Tell us Peter Jonson,why cannot our RBA create just our inflationary money of 3% of GDP for our Govt and banks? Currently we are suffering a depreciation of our currency of 3% pa and having to pay principal + interest on money that is already ours.

It is the private banking system that is stealing from us by creating inflation via their fractional reserve system of banking.

Tax incoming capital Peter?
How?
Like say as it enters the banking system as term deposits? That then are ripped out en masse, like when the tsunami hit Japan?
We already tax interest earned or has deemed to have earned?
I see absolutely no merit in taxing foreign capital by any means, as it enters the country!
It's a regressive idea, and like stamp duty, taxes economic activity at the front end or before we have the said economic activity!
If applied as outlined, likely to cause the very contraction alluded to.
Much of this money is borrowed and impacted by interest rates, some of which are charged by parent companies at artificially high commercial rates, to effectively reduce/remove tax liability!
Why, some local firms have created subsidiaries in foreign tax havens, so they can then outsource various services, at exorbitant rates, simply to "legally" write down/avoid tax.
We certainly need overdue reform!
But rather, suggest a total reform of the current convoluted tax system, which ought to be jettisoned in its entirety and then replaced with a virtually painless single unavoidable expenditure tax, which set at 4.8%, would garner more net revenue PA, than all the revenue raising by all three tiers of government.
Moreover, with reconciliation removed as an element, immediately available to consolidated revenue, which could save the budget bottom line, by removing the need to borrow to run depts.
I believe the way to offset the cost to industry, of the high AUD, is to remove the often onerous cost of compliance off of the backs of industrial innovators and entrepreneurs!
After that, we need to de-privatise inordinately expensive energy provision and once again rebuild our manufacturing base on the back of very cheap energy!
Given we have copious NG, which is 75% hydrogen, we could do worse than use it to supply energy at cost to industry, and then rely on the increased economic activity, to provide additional tax receipts and tax payers!
There are other even more inviting carbon neutral/free energy options, endlessly sustainable biogas and thorium reactors, outlined in detail elsewhere!
Rhrosty.

Interesting Peter, but I notice your whole article was about monetary policy.
I draw to your attention that growth is not dependant on money but energy.
As rising energy costs eat into whatever GDP we have we will not have the funds to repay debt & interest.
I suggest that you google Jeff Rubin, a Canadian economist that has
written much on the effects of declining energy on world trade.
"Your World is About to Get a Lot Smaller".

Another author you should read is Richard Heinberg, "The End of Growth".

The GFC was triggered by oil demand exceeding supply, or perhaps you
did not know that. Well, you are not on your own there, but it does
not change that we have reached the peak of oil production.
Perhaps you have been taken in by the shale oil hype, but that is
mainly a high cost Ponzi scheme.

Rhrosty it is our high exchange rate that is destroying our industries that are import competitive, or are trying to export.

One of the little companies I used to run has seen it's export market shrivel up & die over the last 5 years, after 20 years of growth. At the same time, it is now importing components that used to be sourced here.

Some of those components simply became too expensive from local suppliers, while the cost of competing imports was continually falling. Even worse, some products simply ceased to be manufactured here.

When you can land into store, products made to your specification in Asia, for only 20% of the cost to produce them here, we are in big trouble, as will our labour market in the near future.

If you don't like a tax on non working capital inflows, what do you suggest we do, to prevent our industry being destroyed by imports made cheap by the exchange rate those inflows have generated?

One can make a case for increased capital gains on the sale of Australian assets/land, commercial-residential investment property!
However, this impost ought to fall exclusively on the seller and their unearned windfall profits, which given my druthers, I would virtually tax out of existence!
Particularly unimproved, if rezoned land holdings, which should no longer be allowed to be held by lazy investors as land banks, which then detract from housing affordability.
This tax could however, be successfully avoided, by building within months of acquisition; and BA-development, ought to be implicit in any rezoning approval? [Why buy urban land other than to build (a) house(s) on it!?]
Moreover, the essential infrastructure, roads, water, power, ought to proceed rather than follow rezoning! [And a better way for councils to invest surplus funds; than say, in worthless derivatives!]
House building on a large enough scale, which includes significantly increased local manufacturing, is prevented by this sort of indolent land bank activity; and or, indolent unimaginative govts, simply seeking revenue; [maximised stamp duty,] which ought be repealed as promised, given; I believe, usually funds expansion of already over-bloated corrupt/incompetent govts?
No names, no pack drill.
Rhrosty.

