by David Keane, July 2007
PO Box 582, Gosnells 6110, WA
Ph (08) 9398 3347
Introduction
It now seems very likely, that those politicians who will be elected in the 2007
Australian federal election, will be forced at some time within their 3-year term
to accept the responsibility of facing the most profound economic crisis in
Australia's history. How will they be able to respond, if the global economy enters
into a deep recession /depression? Is such a deflationary trough possible or
likely?
Imminence of an Economic Global Tipping Point
Never before in modern history, has the world financial system demonstrated such
vulnerability. The crisis facing humanity is reminiscent of early 1929, just
before the great stockmarket crash. But the present vulnerability, level of
indebtedness and inadequacy of safeguards are now far worse than they were in
1929. Let us consider a 25th June 2007 article by Ambrose Evans-Pritchard, business
editor of the UK Telegraph:
The Bank for International Settlements, the world's most prestigious financial
body, has warned that years of loose monetary policy have fuelled a dangerous
credit bubble, leaving the global economy more vulnerable to another 1930s-style
slump than generally understood. The Bank has said: "Virtually nobody foresaw the Great Depression of the
1930s, or the crises which affected Japan and Southeast Asia in the early and late
1990s. In fact, each downturn was preceded by a period of non-inflationary growth
exuberant enough to lead many commentators to suggest that a 'new era' had arrived"
The BIS, the ultimate bank of central bankers, pointed to a confluence of
worrying signs, citing mass issuance of new-fangled credit instruments, soaring
levels of household debt, extreme appetite for risk shown by investors, and
entrenched imbalances in the world currency system.
Now in 2007 we see clearly that the U.S. real estate bubble is in the process
of bursting, leading U.S. into an inevitable recession. But how deep will the
recession bite? Will it lead to a frenzy of demands to repay debts? Whatever may
befall the global economy in 2007 and 2008, the spiralling escalation of global
debt is unsustainable, and sooner or later the current debt-driven economic
system must contract. The only way forward for Australia will be to develop an
economy based upon principles of economic sustainability.
Impact upon Australia
A major global economic contraction would impact Australia in five ways:
1. The entire Australian economy and employment will stagnate;
2. There will be demands for Australia to pay off its huge and growing international
debts;
3. The number of bankruptcies will skyrocket because of the high level of debts,
and some financial institutions will cease to exist, possibly causing the savings
of many citizens to vanish;
4. Many foreign investors in Australian property, shares and businesses will suddenly
take their money out of Australia; and
5. Service fees for privatized industries such as phone, water, electricity, transport
(that were previously under public ownership) would multiply three or four-fold.
Australia's debt vulnerability
To get a measure of Australia's vulnerability in times of global economic turmoil,
it is vital that we analyse such significant national financial indicators as Gross
Domestic Product, Gross Foreign Equity, Gross Foreign Debt, Gross Foreign Liabilities,
and Domestic Credit. Figures for these data are available on the website of the
Reserve Bank of Australia (http://www.rba.gov.au/statistics/). The most recently
available data are presented in the Appendix.
So that these figures can be more easily understood, I add together the figures
for Gross Foreign Equity, Gross Foreign Debt and Domestic Credit to come up with
an overall figure of "Total Australian Liabilities". Let us look at the Total
Australian Liabilities (= Foreign Equity + Foreign Debt +Domestic Credit) as a
percentage of GDP plotted against time. After the year 2000, we see a rapidly
escalating rise in our Total Liabilities.
The Heritage We Pass on to Our Children
We do not get the classic signs for exponential growth of Total Australian
Liabilities relative to GDP in the post-recession years of 1994 to 2000. A major
reorientation in economic leadership happened in the few years leading up to 2000.
What happened?
Although Prime Ministers Bob Hawke and Paul Keating led Australian government
in the direction of globalization, deregulation, privatization and spiralling
debt, nevertheless their leadership in this direction was balanced by other
more traditional economic practices. However with the transition to the
Howard-Costello government, caution was thrown out of the window. The economic
driving force became unconditional support for a debt driven economy.
