The government prints the money, (M0) but after that, the various forms of money (M1, M2, M3) are in the hands of private enterprise. The government has recently found it necessary to guarantee M1 so that business transactions can be made without suitcases of cash. I suggest the government should issue online M0 (zero interest) or online M1 (interest say 4%) accounts. Access could be through the ATM network. Then (with appropriate safeguards) remove the guarantee to APRA overseen institutions.

Do not confuse capitalism with free enterprise (aka lassaiz faire).

Once upon a time, free enterprise was a man with a horse and cart. Then came capitalism exemplified as a goods train. The modern version of free enterprise is a truckie.

Technology turned free enterprise into capitalism. Now the wheel has turned, and capitalism is in the process of being supplanted by small free enterprise businesses.

I support the Henry George suggestion that government income should mostly be derived from land tax. To supplement that income I would add the rental income from natural monopolies (e.g. Airports, mineral wealth, electromagnetic spectrum, transport corridors). The income from those monopolies would directly flow to government, while various “teams” would quote for their management.

To summarize:

1) Capitalism (stock market) is withering away as did feudalism before it.
2) Consequently,there are far fewer places to invest money, because most large corporations have no place in the economy of the future.
3) Banks should be cut free from government guarantees. Instead the government should offer guaranteed M0/M1 accounts to everyone.
4) Government should legislate to derive it’s income from land & monopoly taxes, and most of that money returned to the people as negative income tax. (not as free hospitals & schools). Since each child would get a negative income of about $12,000, some of that money could be given to the parents as a cheque that could be cashable at any school.

Much of the above is inevitable (e.g. that is why the stock market is collapsing).

Government will probably enact legislation in a vain attempt to protect the big corporations (because the big corporations pay taxes and hire unionists and PAYE taxpayers).

Governments generally do not like small businesses, because it is so hard to tax them.

It seems to me that a better option would be to allow the RBA to increase the rate of CGT or the time it has to be held for a discount for particular assets types. By applying CGT increases to particular assets the RBA could deflate an individual asset bubble without clobbering the entire economy like they do with interest rates.

On July 30 Hans Redeker, head of foreign exchange strategy at BNP
Paribas, Europe’s biggest investment bank, predicted: “The Aussie is
going down, big time.”

Back then – it already seems like a long time ago – the Australian
dollar was sitting majestically at 97 cents to the US dollar, which
was taking a battering. But the Aussie did, indeed, go down, big
time. Within three months it had crashed by 33 per cent to US65.5
cents. Now Redeker has issued another warning to Australia. We’ll get
to that. But first, let’s look at his track record.

December 2006: Redeker predicted a sharp recession in the United
States, saying the condition of its housing market was worse than the
experts were stating and the flow-on effects would be much worse than
predicted. That was almost two years ago. He was right.

January 2008: He predicted the Aussie dollar was facing two years of
decline, and expected to see it fall to 66 cents. He was right. He
also predicted a rise in financial market volatility, higher
inflation worldwide, higher interest rates in Asia, weakening demand
for Australia’s minerals exports from China, and a weaker sharemarket
in China, all of which would drive down the Australian dollar. Since
then, the Shanghai sharemarket has crashed 50 per cent from its peak.

October 2008: Two weeks ago Redeker repeated his claim that abundant
foreign money had been available to Australia and too much of it had
been spent on real estate, creating a speculative bubble: “The easy
money went straight into real estate ?c Australia will now have to
generate 4 per cent of GDP to meet payments to foreign holders of its
assets. This is twice as high as the burden faced by the US.”

After the Australian Reserve Bank slashed key interest rates by 1 per
cent, Redeker also told London’s Telegraph that he was concerned
about what the Australian Government may do: “Yes, Australia has a
fiscal surplus, but that does not offer as much protection as people
think. If the Government boosts spending further, the current account
deficit will spiral out of control.”
And what has the Rudd Government just done? Boost spending.

There was certainly no discussion of the current account deficit
spinning out of control, or Australia’s excessive debt, when the
Prime Minister, Kevin Rudd, launched his $10 billion economic
stimulus package last week, nor any from the Opposition Leader,
Malcolm Turnbull, who offered in-principle bipartisan support. It
gets worse. Redeker continued: “There is a risk, however remote, that
Australia could face some of the foreign funding difficulties we have
seen in Iceland.”

Iceland! Iceland was the most leveraged economy in the developed
world when it became the first economy to be bankrupted by the credit
crisis. You do not want to be mentioned in the same sentence as
Iceland unless the discussion is fishing or blondes.

