Today David Uren noted the comments made by the Governor of the RBA in New York last week that it was time for governments to do more as monetary policy (cutting interest rates and make debt cheap) was reaching its limits.

Uren noted that

“… Since the Reserve started cutting rates on the eve of the global financial crisis in late 2008, household debts have risen by 50 per cent to $1.6 trillion. While that has encouraged a wave of housing construction, it has left households more heavily indebted than almost­ anywhere else in the world. The Reserve Bank would be nervous about stimulating a fresh wave of borrowing….”

As the Governor does not support more extraordinary forms of monetary policy measures by Central Banks such as “helicopter money” (where the Central Banks issue cash splashes direct to households) this leaves government fiscal policy as a possible alternative.

Or what a sub-editor at the Oz described as the RBA being “Ready to hand back rates baton”  – even if that is not what the RBA said at all.

There is a clear connection between this article and the debate about negative gearing and the massive foreign debt driven speculation in the price of existing housing.

Negative gearing and even the CGT discount are largely red herrings as neither would be an issue if the RBA did not drive down the target rate and APRA did not facilitate low mortgage rates by allowing our banks to build massive external liabilities and dependence on foreign cheap ZIRP/NIRP capital flows.

Furthermore, even if the changes to negative gearing and CGT proposed by the ALP are made they will not result in a fall in house prices if the RBA and APRA remain determined to drive credit creation in the direction of housing either with lower “bait rates” or relaxation of directions regarding who can borrow, how much, when and for what.

In other words our housing bubble and the masses of household debt that it is built on are the direct result of the out of control credit creation that has been driven by the RBA target rates and APRA regulation of Australian Banking.  They control the levers and set them to “maximum household debt”.

Restrict the hot Bank Money being sprayed by our banks (with the approval of the RBA and APRA) at existing housing and the issues of negative gearing and abnormal capital gains on property will quickly fade in significance. People do not speculate on capital gains if the supply of credit (Bank Money) that is driving them is reduced.

Even at record low rates of interest too much debt is deflationary as the interest is not created when the debt (aka Bank Money) is created and must be acquired by the borrower from the Bank Money that is created by other bank lending to other customers.

Ultimately this hunt for Bank Money to pay interest weakens demand and is deflationary – even when interest rates are at rock bottom. That is why the rate cuts of the RBA give a sugar hit (when the new wave of Bank lending / money creation hits the economy) but the effect fades and even juicier “bait rates” are required.

While Governor Glen is correct and fiscal policy is the answer the objective should be to leave more money in wallets via tax cuts with the resulting deficits funded, in part, directly and interest free by the RBA.

This is easily done by having the RBA purchase some special edition non-transferable 0% 10 year bonds directly from the AOFM.   The Australian Office of Financial Management is the mob who flog government bonds on behalf of the government.

Certainly there are some infrastructure projects that Canberra could fund and the inland freight railway connecting Brisbane to Melbourne is one.   Completing the NBN (FTTN, FTTH, FTTC or whatever is your fancy) faster than a drunken slug might be another.  Funding health and education would be others. However, pollies are too good at ignoring the best projects, for dumb white elephants, for the economy to rely on fiscal expenditure decisions made by pollies.

Australian households are quite capable of working out how to use a few more dollars left in their wallets as a result of tax cuts.  They can decide if they want to spend it on toll roads, holidays, child care, education, a yoga class, a safer car, healthier food etc. An increase in the tax free threshold would be the simplest and fairest approach as it would encourage more people especially low income earners to work a bit more and let them keep more of what they earn.  Those on income support due to an incapacity to work might be given a few more dollars as well.

As demand responds to this additional spending power in the community and excess capacity  (unemployment, idle factories etc) are put to good use (jobs, factories making stuff, services being served etc) interest rates can be normalised (and that means slowly increased).  Normalising interest rates will assist the deleveraging process (as people will try to repay their debts faster and borrow less) and most importantly households will have the money (from the tax cuts) to do so.

Oh and if it wasn’t obvious – APRA would be required to direct the banks so that they don’t try and offset the normalising mortgage rates with boat loads of ZIRP/NIRP capital from offshore and drive another house price / household debt bubble.

THE ONLY THING standing in the way is that the RBA must be authorised by the government to buy some special edition non-transferable Australian Government 0% bonds directly from the AOFM.

And yes the reason they do not already have this authority should be something the Banking Royal Commission investigates.

Call them something sexy Mr Morrison “Eureka ‘Golden Kangaroo’ Democracy Bonds” and announce them in next week’s budget speech along with the increase in the tax free threshold that they will fund.

Then even the Glass Pyramid will be happy to applaud you for some brave reform,