The Coalition government can claim that they eliminated Federal government
debt, but at what cost?
Ø At the cost of thrusting management of several vital sectors of the Australian
economy onto the competitive market, with its 'bottom line' of maximizing short-term
profits for shareholders becoming the priority,
Ø The manufacturing sector has been largely destroyed,
Ø Infrastructure has become neglected,
Ø Education and health have become subject to the National Competition Policy,
Ø The public and social supports that Australians will need during times of economic
hardship have been privatized - handed over to private ownership, that will
flee the country at times of economic difficulty.
Now that Australia's manufacturing and farming sectors have been devastated, what
then is driving the economy? It is driven by the short-term boom-time gains and
illusory bubbles of a debt-driven economy. It has all the appearance of the Australian
government running the economy on the 'national credit card'. The short-term
glamours of such extravagance may give the appearance (before the contraction) of
a well-run economy. But when the global economic contraction comes, the
international creditors will come clamoring at our door, and the people will no
longer have the social support systems that for many generations they took for
granted. A decade of 'national credit card' extravagance and unbridled consumerism
has led to the undermining of the economic future of our children. It will be our
children who will be obliged to pay off the debts of this extravagant generation.
The Challenge to our Politicians
Having looked above at the picture since 1988, let us take a closer look at the most
recent 21 months of the escalation in our Total Australian Liabilities.
It is no longer 10 percent of GDP, as between years 1994 and 2000. The most recent
increment of Total Australian Liabilities is 9.3 percent of GDP for the three months
ending March 2007, equivalent to 37.2 percent of GDP annual increase if that figure
is extended over a full year. This shocking increase agrees closely with the
34.8 percent figure for the previous whole year ending 30th June 2006. In effect,
the government has lost control of the national economy. This blowout is the
main factor driving the national economy.
The above graphs exhibit clear exponential debt growth in real terms. It is
difficult to contemplate where Australia's total liabilities might be in five
year's time in the absence of a global contraction, and/or if the management of
the Australian economy continues in the same direction. Is it possible for either
a re-elected Coalition government or an incoming Labor government to reign in this
blowout? Let the leaders of both sides of politics who are vying for our votes in
the forthcoming Federal election declare exactly how they will do it, without
exposing the shallowness of, and short term vision of, debt-driven economic
management. And if they choose not to attempt to reverse this trend, what sort of
economic future lies ahead for our children? Who has the conscience to consider
the long-term consequences of an economic policy without vision?
The Australian government stands at a crossroads, between
(a) the present disastrous (for our children) economic course, reminiscent of
lemmings racing towards the precipice, or
(b) an economic course based upon principles of economic sustainability.
The latter course is not easy, will require much discipline, and may at first
appear as bitter medicine for a generation accustomed to irresponsibility, easy
money and fast credit. Yet it is the only course that will provide enduring hope
for our children.
Nine Steps of Transition to a Sustainable
Economy
1) Admission of the total failure of recent economic policies.
The economic policies imposed upon the Australian people over the past few decades,
by both Labor and Coalition governments, have been disastrous! What parents
would live luxuriously off credit and then before they pass away, pass the huge
debt on to their children, thus forcing their children to live in extreme poverty?
Yet such has been the callousness (or ignorance) of our political leaders of the
past few decades.
No solution can work while our national government continues to pretend that an
unregulated economy and escalating national debt is sustainable. Unless our
political leaders stop their denial and admit outright that the economic policies
of both major parties over the past decade have been appallingly irresponsible,
then we can expect only half-measures. But half measures will not work!
The only way to adopt an economic system in which every Australian citizen benefits,
is to begin by unconditionally rejecting an economics based upon escalating debt
and increasing deregulation, with its divisive and separative underlying philosophy.
The only economic system that will endure the turbulent years ahead must be an
economics based upon the principles of economic, environmental and social
sustainability.
