Make no mistake, the biggest issue being addressed right now is wealth inequity across society, classes of workers and generations. The rise and rise of non-mainstream populists is but a step, a reaction. The tsunami for change is rolling and won’t stop until it breaks.
I have eight children and as the youngest has just turned 18, they are all now adults with the usual life aspirations. They have great advantages as they are all very intelligent (except one who has a genetic disorder), good looking and reasonably well educated. Nevertheless something quite profound happened at our last get together. The consensus amongst the kids was stark to say the least. They all were very down on the future; the overblown housing market, job and earning prospects are crap to non-existent, foreigners are buying the country unabated, over-paid and corrupt bankers and the appalling choices of leaders in politics everywhere. Naturally if I couldn’t explain to them why and how to fix it in simple, understandable terms then I would be paying, and not just for dinner.
I could have described how this happened to my children as one great conspiracy by elites over the last 35 years to enrich certain sections of the population at the expense of others and future generations, but they’re too smart for that conspiracy crap. How about, the world experimented with freer trade, freer capital flows across borders and unfettered money creation via private banks through huge credit expansion as the first steps? The kids understand enough to know that those things on their own were not necessarily bad things. Kids: So what really happened?
Basically the whole experiment was not a conspiracy, but a stuff up caused by incompetence, ignorance and raging self-interest. Governments and central banks created policy settings within the globalisation of trade and finance that could be described as pork barrelling for many, and monopoly and rent creation for a few. These settings distorted the capitalist experiment into a system which gave short term sugar to many and entrenched very large gains to the elite, partly from productivity and efficiency, but mostly by rewarding asset owners and shifting the cost of enrichment to the future. Kids: Simpler English dad?
Freer trade flows allowed cheaper consumer goods, but this shifted first world jobs to third world countries without any thought to what replaces those jobs. So whilst the consumers were happy for a while with their new purchasing power and credit to buy goods, their job opportunities and job worth decreased considerably over time. Freer capital flows in the form of debt encouraged both Australian governments and the private sector to increase offshore borrowing, and inject those funds into the economy, maybe irresponsibly. The offshore borrowings were sugar for the economy as money was injected by budget deficits and housing loans. However, these borrowings weigh heavily on the future when the sugar stops, or worse, when it has to be paid back. Why value labour when today’s free money solves all ills? Kids: Dad are people cruel or stupid? Dad: It gets worse
Governments allowed the globalisation of the banking system, which in turn globalised the private creation of money through debt. At the same time central banks pursued policies which kept inflation and interest rates low, accelerating credit growth and the creation of money by private banks. This situation locks in asset inflation, as the money created by debt pushes up asset prices as it looks for a home. In Australia the home is literally the home. As this process churns, the economy becomes bar belled as more money or wealth is sucked into the hands of asset holders and sellers and debt is loaded on the wannabes. Whilst dollars must be equal, the numbers are heavily skewed to the debt side in the forlorn hope that wider distribution of debt will keep the scheme afloat. Debt driven asset inflation is one source of wealth inequity and the other, as I described, is the devaluation of labour. Kids: Doesn’t high immigration solve these problems as our politicians tell us?
Australia has used high immigration to mask the problems and to pump the wealth inequity. Adding too many people without the productive jobs continues the devaluation of labour, whilst adding to the wealth of entrenched asset and business owners. It certainly adds to the support of the debt load but as debt has to grow at an even greater rate to create the money to keep things afloat, the load per person continues to grow, thus shifting more and more wealth away from most of the population, but mainly the young. Of course it may be that most immigrants are very wealthy and inject their wealth into the economy through productive pursuits. Simple observation tells us that this is not the case or LOL.
Kids: What more can these fuckers do to us? DAD: How about send you to fight a foreign war in the name of some spurious nationalistic cause that again only benefits or bails out the elites?
Or you could get out the pitchforks and muskets and storm the Bastille. Which is what Trump, Pauline and many others are about, at least metaphorically, and that is the destruction of the establishment.
