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Hi, I’m The Economy And My Partners Don’t Understand Me…

Now, I don’t want to boast…

Well, actually I do, but I’ve got very little to boast about and if I start boasting without actually having any concrete to back it up, I’ll sound like Tony Abbott…

Mm, I’m wondering if it’s too early to add: “and Malcolm Turnbull” to that sentence.

Anyway, when I did Year 11 Economics at highly respected private school I got the top mark in the whole school by a significant margin. I point this out so that you understand that I had an intuitive grasp of basic economics. By the end of Year 12, I just scraped a pass because, well, it made no sense. The things I learnt in the ensuing eighteen months just seemed to me contradictory or just plain wrong. I was confused because when I tried to use real world examples to explain the theory, they contradicted the theory.

Ok, now I’m not going to be so bold as to claim that I was ahead of my time because shortly after my exam, all of the economists in the world were confused, but I think that it’s worth pointing out that, if Malcolm Turnbull invented the internet in Australia, then I invented the change in economic thinking in the seventies…

On a side note, when one thinks about Abbott’s suggestion that Turnbull practically “invented” the internet in Australia one realises why they had no problem stealing their “jobs and growth” slogan from George W. Bush’s election campaign. Or the “continuity and change” slogan. It was just “inventing it” in Australia. Pedants would argue that patents are patents and that things are only “invented” once, but then they would say that because they’re the sort of people who’d pick on Malcolm Turnbull for suggesting that Medicare would “never ever” be privatised because it echoed John Howard’s “never ever” GST comment. See, you can invent things more than once!

But back to the topic…

I read John Kelly’s great post this morning and I couldn’t help but think that maybe I should try and explain the economy in ways that even someone considering voting for Tony Abbott in this election could understand it. (As in: Tony’s no longer PM? When did that happen?)

Let’s imagine that I’m so important that people will accept a cash cheque from me because it can be used as a fungible item. In other words, there’s no difference between my cheque and actual money. In this sense, I’m rather like the government because they print notes and we treat them as though they’re actually worth something. Let’s imagine that I have about a billion dollars in the bank.

Ok, now I’ve been giving people all these cheques and, after a while, I notice that some people aren’t cashing them because I’m so important that they’re keeping them as some sort of relic that they actually were having dealings with me. I then decide to keep writing out cheques way past the billion dollars I have in the bank.

One night this concerns me, so I go to the bank and arrange a line of credit, so that if it ever happens that all the cheques are presented at once, they’ll cover it. I ask for a million dollar line of credit and the bank says don’t be ridiculous, we don’t intend to put a limit on your credit.

At this point, I have become the government.

The question for homework is this:

Should I attempt to buy back all the cheques? Or should I just keep writing as many cheques as I like and not consider the possiblity of ever having to pay them back? And what effect will each of these have?

Once you’ve thought about this, you’ll understand the dilemmas facing the federal government and why the economy is neither a household budget nor a blancmange.

And sometime in the next few days, I’ll give feedback on your homework!

Comments?

6 comments

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  1. David

    The Obvious response to the assumption that you currently had a billion in the bank and a billion written checks that no person felt the need to cash:

    Dont Buy back the checks IF you are currently getting interest paid to You from the Bank and if the un drawn overdraft is not charging you a trailing fee.

    But part of your explanation stated should you continue to write checks when you have already written a billion of checks against the Billion you have in the bank. to that I say NO.

    ——

    Now let me explain an economic Solution to you that will fix the Australian Economy. I will explain a few things and my solution is based around those things.

    I am the son of a House Builder and I also became a house Builder. So when I did my Tafe Training I topped the Class in many tests even though I was 15yrs old and Some of the Students were 17-20yrs old. So just as you say you know your game, well I know mine, including all the maths that goes into working out stairs and roof pitch and measurements using formulas.

    Currently the Australian Total Government debt is 750 Billion see link: http://www.australiandebtclock.com.au . Government debt is currently rising faster than the rise in GDP. So to narrow down the obvious objective of improving the economy I will refer to the Big 4 banks net Profit.

    CBA has a current net profit of about 10 Billion and would pay around 3 Billion in Tax. In total all the Banks would be earning around 30 Billion net Profit and be paying less than 10 Billion in Tax for Government revenue. Now when you factor that the Government is spending 26% of GDP or over 400 Billion spending vs the 1.6 trillion GDP. It starts to Paint the Picture that although APRA and the Government are doing all they Can to protect our Banks from Competition, the protection for the banks only generates 10 Billion in tax revenue from Banking Profits. With Government Total debt being 750 Billion and Government spending being over 400 Billion pa.

    A bank can collect Morgages on a House even if the House is 50 years old. The Builder that Built the House only got paid to Build that house once, but the Bank get paid from that house every year and quite likely the Bank is earning more per year from that House than what the Builder earnt to Build the House. Even if the House is 20 years old, its still Likely that the Bank is earning More per year from That house compared to what the Builder earnt to build the house.