2) Restoration of the Public Sector
Our present government, guided by its debt-driven economic philosophy, perceives
almost all public spending to be an unnecessary drain upon the taxpayer, and
regard it as their duty to see such spending wound back as much as possible. But
modern research has found a strong correlation between public sector investment
in infrastructure and private sector profitability. There is no gain for anyone
in dismantling a public sector bureaucracy if it is simply to be replaced by a
private sector bureaucracy (as is the common practice these days).
A healthy economy requires a relatively strong public sector because no private
sector organization can be trusted to self-regulate in a manner which adequately
allows for social priorities and the national interest. Private sector operations
invariably entail a conflict between the interests of private shareholders and the
wider public interest. A strong public sector can provide a valuable instrument
by which governments can intervene to create effective demand, whenever this is
desirable for the common good.
3) Creation of new money to be placed under the exclusive control of a government
banking authority.
Commercial banks should no longer be able to advance loans which are not backed
by an equal volume of financial reserves.
(a) Money Supply
Historically no major recession/depression has occurred without a significant
contraction in the money supply, and likewise no significant contraction in the
money supply has occurred without an accompanying major recession. And recent
experiences have demonstrated that a stock-market crash does not necessarily imply
that a recession will occur. What then can be said to be the primary cause of a
recession? The key indicators of whether a recession is likely to occur has always
been the volume, velocity and distribution of the supply of money. Major recessions
are induced whenever there is a significant contraction in the money supply. This
inevitably occurs whenever there is major bank failure (i.e., failure of a significant
proportion of commercial banks). This is connected with the fact that the financial
system exerts a dominant control over the creation of credit money, which in Australia
and most countries comprises at least 90 percent of the money supply.
The Achilles' heel of the Australian economy is the country's massive foreign debt.
This debt, together with deregulation of the market and lack of fiscal controls,
means that our government is impotent to take constructive action once overseas
factors (inflation, rising interest rates and/or a market crash) invite the
hedge funds to eat into the Australian dollar. By foreign debt, we must include
both public and private foreign debt. The shift of foreign debt to the private
sector means that the government is now able to exert less control than previously.
Most of our "foreign investment" is unnecessary, and in essence constitutes
irrepayable loans, the interest payments of which are usually allowed and
encouraged to continue indefinitely.
As long as this absurd system perpetuates, governments will remain fearful
of full employment owing to its effects in an open deregulated economy, and upon
inflation, balance of payments and foreign debt. In fact governments have come
to value unemployment as a defence against inflation. And yet if proper economic
management and regulation were instituted, there would be no reason why full
employment could not be possible.
b) Centralising the Creation of Money
Who should create and sustain a nation's money supply, the conditions attached to
its creation, and the relationship of money creation to foreign investment? The
fact is that when banks issue loans they create new money. As over 90% of the money
in circulation in Australia is not cash, but credit money issued as loans by
commercial banks and other registered depositories, it is true to say that the
banking system controls the amount of money flowing with the economy. Our present
economy is debt-driven.
We need to challenge the debt-based economic system. The government, via a
democratically accountable authority, should undertake to create a supply of money,
debt-free (that is it does not have to be repaid) into the system. This authority
then spends (not lends) a supply of money into the system on the basis of proven
need. This then will reduce the overall burden of debt in society, break reliance
upon the banking system for the supply of money, and solve many of society's
economic problems.
All national governments have the legal right through their central banks to
create money. However most countries including Australia have now largely
transferred this right of money creation to the commercial banking system, which
has been misusing it by creating money for manipulative, exploitative, and gambling
purposes. Banks and other commercial depositories in Australia are licensed to
issue new credit money, providing they maintain a ratio of regulatory capital to
risk-weighted assets which does not fall below 8 percent, and also satisfy certain
other regulations in regard to liquidity management and risk management.
4) Governments, instead of borrowing at market interest rates, should receive
interest-free or very-low-interest loans by a newly-created government banking
authority.
The finance needed for public works, schools and hospitals, small business
development, rural renewal, environmental projects, and large national
projects could easily be provided from either an Australian government banking
authority or from Treasury in the form of low interest loans. Such a scheme could
only be made to work if the entire financial system was transformed. If the
legal right to create credit money, vested in an Australian government banking
authority, were to be fully exploited then taxpayers and people in general would
benefit immensely, as there would be a release of resources (previously used to
pay interest) that could be directed towards many beneficial areas.
