Get Rid of Central Banks

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Does anyone, really, understand this carbon tax thing? Superficially it makes sense. Put a price on carbon to incentivise a move to a ‘low carbon economy’ and voila, pollution drops. That’s the plan. But how will it unfold in reality?

Climate change Minister Greg Combet said the other day that ‘millions of households’ would be better off under the carbon price. Presumably, that means millions more will be worse off. Probably much worse off.

The big polluters – industry – will pay a tax on their carbon emissions. Where possible they (electricity generators, for example) will pass this tax on in the form of higher prices. In turn, the consumer of electricity and all sorts of other manufactured goods will pay higher prices.

But the government has said it will use 50 per cent of the revenue raised from the tax to redistribute to households, presumably lower and middle-income households. These households, according to Mr Combet, will actually be better off following the introduction of the tax.

We’ll believe that when we see it. But such a stance is hardly incentivising households to reduce their ‘carbon footprint’. Taking from the manufacturers to give to the consumers will hardly help reduce emissions in a meaningful way.

The political imperative is already getting in the way of carrying out the intended reform. The result will be some half-arsed policy that has massive unintended consequences and fails to achieve its goals.

We can pretty much guarantee job losses will occur in the manufacturing sector. Take steel makers, for example. Bluescope Steel competes on the world stage. High labour costs, a strong dollar and stringent production standards means Bluescope is already struggling to remain competitive. Its return on equity is not even 5 per cent. When a company’s cost of capital is far greater than its return on that capital, things are bleak. It means value destruction.

A carbon tax on steelmakers is hardly going to improve the situation. The government says the carbon tax will only add $2.80 to the price of $800 tonne steel. Bluescope’s Paul O’Malley reckons it will be closer to $8.

Either way, steel prices will rise and Australian steel will become more uncompetitive than it already is. Steel making is a global industry. Countries willing to emit the carbon will get the contracts.

In another case of unintended consequences, Brickworks piped up yesterday with its own example. Because the company has taken steps to reduce its emissions over the past few years, it will not be eligible for heavy emitter assistance. That means the price of bricks will go up.

And the company argued that it could also encourage the use of substitutes. Meaning that over the long term, houses may be more energy intensive, defeating the purpose of the tax in the first place. This is because non-brick housing requires more in the way of cooling and heating.

Obviously, companies are talking their book when arguing against the need for a new tax. They always will. But the problem is simply that thousands of unintended consequences will flow from it. It always happens.

Will the price of these unintended consequences be worth it? We doubt it.

Here’s a radical solution that requires no new tax. Get rid of central banks.

The genesis of this carbon tax came about in 2007 when climate change was a major political issue. It still is an issue (and the tax is a derivative of climate change) but the electorate has cooled in its support in a big way.

Is it any coincidence that climate change was such a concern when the global economy was booming, asset prices were sky high and people everywhere felt wealthy? It’s far easier to care about the environment when you feel financially secure.

Central banks had a major role to play in this whole dynamic. Easy money provided the illusion of wealth. Easy money also put a strain on the earth’s resources through the huge amount of purchasing power it created.

Put another way, central banking policies brought forward and concentrated a huge amount of global demand in a short space of time. While it provided the illusion of wealth for many, it also highlighted the fragile state of Mother Nature in its attempt to cope with the credit boom.

So, why not just get rid of central banks and put monetary policy in the hands of the market? Moving to a system built on sound money would ensure credit is only created where it’s genuinely needed for productive purposes.

The current system means central banks create reserves for the banking system to try and force them to lend. And where they don’t lend, they speculate, driving up asset prices to create more phoney wealth.

Most of the world’s economic problems are the direct result of central banking activity. To the extent that these policies create a mis-allocation of resources, we would argue that central banks also contribute in a big way to the climate change debate.

And if you don’t believe that line of thinking, there’s plenty of others reasons to bring central bankers to heel. This article about Fed handouts to the well connected will make your jaw drop.