After quoting Redeker, the Telegraph’s global business columnist,
Ambrose Evans-Pritchard, weighed in with his own commentary: “The
immediate problem for Australia’s banks is that they gorged on
offshore US dollar markets to fund expansion because the interest
costs were lower. They were playing on a huge scale with leverage.
European banks face much the same problem as dollar liabilities come
back to haunt, but Australian lenders have pushed their luck even
further.”

Gabriel Stein, of Lombard Street Research, weighed in with this,
after noting that Australian household debt had reached 177 per cent
of gross domestic product, almost a world record: “It is amazing that
in the midst of the biggest commodity boom ever seen they have still
been unable to get a current account surplus. They have been living
beyond their means for 10 years. What worries me is that productivity
growth has been very low: they have been coasting after their reforms
in the 1990s.”

The global financial world is watching the Australian dollar because
it holds a key to the great unanswered question of this uncertain
era: will the global market punish a currency for its declining
interest yield? Or will it reward a currency because of the soundness
of its economy? Central banks are acutely interested in the answer.

Evans-Pritchard thinks the early signs are hopeful that the answer is
the good one, that nations will be rewarded for having sound
economies. But he does not believe Australia can escape the
consequences of excess: “Australia has allowed its net foreign
liabilities to reach 60 per cent of GDP during a decade-long boom,
twice the level of the US. The country will, in effect, have to pay 4
per cent of GDP in the form of rents to foreign asset-holders as the
bill for such extravagance falls due.”

The bill is falling due. Earlier in the year Australians travelling
in Europe would have paid about $1.50 for every euro spent. Today
they need $2.10. The Aussie dollar is weak again, despite all the
luck of the China boom. This raises a number of awkward questions.
Did the lucky country became the greedy country? Did it fail to
sufficiently embark on a program of nation-building during the
resources boom?

Was most of the bonus redistributed as tax cuts, which were spent
chasing bigger mortgages, bigger homes, new cars and general
consumption, stimulating short-term economic growth but not enough on
long-term productivity and higher savings? During 17 years of
unbroken economic expansion and a 10-year commodities boom, it took a
lot of people, borrowing a lot of money, taking a lot of unproductive
risk, to get to where we are today: a nation with excessive debt and
excessive vulnerability to external circumstances barely within our
control.

http://www.smh.com.au/news/opinion/paul-sheehan/greed-a-deadly-sin-for-the-economy/2008/10/19/1224351052160.html?page=fullpage#contentSwap1

We and the US have been operating the world’s first cargo cult. We would not need “growth” to repay the debt we just need to be much less greedy. We also need to be be organised by the government in such a way that we can “trade” on the global interface and not just buy on credit. We need free trade not free cargo. Our line of credit is collapsing leaving us with a $700billion debt and all the oposition leader could comment on tonight was that he was concerned that the goverment would kill the (fiscal) surplus.

Also beware our quoted unemployment level of aroung (4.5%) it is a lie and pollies say this is “historicaly low”! This is for a very short “historical” period as back in the 1960’s unemployment was at a low of 2% real or 1% using the current shambolic metric. If this unused labour was being and had been used, we would have a much smoother future with little debt but now the “Greater Depression” looms.

We have been bludging on other countries (the Americans would say “mooching”).

No it isn’t. It’s greed.

It doesn’t matter how good people have it, they want more.

In the case of housing, they want more bathrooms, more toilets, more living rooms, more and bigger TVs, more and bigger refrigerators, swimming pools, airconditioning, bigger McMansions….

It’s called living beyond your means.

I have almost finished (and am living in) a 145 m2 house I designed with one bathroom and one toilet. It’s an environmental award winning house. We virtually own it outright, and it costs nothing to run, our last power bill was $29.55, and $25 of that was ambulance levy.

The economy can collapse as far as we are concerned, we saw this coming a long time ago.

So when I mention forgiving debts, I’m not at all concerned about ours.

I built the house for $95,000 BTW. It’s all solar powered, all costs included.

So much for Carbon trading costing the earth!

Debts forgiven as in jubilee is very different to debts not being repaid. The debts will not be forgiven.

I agree with you strenuously that there will not be further growth from this point. No! The lender will take what they can. Both the borrower and the lender will suffer heavy loss.

The biblical model of Jubilee didn’t work then and it won’t work now.

If anyone out there is in debt (even your home loan). Get out now. When the global companies start falling and the CDS risk starts unwinding (or some other unknown trigger) the crunch on main street will be much harder than the crunch on the share market. When the lenders/depositors panic, everything gets liquidated and surprise surprise there are no buyers. Houses are very illiquid and will suffer unprecedented falls in value. Because of Australia’s obsession with home ownership the falls will be even greater.