An Economic Sovereignty Loan Plan [along the lines advocated by U.S. reformer Ken
Bohnsack] would be established by which federal, state and local governments,
instead of borrowing at market interest rates, especially from
banks and foreign lenders, are issued interest-free or very-low-interest loans by
the government banking authority. These would be for capital infrastructure projects
likely to return a profit, and also to retire existing debts. Retiring public debt
would gradually eliminate the annual interest bill and improve the budget deficit.
When full employment is reached, increased tax revenues may overtake any need for
further government credit money.
5) All of the money presently circulating as a result of bank lending to be
replaced with money created by the government banking authority.
A major cause of both inflation and deflation is the power of banks to create
money by granting or by recalling loans, and they thereby increase or reduce
the amount of money in circulation. Over 90 percent of circulating money has no
reserve backing; it is simply credit money created by virtue of the public's
trust in the financial system's ability to ensure that all money flows will be
balanced and stable. But at times of economic crisis the banks have the capacity
to strongly reduce the amount of credit money circulating. For example, during
the Great Depression in the 1930s, circulating money in the US reduced from $27
billion (in 1929) to $20 billion (in 1933).
The power of private banks to create new credit money should be withdrawn and the
power should be returned exclusively to an appropriately constructed agency of
central government. In his book "100 Per Cent Money" (an Adelphi publication,
N.Y. 1935), Irving Fisher proposed that the government should withdraw the right for
private banks to make loans in excess of their reserve holdings, while simultaneously
the government should manufacture sufficient base money to ensure that all of the
public's deposited credit money will be matched by bank reserves. These reserves
are to be distributed to banks according to their lending requirements. From then
onwards, banks can only advance new loans if they possess sufficient reserves to
match their lending on a one-for-one basis. In this way, inflation and deflation
would be substantially reduced and the banking system as a whole would be more
robust. The quantity of money within the economy would be monitored and controlled
exclusively by the government through its appropriate financial agency, which would
employ open market operations to increase money in circulation (by buying Treasury
securities) or reduce it (by selling Treasury securities). This would maintain
stable price levels, and assist in keeping the dollar value and employment at
optimum levels.
6) Movements in foreign liabilities to be constrained.
(a) Reversing the Growth in Foreign Debt
The only way to avoid future problems with our huge foreign debt is to firstly develop
a mechanism by which imports and exports are balanced each year, and then to start
paying off the existing debt. Australia is a consumer nation,
and at present is importing more than it exports. A mechanism needs to be found
which automatically increases the cost of imports in comparison to exports, until
the cost of imports equals the cost of exports.
One such mechanism has been proposed by Australian economic theorist John
Iggulden. He calls it the Impex System of Foreign Exchange Management (Impex is
short for Import-Export). He proposes setting up an official Impex Facility through
which all overseas transactions pass. Money earned overseas would be exchanged, not
for Australian dollars directly, but for an Impex draft. And the only way in which
anyone could spend money overseas would be to buy Impex drafts. These drafts would
be weighted so that medium term imports (overseas spending) and exports (overseas
earnings) are balanced. That is, if imports temporarily exceed exports, the cost
of the Impex draft in Australian dollars (the Impex rate) increases, until the
cost of imports reduces import demand, and imports and exports once again come
into equilibrium. A high Impex rate would in effect put an additional cost on all
interest, services, and foreign profits going out of Australia.
Once such a mechanism is established, Australia can start the long haul of paying off
its huge foreign debt, by setting the Impex rate slightly higher than the natural
market rate. It is a fallacy to believe that foreign investment is needed. Once we
have developed a balance of foreign exchange mechanism, all of the money needed for
investment in Australia can be better provided by government and Australian
investors, without the lethal element of exorbitant foreign interest rates - over
which our government has no control.
