the reserve requirements are currently zero % and APRA’s capital requirements are as weak as low alcohol beer there is plenty of room to work using that tool.

Getting the reserve requirements up to 100% would be a worthwhile medium term objective as at that point the banks would be nice and safe and would be only lending on terms consistent with the terms on which they accepted deposits.

Step 3      In return for the tax cuts, demand reform of major markets and industries that are full of rent seekers and pork.

While the “Debt Free” tax cuts in Step 2 were intended to ease the potential squeeze resulting from the Step 1 – kicking the unproductive capital inflows process, there is no harm in telling people that the tax cuts are really about stimulating the economy and giving everyone a reason to get out of bed.

While the populace are in an appreciative mood it will be a good time to get started on the real reform of shaking up the rent seekers and lazy and un-competitive markets.  It is beyond the scope of this briefing paper to list and discuss them all but I am sure you can think of as many as we can (browse around previous TGP posts for some ideas).

Here are few of the most obvious:

  • Free up Land supply in all of the states – good to hear you are champing at the bit to get stuck into this one.  This paper is particular good on the subject.
  • Zoning of land to be used for business related purposes – too often this is now used by existing businesses to block new entrants.
  • Remove some of the excesses involved in superannuation and the CGT discount.
  • Introduce a modest commonwealth land tax to fund housing related infrastructure or legislate a system of MUD bonds.
  • Medical and other professions – erecting barriers to entry in the ‘name of consumer protection’
  • Market concentration – the job of government should be to force as much competition as possible into the market. If it is good enough for workers to fight tooth and nail for jobs against competition across the nation (and thanks to Mr Robb from across the globe) it is good enough for business.  No more of that rubbish from Mr Robb that oligopolies and business cartels are some how good for us.  It is time to bust up a bunch of the competitive market smothering cozy duopolies and force some divestment.
  • Crooked and undemocratic unions – term limits for union leadership are likely to be as effective as limited terms for US presidents in reducing the considerable power of incumbency.  The more union members who get experienced in leadership positions the better the union movement will be. While the dangers of unions are always beaten up by conservatives the TGP appreciates that you will need to throw the IPA boys in your policy centre a bone or two.


So there you have it Mr Morrison, a simple 3 Step Plan that will allow you to save Australia and take the title of Australia’s greatest treasurer.

And the best part of all is that you can execute this plan and remain true to your small government preferences and traditional liberal party instincts of encouraging enterprise, innovation and hard work rather than the lazy indulgences involved in a nation living off asset sales and foreign debt.

PS:   Mr Shorten and Mr Di Natale

The plan can work just as well for your respective parties but you will probably prefer to use more of the “Debt Free” money created in Step 2 for national building projects selected by technocrats than for tax cuts.   The mix is up to you!

Categories: Macrobusiness

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