The Bank of American Merrill Lynch reportedly thinks the RBA monetary policy lever might be broken, while many other are concerned that the rising levels of interest bearing public debt incurred by Mr Scott Morrison may soon be reaching its limits.
Monetary policy exhausted and fiscal policy not far behind?
Guess we are all out of options then and should just curl up and sob in a corner.
10 years after the Great Financial Crises and we are still reading brain dead statements of the bleeding obvious because it is all too hard to discuss alternatives to the status quo.
The lack of imagination amongst our economic chattering classes and their rigid adherence to bad ideas is impressive.
No wonder it took so long to convince folk that the earth revolves around the sun.
Here once more is the Glass Pyramid “3 Step Plan” to drain the Australian economic swamp.
1. Reintroduce private bank credit creation regulations that restrict lending by reference to the purpose of the loan ….not the category of the borrower.
In other words loans with a high risk of encouraging speculation in the prices of existing assets will be rationed. Loans directed to building more productive capacity will be encouraged.
This is largely how we ran our banking system until the bankers managed to fool the public into believing that the ‘discipline’ of the free market would force them to allocate capital / credit productively. Well we now have 30 years of evidence that deregulated private bank credit creation means one thing: Asset price bubbles and more wealth for wealthy pockets.
2. Unproductive capital inflows will also be heavily restricted – starting with the three key forms of unproductive capital inflows
- Mere transfer of title to existing Australian assets to offshore owners
- Mortgage operations of private banks, secured by existing property, supported by capital inflows
- Sale of government securities to offshore parties.
The features of these three forms of unproductive capital inflows have been discussed at length by the Glass Pyramid so we will not go over that ground here.
A completely unrestricted capital account is yet another ‘reform’ recommended by the bankers and their finance mates back in the 1980s. It was a mistake but do not expect any of them – even now – to admit that.
3. Start funding a modest portion of the fiscal budget with the sale of 0% non transferable bonds to the RBA.
The budget is about $420B so $20B is about 5%. That is enough to start with.
This amount will make little difference overall but we need to start somewhere and it will allow all the sound money loonies and private Bank apologists to exhaust themselves for 12 months announcing the end of times and the onset of totalitarianism.
Over time as the hysteria reduces, the proportion of the budget / deficit funded by selling interest free bonds direct to the RBA can increase, though a limit will be reached soon enough as inflation will remain a policy constraint.
The effect of these 3 steps will be as follows.
The AUD will start to soften as unproductive capital inflows are restricted. Ultimately the level of the AUD will reflect our trading performance rather than the capacity of our banking and financial sector to sell off Australian assets and claims on our future income.
This will allow our businesses to better compete against imports and on the world market. Good for business and good for jobs.
Existing asset prices will soften as unproductive credit creation by our private banks slows and productive credit creation expands. Banks will lend to create new productive capacity – new houses and new factories – rather than simply lend to speculators in the price of existing housing.
The amount of interest accruing debt issued by the government will stop rising and start to fall as it is replaced with zero interest accruing money created explicitly by the RBA.
Inflation will continue to be monitored and reported on by the Australian Bureau of Statistics and the RBA and will remain a limiting factor on fiscal policy and the fiscal deficit.
There is nothing complicated or difficult about the above – except if we simply refuse to discuss it.
Don’t expect economists or public relations people from our banking and finance sector to discuss the above or even admit that these options exist.
If they do they will run a bunch of wild “sky is falling” scare stories to divert attention.
From the perspective of the banks and finance industry the above plan will weaken the stranglehold they have had on the economy since financial deregulation in the 1980s.
The interest rate of the loans from the RBA to the government really don’t matter at all. You can conflate the RBA and the Government into one sector – the public (government) sector. So the only question is whether governments can just print deficits without consequence. The answer to that is obviously ‘no’ as one or both of two things will happen. 1. Your CAD, already a major issue and even more of an issue once you clamp the speccy temporary inflows, blows out and drives your currency further down. 2. You have to raise interest rates in or tax on the private sector to mop up the surplus money.
Now some think the government is better at allocating money than the private sector. That’s moot and not of my concern here. However, just to give an opinion, if interest rates are at a positive RAT level sufficient to encourage saving and sort out non-productive investment and your currency is at a value that reflects the trade performance rather than asset sales to foreigners then the private sector will allocate resources very efficiently. There is an argument for some long term and socially worthwhile projects to be undertaken by government.
Re the government deficit with no consequences this MonuMental Tripe really needs to be erased from your otherwise excellent treatises ideas.
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I understand you concern but I don’t follow why you think the current arrangements are superior.
The current arrangement involves no restrictions on capital inflows and the RBA sets interest rates with really only a single purpose – to stimulate the demand for credit. It is not surprising that the rate is artificially low as that stimulates more demand for credit. Once the credit / asset price dragon is off the leash they find it almost impossible to reverse course as the resulting deleveraging will inevitably cause much misery.
You are concerned that if a fiscal deficit is directly monetised that the government will have no regard to inflation and will print money willy nilly. Why would the government, the media and the public be any less interested in inflation than they are now. Why would a government risk criticism by ignoring the measurements of inflation produced by the ABS?
You also mention capital inflows and the CAD. As I noted in the 3 step plan – unproductive capital inflows would be heavily restricted. As they are mechanism by which the AUD is driven up above what the trade performance would produce they are the reason that imports are more attractive and exports cannot compete.
Cut off the unproductive capital inflows and it is much more likely that the trade performance will improve in a relatively short time. As we are currently running monthly trade surplus there is no time like the present to starting cutting down on unproductive capital inflows.
Considering the RBA currently uses interest rates to manage the demand for credit and as a consequence the amount of bank credit as money sloshing around the economy, if the focus was to shift towards publicly created money there would be much less if any need for the RBA to fiddling around with the target rate as a tool of economic policy. Some rates of interests for some lending activities may even be fixed – either to encourage or discourage borrowing – but hopefully that would prove unnecessary.