    MY SOLUTION

    IF House Builders could be allowed to Form a Society of Builders and Become a Building Society, the economics of our Country can be . transformed. The reasons are that a secure lending Group can source wholesale Money at 2% and lend it on Home loans at 4.5%pa.

    Currently the entire Building Industry QBCC regulation and Australian Building Code is a complete mess and not structured in a manner capable of producing economic growth. WIth the Entire Building regulation Authority becoming the Australian Building Society it is a game ghanger for Confidence in the economy because of a few KEY REASONS.

    Firstly as The Building Industry would now be getting banking revenue from the profit of providing Home loans it means that the Industry can afford to do many things that it currently cant afford to do, LIKE Providing 25 year structural Building Guarantee with the 25 year Home Mortgage.

    Training support for Apprentices, Contractural Gurantee to Protect both the Builder and the Client if on or the Other went bankrupt during Construction, meaning there is a pool of money able to pay all workers and complete the project. Also the Building Society would also be able to pay entitlements and superannuation in an Industry that has not one single entitlemsnt like RDOs, Sick pay, Long service leave etc.

    It would mean that Builders could start Building projects NOW even if there was no margin, because the Profit on the Building can be made by providing the Mortgage at 4.5% and Sourcing the Wholesale funding at 2.5%pa. This way the Building Society makes 2% every year over and over. Rather than making a 6% Margin once only.

    The Key support to the economy is more houses would be covered by a 25 year structureal and defect Guarantee whilst they had the Mortgage with the Building Society. It means more people have work, More Home Buyers can be confident knowing their home is covered by a Guarantee. More Clients would build knowing there is a Building Guarantee if the Builder goes Broke. More Builders would build knowing they are Covered if the Client Goes Broke.

    Its an Infinate Win win for the entire economy. The Only loss is the Banks will lose some market share, But the extra Building will taking Market share mainly on new Construction. Banks will still have a Thriving Business,

    The Governments get More revenue, Houses get built to a Higher standard because they now must be Guarateed for 25 years. More people have Work. Builders can now afford to build on tiny Building margins because they will be getting some banking revenue.

    By Contrast, CBA earns 10 Billion net profit, Stocklad makes 600 Millionpa net Profit, yet the House Builder AV Jennings makes just 30 Million per year net Profit.

    The entire Housing Industry is currently a shambles and ran by Ministers that have never Built a house before and have NFI. My Solution would fix the entire economy and get all the Financial numbers moving in the right direction towards Properity for our Country.

    Regards

    Dave ‘Chippy’

    0410169400

  2. JohnB

    Regardless of your social/financial circumstances or the amounts of money involved, you are morally and legally bound to honour your issued cheques.
    The effect of such continued actions would most likely be a jail sentence for you and your conspiring bankers.
    Both you and your Bank are spending constrained users of a nations sovereign currency; neither party is the issuer of that currency.

    You had no right to issue essentially valueless cheques.
    You have acted dishonestly in issuing cheques in excess of your available funds and also broken your initial contract with the Bank regarding responsible/proper use of a cheque account,

    The Bank too has no right to offer waiving application of common honesty laws to provide you unlimited financial benefit. The bank has no lawful right to abandon proper commercial banking practice – they are required to comply with the law of the land in the conduct of their banking activities; they must retain statuary reserves, abide by govt. financial regulations they operate under – as well as to protect their trusting depositors and shareholder/business owners.

    Your analogy provides little use other than to contrast the very different financial situation of a sovereign fiat currency issuing government.
    A sovereign currency issuing nation does not issue dud cheques.

    As sole issuer of the currency, provided it does not incur debt in foreign currency, it is not spending constrained and thus can never be unable to payout creditors; it has the resources, the productivity, the industry and the workers of the the nation at its disposal to back its issued (floating) currency.
    It has every right, in fact a duty to issue whatever currency amount is necessary to ensure efficient effective regulation of a productive national economy to the best and most equitable benefit of all its citizens.
    It can buy whatever resource is available for sale in the national economy, including unemployed labour – responsible management of the national economy should ensure social fairness, with sustainable ongoing availability of those necessary resources.

  3. Phil

    Love it Rossleigh – I haven’t a clue but sure as hell am I waiting for the answer!!

    PS Be nice please, I think I was away the day they did maths in my High School.

  4. Jaquix

    Dave the Chippy has an interesting idea, thinking outside the square. Basically its a Building Bank. Perhaps super funds would also find it an attractive investment proposition.

  5. Garry

    The government does not print money, the central bank does. Big difference, ask JFK.

  6. silkworm

    JohnB has nailed it.

    Garry, I suspect you are wrong.

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