While the COVID-19 pandemic has caused disruption, to some it remains a minor concern, compared to their true horror, “a property bust”, that they believe is lurking and waiting to pounce and devour the Australian economy.
This tweet by Stephen Koukoulas is fairly typical of the genre, containing a warning of “smashed” household wealth and a “knee capped” economy.
And the linked article by Koukoulas talks of the government “pummelling” house prices.
Pump priming is needed now to lift the performance of the economy and help jobs right now, but should spill over well into 2021 when the house prices risks are most acute.
The flood of risks on the economy broadly and housing in particular are overwhelmingly to the downside.
Policy makers – do something now.
Shocking stuff but unfortunately the concern is well founded as our “deregulated” private banks have been allowed, over the last 40 years, to expand their loan books enormously by extending more and more credit secured by nothing more than residential land prices that have themselves been inflated by earlier bank credit creation.
Yep, the value of the land which is the security for new loans was inflated by earlier loans. As those earlier loans made the land more valuable it could now be used to secure larger loans which were then used to bid up and inflate the land values even more.
Australian Banks had invented perpetual wealth creation.
As long as they kept making larger loans to more and more people, the value of the land securing those loans would keep rising.
How brilliant is that!
There was just one small catch. Aussie household incomes in this era of disorganised labour were only rising slowly and eventually they became a limiting factor on how much credit (aka money) the banks could create.
To solve this problem the banks started lowering their lending standards (i.e. not asking too many questions or double checking the fibs) and the RBA started cutting interest rates as lower interest rates allow for larger loans for a given level of household income. The RBA euphemism for this asset price fluffing with ever cheaper credit is “providing support” to the economy.
Nothing was allowed to stand in the way of the great Aussie wealth perpetual motion machine. As Aussie households ran out of aspirational enthusiasm for more debt to chase inflated property assets the government opened access to local residential property markets to hot money from foreign speculators eager to get rich on the Aussie property perpetual motion machine and if we had to offer them a fast track to a residential visa to seal the deal we did that too.
How brilliant is that?
Keeping a housing a banker / property developer / real estate agent / tax dodger housing bubble alive by selling residency to foreigners.
Only a #Nazi #racist #xenophobe could be opposed to that!
So having built this steaming mountain of inflated residential property prices with a steaming mountain of bank credit and having stood by as the domestic economy was twisted and warped by asset price fluffing ponzinomics, keeping the perpetual wealth creation machine marching forward remained of critical importance and yet very hard to do when COVID-19 has shut the borders and is crushing household incomes that even before COVID-19 had been stretched to breaking point servicing the existing mountain of household debt (2nd highest in the world).
What are the options?
If we fool ourselves, that the existing model of pumping land values higher with debt so they can support even more debt remains viable, then there are no good options. The evidence for this can be seen in the increasingly desperate pleas, by the industry insiders, lobbyists, rent seekers, journalist promoters of the existing model, that the government simply must:
- Ignore the risks of COVID-19 and open the doors as soon as possible to more immigrants who can jump on the lower rungs of the debt / house price ponzi ladder.
- Offer larger incentives to induce Australians to enter the housing market and take on debt to help maintain upward pressure on house prices.
- Offer tax benefits to induce Australian to continue to over invest / over capitalise existing housing … e.g. a renovation bonus
- Relax restrictions on foreign speculators betting on Australian house prices.
And if anyone questions whether any of these demands make sense or are in the interests of the Australian public or even environmental sustainability the response of the promoters is simple.
Do it or the economy will get it. In other words do it or the economy will collapse because we have built the economy around the great Aussie property perpetual motion machine!
How can MyRBA help? For some details on MyRBA see recent posts.
MyRBA can help because it ends the dependence of the public monetary system on the money / credit creation by the private banks which for the last 40 years has been directed to the unproductive pumping up of prices of existing assets rather than investment in productive new economic capacity.
Fully reserving the near $2 trillion worth of private bank deposits on the RBA balance sheet and allowing the general public and non-banks to operate MyRBA deposit accounts at the RBA means that there is no longer any need to bend so much public policy to the single objective of increasing demand for household debt that is to be directed to driving up the prices of existing housing.
In other words the reliance on “trickle down” economics, whereby money created by private banks and given to those they deem “credit worthy” is believed to eventually trickle down to the little people as the “credit worthy” borrowers spend their fresh bank credits on new splashbacks and European applicances, will end.
Instead we can pursue “trickle up” economics whereby any amounts of new money that are considered necessary to maintain currency stability as the economy grows (or to counteract the deflationary effects of COVID-19) are to distributed on a democratic and equal basis via the MyRBA accounts and allowed to flow out from those MyRBA accounts to those who are best able to persuade the owners of those accounts to part with some of their MyRBA balances.
Allowing ALL of the general public the opportunity to decide what goods or services they spend the distributions on, or whether to pay down debt or to invest, is far superior to the current model where only those deemed “credit worthy” (aka existing asset owners) by a private bank are given access to newly created money and even then for the limited purposes of punting on house prices.
Giving the general public the power to choose what goods and services are of value to them is critical when COVID-19 is likely to fundamentally change the patterns of economic activity and demand for different goods and services. We simply have no idea what businesses will survive and what businesses will spring up to serve the public in the COVID-19 era. Maximum flexibility is required and that is why the general public should be picking the winners by making spending decisions with their own money and not pork barrelling politicians, know all public servants or worst of all bonus hunting bankers.
And before anyone shrieks Weimar, Zimbabwe etc they should keep in mind that the track record of the RBA in avoiding the massive asset price inflation, that resulted from the recklessly unproductive bank money creation over the last 40 years, has been woeful and that form of inflation is much less likely under the MyRBA approach as banks cannot simply create “credit” out of thin air they have to actually persuade an investor to part with their MyRBA deposits before they can make a loan.
As for CPI inflation, does anyone seriously suggest that after a 40 year obsession with the eradication of CPI inflation and the various drivers of it, including the union movement, that the obsession is suddenly going to evaporate?
In the event that from time to time, new money creation is considered necessary and is distributed to the public via their MyRBA accounts (or their fully reserved accounts at banks) the impact of those distributions on CPI inflation will be watched hawk like by all those bank loving types who will be desperate to regain control over public money creation.
CPI inflation will be the least of our concerns.
Bankers suffering relevant deprivation syndrome and moaning endlessly and loudly in the AFR about the loss of their money creation powers is much more likely to be a source of ongoing concern and public irritation. They will not go quietly into the night. Expect the parasites to fight with everything they have.