Hasbeen, I suggest we jettison all the current complex taxes. Inclusive of payroll tax, fuel excise, the current carbon tax arrangements, stamp duties etc, etc.
It's the only way to actually remove enough of the current cascading costs to make some of our manufacturing industries competitive.
A simple unavoidable expenditure tax of just 4.8% collects more revenue, around 25%, all while lowering overall costs on industry by as much as 30%.
This 30% is paid for courtesy of multinationals and others avoiders; or all forms of avoidance, which would be no longer possible or permitted.
Cheap energy supplied in a public format at virtual cost, is and remains the cheapest form of energy, and ought to replace the private price gouging model!
The actual cost of producing a kilowatt hour of coal-fired electrical energy is around 3 cents.
Coal seam gas ought to be cheaper, given actual total labour, development, and delivery costs, always providing it remains the poeples' property, until delivered as energy to the end user!
China's labour costs are inflating by around 20% PA; and all the so called cost benefit advantages, will shortly disappear just as they did in Japan, Taiwan, Singapore and Korea before them.
Moreover, one can seen most of the high-tech energy dependant industries relocating here, if we but provided the worlds lowest and fairest tax rate and the world's lowest costing energy.
We should also build our own nuclear powered shipping line, to take full advantage of these conditions, so as to lay the markets of the world before our own manufacturing, at stable predictable costs, even as the costs of conventional powered transport options, are rising through the roof!
I've heard the expression work smarter not harder, and we really do need to do a lot more of that!
Cheers, Rhrosty.

The article concentrates on inflation, interest rates and the exchange rate. The writer appears to ignore the problems associated with maximizing the well-being and social justice of our society.

If the foreign trade is in balance then the financial wealth of Australian society can only increase if the government runs a deficit and over a business cycle the percentage growth in the government debt can match the percentage growth of the economy, in fact it needs to do so to facilitate the transactions in the economy.

Private banks only create debits and credits. A financial institution gives you or someone a loan to buy a house. The borrower has a liability and the bank has the loan on its books as an asset. The seller of the house spends or saves the proceeds. If the seller saves it another institution pays him a significantly lower interest rate that the system charges borrowers. If he spends it then ultimately small amounts appears in the accounts of many savers as the money wends it way through the economy.

The interest the borrower is charged reduces the borrower's ability to spend and contribute to the creation of employment in the economy. If banks make loans that are un-prudential, asset value inflation will occur and such bubbles always burst.

What is the capital that attempts to flow into Australia? Often it is the surplus $US accumulated by Chinese exporters who have obtained those dollars by following mercantilism policies to avoid potential problems in China.

foyle have a look at this article published on Barnaby Joyce's site.http://www.barnabyisright.com/resources-articles/tick-tick-tick-aussie-banks-15-trillion-time-bomb/ Our banks have assets of $ 2.62 trillion and have exposure to $ 14.2 trillion in the phoney derivative market.We are pledged to bail them out but our GDP is only $1.2 trillion.

Unless we enact leglislation to separate their gambling economy of derivatives from our housing assets,we can lose everything.

Mr Jonson competently and confidently expresses one side of the argument for a tax on capital inflows, but is a little light on telling us about the downsides.

This is probably not surprising, since the piece is aimed at other economists, who would already be aware of the various dangers associated with such a move. To the layman, however, it looks just too simple, and as a result allows everyone to mount their own particular fiscal hobby-horse, reluctant to admit that they don't, trooly-rooly, understand what the article actually means.

There is undoubtedly a case to be made, and I hope the issue is under constant review. But it should be a debate held with a greater degree of honesty than we presently experience. Would the proposed solution have the effect of making capital for SMEs less accessible, as they discovered to be the result of Chile's policies over the 1991-98 timeframe...