Whilst the populist movements may feed on anger, they’re just another symptom of wealth inequity and not a solution, though they certainly highlight the issues and get the wave rolling. Practically there are things which can be done to reverse the process
The problem for the beneficiaries of the current system is that the system is out of control, with no ability to find a steady state. Central banks, including our RBA, who mostly gained their independence through the period in question would have you believe that they can control outcomes to the benefit of all. While in reality they are simply pursuing their own agenda of pumping inequity and temporary sugar for the masses until a crisis hits. So another financial crisis is baked in and it will be bigger and wider ranging than the past.
What those on the losing end of inequity must do is ensure that next time around the elites aren’t bailed out at the expense of everyone else, as occurred in the years from 2008. This will not occur and history will repeat unless there is a legitimate political movement to make those responsible accountable and reverse wealth inequity. Dad: So kids, you need to get active. There is no other way. Kids: If we get active, how do we actually improve wealth inequity?
Reality may be difficult to take, but if the system has created too much money then wherever there is a savings of money, that is deposits in a bank, then part of that money is excess. Any redistribution of wealth will have a negative impact on the majority. Here’s how to address wealth inequity.
- Asset values must be crunched and debt written off. This must be a political act. Nothing can be expected of bureaucrats or central banks. The independence and non-accountability of the RBA must end. The people or parliament must decide monetary policy.
- Drop interest rates hard into real and nominal negative territory and make it clear that the next moves are up and up. This is not about increasing credit creation, it’s about actually destroying both money and debt in non-productive assets, a redistribution. Its also about encouraging productive investment and not asset investment.
- The RBA can replace the ensuing capital flight from the banks due to the collapse of interest rates with our own form of mortgage QE to fund the banks. At this stage the AAA rating is history but banks are liquid.
- No bank rescues must be made clear, with equity and bond holders taking losses from mortgage defaults as house prices fall. This will flow through to losses in almost everyone’s super funds as just about everyone will have bank share and bond exposures, but it’s the way its gotta be.
- Banks must increase capital against residential mortgages and overall so they are unquestionably strong on a non-risk adjusted basis. If they can’t they are nationalised with management held responsible. Any bank with only the smallest government support must have management salaries capped at say 8 X average wages.
- Serviceability of mortgage loans provided by banks must be based on a normalised rate of at least 8% and mortgage terms set at a maximum of 20 years. Failure to comply is a criminal offence. This won’t improve affordability in the short term, but it will once the system is recalibrated.
- Net immigration is reduced to a manageable 0.4% of population per year.
- Any tax concessions that favour housing investors over owner occupiers, i.e. negative gearing and CGT discount are to be removed. No grandfathering, just one big bang, gone. These selective tax benefits have turned into an abomination.
- Tax benefits for the wealthy through superannuation concessions to be removed immediately leaving only a small flat capped tax benefit for all. Currently superannuation is nothing more than a tax dodge for the rich. Superannuation does not of itself create wealth, it redistributes it.
- A Death and Gift tax of 20% to be introduced. Due to wealth inequity, much of accumulated wealth is unearned and needs to be clawed back to balance the ledger. Wealth inequity makes these taxes fair and must haves.
- Abolish stamp duty and replace with an annual land tax, higher for vacant property and land. Special tax for land bankers.
- Enforce Australia’s foreign buyers of housing laws and international money laundering laws.
- The RBA and APRA merge with a broader mandate which includes overseeing a balance between corporate, SME and household lending, which encourages the growth of productive businesses. Management of the financial system includes no taxpayer support for any individual bank failure, but protection of the financial system as a whole as a priority along with inflation and employment.
- If the budget is still not balanced, which it won’t be, the real pain needs to start. Although commodities may assist with budget repair for a while yet, Government debt levels must at least stabilise. We must find added value stuff to sell to the world. Stuff that values labour. The government must directly support these initiatives and provide the infrastructure where the creation of stuff that values labour flourishes.
Nothing to it really.