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The Forum > Article Comments > Monetary policy revamp > Comments

Monetary policy revamp : Comments

By Peter Jonson, published 14/1/2013

If the current dilemma with Australia's monetary policy is not resolved, it will do great damage to Australian industry leading to a great depression.

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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.
Posted by Foyle, Monday, 14 January 2013 3:27:41 PM
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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.
Posted by Arjay, Monday, 14 January 2013 5:19:37 PM
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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.
Posted by Pericles, Monday, 14 January 2013 6:34:28 PM
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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
Posted by Foyle, Monday, 14 January 2013 7:38:38 PM
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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.
Posted by Arjay, Monday, 14 January 2013 7:58:46 PM
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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.
Posted by Hasbeen, Monday, 14 January 2013 8:11:54 PM
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