"Although Chilean-style capital controls may yield some benefits, any such benefits should be weighed against this cost of increasing financial constraints for small and mid-sized firms"

http://web.mit.edu/kjforbes/www/Papers/One%20Cost%20of%20Chilean%20Capital%20Controls-JIE.pdf

Mr Jonson hints that his preferred option would take a more direct form than the URR employed in Chile, but neither is he clear on what form the taxation would take. A fairly recent (2008) paper from the National Bureau of Economic Research in the US makes a further point on the delicacy required in such policies:

"Bartolini and Drazen (1997) caution that changes in capital controls may serve as a signal to foreign investors. Presumably, the same may
be said about tax policy. Foreign investors might interpret an increase in the tax on foreigners as an attempt to preserve an attractive asset for local investors. If that is the case, then foreign investors may just pile more capital into the country"

http://www.nber.org/digest/nov08/w13842.html

It would be comforting to think that we had the type of policymaking framework in which debates on key financial issues such as this are conducted with non-partisan clinicality. Regrettably, any initiative, whether bold or timid, would become a political football within seconds of its announcement.

Arjay,
I couldn't see who wrote the item on the Barnaby Joyce site.

The Australian Banks were broke some date in Sept/Oct 2008. The Rudd Government faced a dilemma and probably chose the wrong option. They could have guaranteed the bank customers' accounts, which they did, and allowed the banks to default on their dodgy foreign gambling.

Chifley's aim could have been achieved for peanuts with an offer of an Australian dollar or two per bank share to all shareholders. The big end of town would have screamed blue murder but the directors had brought the problem onto their shareholders by their own stupidity.

The Australian Government's own liabilities in foreign dollars should only be for goods purchased from suppliers who will not accept $AUS in payment. No sovereign government can go broke paying any bill it occurs that is denominated in $AUS. A payment of Australian dollars to a foreign supplier probably has little affect on the internal economy other than, at some stage, increase our exports.

If you wish to get ahead of the mainstream curve on economic knowledge follow the blogs at New Economic Perspectives. One of the bloggers, a former US government regulator, Associate Prof. William Black wrote a book, "The Way to Rob a Bank is to Own One." An excellent cartoon explanation of the current knowledge, prepared by a US professor is at; http://neweconomicperspectives.org/2012/05/10

foyle as for the stats on derivatives v's real assets,Barnaby Joyce references the ABS in his graphs.

It has been litany of lies since 2008 with promises of "Green shoots" and heaps of other BS.Max Keiser of Russia Today says April 2013 will be the really big collapse that probably will be followed by war with Russia and China.

Rhrosty where do you live, the moon. That is a highly uninformed attack on private land development mate. Here are some facts.

I am sitting on my 20 acres, bought to keep my kids out of town, & run & train their horses. However, thanks to some nasty Labor pollys, I can only use it to run a few horses. When I wanted to run a nursery permission was refused.

One of my kids would like to have an acre split off for her to build her own home. Not permitted. We have not been allowed to subdivide since the very large new city was approved near by. Can't have competition with Labor favoured folk, now can we?

On the other hand, I am adjacent to a moderate development by an old farmer, of a bit of poor land on his property. This was to allow him to retire, & set up his kids future. This is all half or one hectare blocks.

He had to find water, build a water treatment plant, & reticulation system through out the area. This had to then be gifted to the council.

He had to install underground power, & phone systems, along with the water.

He had to gift over a hundred acres to the council for parks. This they lease to a grazier, who's half wild cattle are a constant hassle.

He had to build a very attractive road system through out the development.

After completion of most of this, some bureaucrat decided to double the size of the required water treatment plant, & supply the district from it. Fortunately, after considerable cost, he beat them in court.

The last thing we want is a town water system. We have invested in our own water supply, & are not interested in one, which no one is allowed to use when it is dry, due to restrictions.

The worry involved in government interference & changes after the event is probably what caused the heart attack that killed him.

If anything is driving up the price of land it is government stupidity.

Hasbeen hang onto the land as the powerful elites on this planet are going to bring on the worst depression in our history.Never in our history have we been exposed to so much debt.Never in our history have so few owned so much.Absolute power corrupts absolutely.

Many of us have tried to create awareness to avert this economic/social catastrophe but with Obama now sending troops to 35 African coountries to contain China,WW3 is looming large on the horizon.

I'm trying to work out why I'm so concerned about the survival of an ethical humanity since our ruling elites have always been ruthless and have no moral compass.