There has been a lot of talk recently about what the election of Donald Trump means for world trade.
During the US presidential campaign, Donald Trump suggested the solution lay in the imposition of tariffs on the exports of countries considered ‘trade manipulators’ and since the election the talk has continued.
It has not taken long for Australians to start to wonder what all this talk of “new” tariffs overseas may mean for Australian exports and jobs.
The problem is that thousands and thousands of Australian jobs have been destroyed over decades by a type of tariff on Australian production that few people understand and even fewer talk about.
This extremely damaging type of tariff has continued to cost Australians their jobs even as we entered a string of Free Trade Agreements that were intended to improve our access to foreign export markets.
The little discussed type of tariff that has destroyed so many Australian jobs is the “Unproductive Capital Inflows” tariff or “The Great Reverse Tariff”
Despite what Andrew Robb, Scott Morrison, Penny Wong, Joel Fitzgibbon, David Uren and a host of others would have you believe not all capital inflows to Australia are equal.
They certainly cannot all be called “Investment”.
Only capital inflows that clearly and directly add to the productive capacity of the Australian economy should be called “investment”.
Determining whether a capital inflow adds to the productive capacity of the Australian economy is not difficult as it will usually involve something very tangible – new factories, new office buildings, new homes, new infrastructure, new intellectual property etc.
If it is not possible to link a capital inflow clearly and directly to the creation of new productive capacity it is highly likely to be an unproductive capital inflow.
The onus on demonstrating whether a particular capital inflow or a class of capital inflow transactions is productive or not, should fall on the person proposing that the capital inflow be permitted.
Why do “Unproductive Capital Inflows” destroy Australian Jobs?
Unproductive capital inflows destroy Australian jobs because they put upward pressure on the exchange rate without adding to the productive capacity of the Australian economy.
Unproductive capital inflows drive up the Australian dollar higher than it otherwise would be and as a result Australian production is less able to compete in world export markets and less able to compete against goods and services imported into Australia.
Upward pressure on the exchange rate results from productive capital inflows as well but those inflows are being used to increase the productive capacity of the Australian economy by creating new factories, new offices, new infrastructure.
Productive capital inflows create new jobs and new useful economic capacity.
Unproductive v Productive Capital inflows – The great failure of Australian politics
Distinguishing between productive and unproductive capital inflows is not difficult as the test is quite simple.
“Does the proposed capital inflow or class of inflows clearly and directly add to the productive capacity of the Australian economy.”
Sadly the vast majority of our politicians in all of the major parties completely fail to make this distinction when talking about capital inflows. Generally, they just call ALL capital inflows “investment” and insist that Australia needs all of them.
The likely explanation for their failure, is that they are simply ignorant of the distinction because the “neoliberal consensus” with its ideological obsessions and idiotic simplifications fails to make the distinction and simply proclaims that all free flows of capital are wonderful and the more free the flows the better everyone will be.
Australian politicians simply need to expand their economic analysis toolkit and start to distinguish between productive and unproductive capital inflows.
Considering the importance of the distinction to Australian workers, the ALP and Greens and other minority parties should be all over the distinction like a rash, but as the massive self imposed “tariff” due to unproductive capital inflows also damages business and Australian commodity exports Liberal Party and National Party politicians should be interested as well.
The only politicians who will not be interested are those globalists / carpet baggers who care nothing for the interests of Australian business and workers and prefer to peddle the interests of neoliberal ideologies and our trading partners/rivals in the pursuit of post political careers perks and employment.
The Glass Pyramid need not name and shame (today) as the media has been identifying the worst offenders for years.
You know who you are!
Examples of Unproductive Capital Inflows
Identifying unproductive capital inflows is very easy. Unproductive inflows do not clearly and directly expand the productive capacity of the Australian economy.
Identifying productive capital inflows is also not difficult. It is generally very easy to point to the new productive capacity resulting from the proposed capital inflow.
Fixing the problem is not difficult either because the vast majority of unproductive capital inflows (we are talking about hundreds of billions of $AUD) fall into a few classes of transactions. By restricting these few classes of transactions most of the problems of unproductive capital inflows will be addressed.
This means that there is no need to check every capital inflow and determine whether it is productive or unproductive.
By dealing with the major and massive unproductive inflows we can leave to another day whether the ‘net’ needs to be widened to other classes of capital inflow transactions.
The “Big Three” forms of job destroying unproductive capital inflows.
1. Taxpayer guaranteed bank borrowing offshore to support residential mortgage operations (i.e. to support lower mortgage rates).