Or what about the fact the Libyan rebels, in what seems like an unprecedented move, created a new central bank in the midst of the uprising. It just goes to show how political and economic power is err, centred around a central bank.

Mother Nature is a tough cookie. She constantly evolves and adapts. That’s not saying we idiot humans haven’t treated her poorly. But she can handle us all living within our means.

Greg Canavan
The Daily Reckoning Australia

PS: In the latest issue of Sound Money, Sound Investments I warned readers:

“As an Aussie-based investor you’re at the whim of the big boys – Japan, the US and China. Loose monetary policy from the US and Japan versus a slow but sure tightening from China.

The influence of Japan and the US is winning out and pushing our market higher. But as fears about inflation grow, even they might need to pull their heads in soon.

When the situation is complex and confused you’re better off doing nothing. Right now, having a large exposure to both gold and cash seems the prudent thing to do.”

I should have added silver, too.

Over the last few years gold has moved 4.67 higher, from around $312 to $1,458. But silver has risen even more…from $6 to $40 – a rise of 6.67 times.

Why is silver rising faster than gold?

This new report by Dr. Alex Cowie provides some intriguing answers. He also outlines a speculative way to leverage any further gains silver makes in 2011.

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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20 Comments on "Get Rid of Central Banks"

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Dan
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Prior planning and preparation prevents p!ss poor performance. What I’m getting out of all of this is this: The Government borrowed a massive sum of money from China to throw at anything and everything in order to insulate Australian banks and big business from keeling over (in the form of grants and stimulus packages. A lot of that money ended up in China in the form of imports. Now it is forced to find a way to tax people, basically, it doesn’t really matter how. They are using climate change and carbon because this reflects the lag time between coming… Read more »
Fred
Guest

One way to keep the bastards more honest is for you to know the rules that the bastards are supposed to follow when they try make the legislation to screw you. The rules those bums are supposed to follow are good regulation guidelines from both COAG and the OBPR, commonly flouted by many a department, but at least some structure to use to hold them to account when you complain about unintended consequences etc.

Tim
Guest
Here’s my idea. Everyone gets a personal emitting certificate/allowance. At the end of every FY, the utilities have to report to te ATO, and you, a summary of your emissions (starting with electricity and water only). If you go under your PEA, you get the pro rate difference back through the tax system (utilise existing systems and agencies). If you go over, you get a bill (this could be done quarterly to avoid bill shock). Don’t tell me this wouldn’t drive innovation as people looked for efficient appliances to maximise their refund. Utilities would see less power used and to… Read more »
Dan
Guest
All taxation should be looked upon as a bad idea, but we nonetheless accept it as an inevitable and necessary part of having a commonly owned infrastructure to support our society more efficiently and fairly than would have occurred if everything was left to private enterprise. Commonly owned infrastructure or services are not always effective and so these should be kept to basics. The carbon tax is no good, because it will have unintended consequences by stifling production and runs the risk of crashing our already dysfunctional economy. For decades now we have seen very little in the way of… Read more »
Rod
Guest

Tim, you’re dead right. The computer world could easily manage this.

Joe
Guest
Simply put, if the Australian economy moved to a completely consumption based tax system, then the application of TAX (currently known as GST) could and should fully fund the expenses of Australian society. If you wish to price carbon into the economy in order to increase the incentive to lower carbon production, then increase the TAX (again currently known as GST) on the output of carbon intensive industries. Apply TAX (yes GST) to all imports and include a transportation levvy, so that the TAX charged reflects the true cost not only of its’ production but also its’ distribution. Once you’ve… Read more »
Pregnancy Journal
Guest

Carbon tax is just going to increase the legislative burden on small business. As if we don’t have enough to worry about in these trying times. It’s just going to be an extra headache!!