(b) Reversing the Growth in Foreign Equity: Foreign Ownership and FIRB Reform
The Impex system will need to be supported by a drastically-reformed Foreign
Investment Review Board (FIRB) to reverse the disastrous situation where foreign
ownership/control of Australian enterprises has now officially exceeded 50 perecnt, and
may well exceed 90 percent if we take into account nominee shareholders. FIRB's approval
criteria must be based not only on the estimated expenditure in Australia but more
importantly, on the long-term employment of Australians and of technology transfer
into Australia. FIRB's role in funding should be expanded to include information
and education to local enterprises for which Australia would otherwise be dependent
on foreign investment and imports. As well the FIRB should ensure:
· Transfer of ownership to Australian owners and investors at the end of between
10 to 20 years;
· Detailed monitoring and regulation of foreign capital;
· Investment of foreign capital in import replacement industries, and enterprises
consistent with national environmental and social priorities,
· Approval of foreign involvement in new ventures only where foreign capital,
technology and relevant expertise are not available in Australia;
· Strict monitoring of export and import prices to eliminate "transfer pricing"
and other tax avoidance/evasion arrangements;
· Prohibition of foreign investment used to own land for residential or commercial
purposes.
7) Developing a National People's Bank
Initiatives should be taken to develop a policy for a national People's Bank, which
should invite participation from current People's Banks such as the Bendigo Bank,
micro-credit banks such as the Grameen Bank, and civil society (through a national
Civil Society Forum). In this way, the emerging policy will be developed
democratically by the people, for the people. People's Banks must be
based upon the ideal of introducing minimal bank fees or very low interest rates
and priority on serving the people. Ownership of the banks will be vested either
in government (owning the banks on behalf of the people) or by private shareholders
under strict guidelines that ensure that no superfluous profits are made to be
siphoned off by greedy interests. Because the corporate goal of profit-making has
been replaced by the goal of minimizing interest rates on loans and maximizing
customer service, these banks will eventually come to dominate the banking sector
in Australia. Once a People's Bank policy has been initiated, strategies can then
be cultivated to reduce Australia's private domestic debt.
8) Openness of Economic Information
Once our leaders have admitted that debt-driven economic policies have failed
utterly, they must admit also about the censorship of vital economic information
over the past few generations. Government needs to come into immediate consultation
with civil society, to develop a broad policy on openness of economic information.
A Code of Openness of Economic Information needs to be developed, if not by our
political leaders, then by civil society.
What items would such a Code of Openness of Economic Information embrace?
There would be a right to absolute openness and public availability of essential
economic information from the ATO (Tax Office), Treasury and ABS (Bureau of
Statistics). This will include degree and amount of foreign ownership, amounts of
money and profits shifted overseas, amounts and details of tax paid by foreign and
Australian ownership, analysis regarding nominee shareholders, national turnover,
and comparative impact of the Double Tax Agreement Act. A commission needs to be
set up to investigate these figures for the past few generations, to disclose to
the public the vital economic truths and trends that had previously been hidden
from the public. We need clear answers to the questions of how our economy became
so horrendously managed, and whether any corruption and false statements to the
public were involved.
We need to inaugurate investigations regarding past investment practices, the buying
up of Australian businesses, and profit transfers overseas.
We need to develop a Green GDP, taking into account the volunteer economy, and social
factors, and we need to bring in full-cost pricing embracing measures for pollution/
toxic wastes, resource-depletion, inefficient and wasteful practices, and effects
upon culture and living standards. And we must remove subsidies made out to powerful
lobby groups, including TNCs. Methods of assessing unemployment rates and
consumer-price increases (CPI) need to be overhauled. These may seem radical approaches,
but if we are to save our economy, then we need to start the new economic planning
upon clean foundations.
9) Tax Reform Debate involving Civil Society and State Governments
The introduction of the GST tax placed an appalling burden upon small businesses,
while not delivering major improvements in the economy. The main problems with the
GST are its regressive nature, and the lack of information and public debate before
the legislation for it was passed. With such secrecy, and the final decision being
made between Liberal and Democrat leaders behind closed doors, the GST legislation
was doomed to fail before introduction. Herein lies the key to why tax models enacted
by the Commonwealth governments have consistently failed over the past generation.