The taxpayer guaranteed local banks have borrowed hundreds of billions of dollars offshore in order to offer lower interest rates for residential lending. The vast majority of that lending has involved bidding up the prices of existing homes rather than building new homes. It only takes a few seconds to realise that a large first world economy like Australia should not need to be borrowing from offshore for new housing anyway.
Borrowing offshore (with taxpayer guarantees), driving up the $AUD and destroying Australian jobs just so that we bid up the price of our existing housing stock is madness.
Yet that is Mr Morrison’s idea of sensible economic policy.
APRA should direct the local banks to wind down to zero over the next 5-7 years the use of offshore capital by our local banks for residential mortgage operations.
2. Selling Australian government bonds/securities to foreigners
When an Australian Government security is sold to a foreigner it does not increase the supply of $AUD.
All it does is drive up the $AUD as those foreigners buy the $AUD they need to purchase the government security.
Hundreds of billions of dollars of Australian Government bonds are held by foreign interests either directly or via trustees and guardians.
If the Australian Government wishes to raise funds by borrowing it should do so by borrowing from Australians. Requiring Australian governments to raise funds by borrowing from Australian citizens rather than foreign exchange rate manipulators will assist responsible government.
Restricting ownership of Australian Government bonds is easily achieved by introducing a system of registered ownership of specific classes of Australian government securities. The owner of an Australian Government bond is recorded just like the title for a block of land. Ownership will be limited to Australian citizens and trustee and guardianship forms of beneficial ownership will not be recognised or permitted.
A limited class of government securities may be free of these restrictions for limited purposes but there is no reason why foreigners should be permitted to own legally or beneficially without any effective restriction Australian government securities. Especially securities issued by the Australian government to fund routine recurrently expenditures of government.
3. Mere transfer of ownership of major / significant land, industrial and infrastructure assets offshore.
The third of the “Big Three” is the mere transfer of ownership of major / significant land, industrial and infrastructure assets offshore.
The mere transfer of ownership of an Australian asset into foreign hands does NOTHING to expand the productive capacity of the Australian economy. All the transaction does is put upward pressure on the $AUD and destroy Australian jobs.
If a foreigner proposes to acquire an interest in an Australian asset they should be required to provide clear and direct plans and assurances as to how they will expand the productive capacity of that or other assets.
If they fail to deliver on those plans and assurances they will be required to divest the asset.
Certainly, assessing whether a foreigners acquisition of an asset will expand the productive capacity of the Australian economy will require some analysis but is it any different to what Border Force already do to make sure that damaging pests and imports do not make it through our airports and ports?
Unproductive capital inflows are just another form of damaging economic pest that should be stopped at the borders.
Forget new tariffs – fixing the Big Three is likely to be more than enough.
The above discussion illustrates how easy it is to stop unproductive capital inflows from destroying Australian jobs.
And doing so does not involve imposing any tariffs or quotas on overseas production.
Nor does it prevent productive capital inflows from expanding the productive capacity of our economy.
All it involves is removing the Great Reverse Tariff that unproductive capital inflows place on all Australian workers and businesses.
It does not require Australia entering into any new trade agreements or begging our trade rivals for scraps from their tables.
Fiddling with tariffs without restricting the unproductive capital inflows into Australia is likely to be a waste of time anyway as our competitors could just increase the flow of unproductive capital into Australia to place further upward pressure on the $AUD.
If we start taking action on the unproductive capital inflows the $AUD will slowly decline to a level that reflects our actual trade performance.
When that happens business and workers will be more competitive and will start producing more goods and services locally to replace some of what we currently import simply because the $AUD has been driven higher by the unproductive capital inflows.
Our goods and services will be more competitive internationally as well so it is likely that our export performance will improve as well.
In the event that this relatively simple but profound change in policy towards unproductive capital inflows proved to be insufficient only then might discussion move towards measures such as tariffs or quotas.
Fixing the Australian economy, rebuilding our local production capacity and generating thousands of secure well paying jobs is not difficult.
We just need to distinguish between unproductive and productive capital inflows and immediately start to restrict the “Big Three” classes of unproductive capital inflow transactions.
If the major parties (ALP, Liberal Party, National Party, Greens) fail to act they can be sure that one of the increasingly active new political parties will adopt the issue as part of a campaign to rebuild Australia.
