This blog is inspired by an article that I recently read with the heading ‘Is there a better way to kill inflation than interest rates’, written by ABC business reporter Gareth Hutchens.
Currently the Reserve Bank is using the sledgehammer of interest rates to crack the inflation nut, a concept adopted as far back as the Keynesian era of 1930’s. Mortgagors are paying more and getting nothing back for doing so. More importantly it is only mortgagors who are funding the battle to beat inflation which means that approximately one third of the population are getting a free ride.
There must be a fairer system says Hutchens.
Back at the start of the second World War in 1940, John Maynard Keynes (JMK) proposed a solution that was brought on by the inequities that would be created out of the war effort. That doesn’t sound a lot different from the unintended consequences that came out of the Covid Pandemic. JMK was asking the question ‘how do you stop people from using excess income to compete over scarce consumer goods that will trigger inflation in the domestic economy’. He proposed to set up a Savings Scheme (SS) that would postpone the ability to spend too much money that would otherwise create an inflationary problem. JMK said it would be much fairer to postpone people’s ability to spend because it would allow workers to keep the money they’d worked hard for. As an aside the current system in increasing interest rates on mortgages is a crude way of stealing money from people who worked hard in the first instance, saved hard in the second and are looking forward to prudent spending when they retire.
Implementation of the SS would be simple and done no differently than the way by which we make our routine superannuation contributions. This would mean that a percentage of our salary would be transferred and held in trust to the credit of the taxpayer into their nominated account that would preserve its capital value but increase in value over time due to the interest that is earned on the deposit.
JMK envisaged that once the inflation fight was over, the accumulative savings could be released back to workers by a series of instalments that would ensure that not only is the money returned with interest to the taxpayer but is done in a way that doesn’t reignite an inflation problem due to the funds being available for particularly discretionary spending.
But here is the problem. The cause of the inflation that we are now battling with was initially caused by the closing of the borders by panicking politicians but then exacerbated by supply chain issues and together these contributed approximately 80% of the cause of the inflation effect.
THE CAUSE OF INFLATION HAD LITTLE TO DO WITH OVERCONSUMPTION.
At this stage mortgagors are finding a way to afford the increase rates on their loans by drawing down against the savings that they generated during the pandemic through shutdowns and handouts. The family budget is about to be smashed because household savings are about to run out but the ongoing increased costs have to be endured. How can a mortgagor in this country with an average loan of $500,000 afford to pay an extra $1,000 per month handed over to a bank in the form of higher loan costs without in any way enjoying a benefit. This system is stuffed and the system has to change and if politicians are going to do the right thing they have to have the gumption to make the easy decision and its as easy as this. In the coming May budget the Treasurer can put in place with a stroke of a pen a Savings Scheme that replaces the need to increase interest rates any further and so give people something to look forward to when finally, the inflation battle is won. If something is not done along these lines, far different from the 80-year-old edict that currently prevails, then the property markets will be badly damaged and more sadly a significant number of first-time buyers, some of whom should never have been introduced to property ownership, could be ruined for life.
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