That key has been in the undemocratic, authoritarian and secretive monopoly on policy
and decision making by Commonwealth governments. The Commonwealth government has
never even invited State governments to have equal participation for developing
Australia's long term tax policy. State governments are simply briefed on the
Commonwealth government's tax plans as a "fait accompli".
A further major reason why such authoritarian and secretive tax legislation does not
work, is because there are vital ethical issues involved in the tax debate. Such as
balancing fairness and tax impact on various levels of wealth or income, with
complexity and evasion issues. In the past such ethical issues have never been
openly debated; they have simply been decided on ideological grounds. Hence the
inevitable failure of resulting tax policies.
The practical and ethical issues involved need comprehensive and open debate with
equal participation by civil society and State governments, and for this, all
relevant economic information needs to be made available by the Commonwealth
government, so that public and State government think tanks are free to undertake
comprehensive assessment of various economic and tax models. The creative fruit
of such open people-centred debate will then lead us to a tax model that will work,
and save the people and our government vast amounts of money formerly wasted.
By David Keane,
July 2007
Acknowledgment: Policy on the Economic Sovereignty Plan and Foreign Ownership and
FIRB Reform by courtesy of Economic Reform Australia (ERA). ERA also helped
immensely with advice in numerous other economic areas. Their policy statement
and newsletter are available for anyone who wants to be in touch with progressive
economic thought in Australia [Economic Reform Australia; PO Box 505, Modbury,
SA].
APPENDIX
I have taken June data from June 1988 to June 2005, and quarterly data from June
2005. You can confirm these data by looking up Gross Foreign Debt, Gross Foreign
Equity and Gross Foreign Liabilities on Reserve Bank table H4, seasonally adjusted
Domestic Credit on table D2, and Gross National Product on table G10. These figures
are provided by the Australian Reserve Bank every quarter, now 3 months late.
On 21/June/2007, the Australian Reserve Bank published the March 2007 figures for
table H4, and so now we have available all the information for all these statistical
categories up until the end of March 2007. I simply rearrange the Reserve Bank
figures which helps with comparison and trend analysis, and so it can be easily
understood, I add together the figures for Gross Foreign Equity, Gross Foreign Debt
and Domestic Credit to come up with an overall figure of "Total Australian Liabilities".
Let us first consider the evolution of the figure for Total Australian Liabilities
(= Gross Foreign Equity + Gross Foreign Debt + Domestic Credit) as a percentage of
GDP. In the post-recession years of 1994 to 2000, Total Australian Liabilities was
increasing at a regular rate of about 10 percent of GDP every year. This in itself
reflects an unsustainable pattern and therefore lack of economic vision by the
incumbent Australian government. But after the year 2000, a very alarming trend
appears.
Year to June 1995 increment = 7.6 % of GDP
Year to June 1996 increment = 7.1 % of GDP
Year to June 1997 increment = 8.7 % of GDP
Year to June 1998 increment = 12.9 % of GDP
Year to June 1999 increment = 7.1 % of GDP
Year to June 2000 increment = 16.9 % of GDP
Year to June 2001 increment = 18.6 % of GDP
Year to June 2002 increment = 7.9 % of GDP
Year to June 2003 increment = 12.3 % of GDP
Year to June 2004 increment = 22.1 % of GDP
Year to June 2005 increment = 15.4 % of GDP
Year to June 2006 increment = 34.8 % of GDP
Year to March 2007 increment = 35.1 % of GDP
Let us take a closer look at the most recent 21 months of the escalation in our
Total Australian Liabilities. The annual increment is no longer 10 percent of GDP,
as between the years 1994 and 2000. Nor is it 15 percent to 20 percent of GDP as
in the years 2001 to 2005. Recently, this figure has blown out to an annual
increase of over 35 percent of GDP. In effect, the government has lost control of
the national economy.