If foreigners wish to invest in new Australian residential housing they can be allowed to do so in form of purchasing new housing direct or by investing in Australian mortgages secured by new housing (new housing RMBS). While this activity involves capital inflows it is clearly and directly expanding the supply of new housing. At the moment the RMBS market is largely dead in the water because it cannot compete with banks effectively borrowing offshore with a taxpayer guarantee). It is important to note that if foreigners are only interested in investing in new Australian housing if they are permitted to immigrate and live in it they are not adding to the supply of new housing.
“Nevertheless, there have been two episodes of rapid and unsustained rises in net
foreign liabilities, the unwinding of which were both associated with depressions
in the 1890s and 1930s.5” – Quote taken from pg5 of the RBA link u posted, sounds eerily familiar to today
Yes – i saw that! Needless to say I don’t subscribe to the ‘consenting adults’ myth
Yes the difference this time is we are not limited by the gold standard, perhaps the gov’t will step in. With our fuel coming through the South China Sea the chance of inflation is running high for the future, these massive debts will not be serviceable with an oil price shock in my opinion.
Yes at 1:13:25 , talking bout the Asian financial crisis
Cheers I will check it out
No worries, thanks
Another newbie qsn – Do these capital inflows (foreign issued loans) count as exports on the Balance of Payments?
I don’t think they are classified as ‘exports’ but they are taken into account
I haven’t read this but it looks like it might be interesting
Click to access rdp2007-02.pdf
Ok thanks for that, might have been a misunderstanding by me, I thought it was described that way in the “Princes of the Yen” documentary.
Do you have the time mark for the decription in Princes of the Yen. I am curious as to the context. This is also helpful
Like most things in life, there is more than one way to skin a cat – usually end up with the same result
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I notice u say the bonds fund govt expenditure, what level of gov’t expend is this as I have noticed in the MMT group there is a belief that they are used to control interest rates by influencing the level of reserves? thanks
I prefer to avoid that largely chicken v egg debate. The fact is that when the AOFM sell a bond the accounting involves a credit to the Treasury ES account and a debit to the ES account of the buyer. When treasury writes a cheque that is presented it is a debit to the Treasury ES account and a credit to that of the bank to whom the cheque was presented. That ES account balance can be used to buy a bond – thus the chicken or the egg. Fresh injections into this process come from the RBA or ADI credit creation – mostly the latter. Beyond the chicken or the egg issue what I am saying is no different to what MMT says – it is just accounting. Though MMT does not talk about ADI credit as public money creation as directly and as frequently as I feel is necessary.
Thanks for that reply, I don’t mean to cause differences just clarifying my understanding.
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Answering questions helps me think about what I think I know and how to explain it more effectively. I prefer to look for what different perspectives have in common rather than how they differ. The similarities are generally much greater than the differences. Economics as a tribal sport leaves me cold.
I have been reading the 1959 Reserve Bank Act and it states that its number 1 aim (of 3) is the “stability of our currency”. How does that fit with the idea of a floating the currency was meant to mean our exchange rate adjusted for our trade performance? are these capital flows u write about, proof that the RBA is preventing this adjustment and therefore sacrificing local industries who cant compete as the dollar is maintained too high. In doing so, are they contradicting their 3rd aim for “the economic prosperity and welfare of the people of Australia”?. Seems to me both govts who favour the free market don’t do so in policy, export parity pricing and rigging of interest rates driving these negative capital inflows u refer to.
I think it fair to say that stability of the currency is meant to mean that the RBA should seek to avoid both inflation and deflation.
As for a floating exchange rate I think that is generally not the problem. Rather I think the central problem are what transactions are permitted. For example: being in favour of trade in goods and services does not mean that one does not support quarantine and any other regulation considered necessary for trade that is in the interests in the country.
The core of the problem is that there are a bunch of foreign exchange transactions that should be either prohibited or heavily restricted. They are the capital flow equivalent of importing cane toads, rabbits, foxes and the European Carp.
Too many people assume that if you have a floating currency you must allow any and every capital transaction and in any volume. That is not the case and the sooner we start regulating the most offensive forms of capital flows the sooner our exchange rates will reflect our trade performance.
Well done on some of the best reading I have seen on our situation. Obviously our gov’t has taken the lie down and let whatever powers want to take us over financially by stealth approach to national security. People I talk to trust gov’t, I don’t anymore. My understanding of history is that our leaders will save their own skin when the going gets rough, lets just hope it doesn’t get to that stage.
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Thanks Watson, While there may be some method in their ‘madness’ for the most part I think it largely the result of the ‘easy politics’ of telling people that there is a free lunch on offer. No pain and pay later is always a compelling pitch and that is what both sides of politics are dishing up.
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