Ned S
Guest
“if the Australian economy moved to a completely consumption based tax system, then the application of TAX (currently known as GST) could and should fully fund the expenses of Australian society” If it was raised from 10% to 70% it would apparently? : “GST revenue represented 14% of total taxation revenue for all levels of government.” Source: http://www.abs.gov.au/ausstats/abs@.nsf/Latestproducts/5506.0Main%20Features32009-10?opendocument&tabname=Summary&prodno=5506.0&issue=2009-10&num=&view= With 70% GST being something I have absolutely no enthusiasm for paying going forward even if all the other taxes are dropped. Some numbers: * I earn maybe 50K pa * Of that I spend 30K and dump 15K into super and… Read more »
Joe
Guest
Ned S, So you are saying the marginal tax take in Australia today is 70% ? I doubt that, but I am open to have it proved to me. 70% of everything earned is taxed. Our government (of whatever political flavour you choose) must be the most inefficient institution in history. $70 of every $100 of GDP is government spending ! If the actual real across the board tax take by the government is say $20 per $100 of GDP, then you would find your total tax bill on a $30K spending would be $6K. 20% of your inheritence would… Read more »
Joe
Guest
Income taxes levied on individuals in 2009-10 represented 38% of total taxation revenue. In comparison, income taxes levied on enterprises represented 18%. According to your link Ned S. So, a tax across the board paid by all (enterprise and individual) would surely based on GDP be significantly less than the 70% you mention. * I earn maybe 50K pa * Of that I spend 30K and dump 15K into super and ‘save’ a little bit * With the result being that I pay maybe 3K income tax and 3K council rates (I have an IP and a home) and 3K… Read more »
Ned S
Guest
“So you are saying the marginal tax take in Australia today is 70% ?” The current GST rate is 10% According to the link, GST accounts for 14% (ie 1/7th) of the tax take. So GST would have to be upped to 70% if it was to be the sole tax. Real crude numbers admittedly. But without some sort of mind numbingly complex model on the interplay between our economy and tax, a pretty obvious way to get an idea of what the GST might have to be if it was to replace all other taxes. From what you say,… Read more »
Joe
Guest
Where did I say TAX (as in GST replacement) of 20%. Ned S, you really have to read what others write in order to refute their argument. Look at what I have described in its entirety and you will see it does make absolute sense and that it is a valid and efficient way to reform our tax system to encompass a Carbon weighting and a fair, balanced and efficient government revenue raising system that gives the bastards absolutely no where to hide. In one broad proposition I have defined to you a proposal that improves the efficiency of the… Read more »
Dan
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The GST alone, if applied evenly at every level (including I guess income tax for wage earners as it is a service provided by them) and to every exchange at a blanket rate, could be argued as being a fair tax. I doubt it would need to be as high as 70% if it was applied in such a way, but if a product is traced from beginning to end, there could have been 3 or 4 exchanges each attracting the GST rate. But I can see how that would kill the accounting industry and make it very hard for… Read more »
Ned S
Guest
“Where did I say TAX (as in GST replacement) of 20%” When you stated? (With it being a case of ‘indicating’ rather than ‘saying’ perhaps): “If the actual real across the board tax take by the government is say $20 per $100 of GDP, then you would find your total tax bill on a $30K spending would be $6K. 20% of your inheritence would be taken as tax.” “And all you can manage to do is whinge about death taxes.” Hardly a reasonable assessment of my comments I’d suggest Joe? “Ned S, don’t worry about it … when you get… Read more »
Dan
Guest

Inheritance is not a sale/service and is not a productive exchange of goods. It should have nothing to do with how the government assesses an economy. They might as well put a tax on birthday presents.

Joe
Guest

Agree Dan. But there are two ways for untaxed wealth to be transferred.
Either externally to the nation, or to a third party via inheritance.
These are the two exceptions only to the existing consumption/GST method of revenue raising.
And NED S, nothing to do with socialism versus capitalism. You are just being facetious now.

Joe
Guest
Also Dan, why income tax? The TAX will be paid by your employer for your service. For an individual there will be no tax at source. As a consequence a re-aligning of wage rates would be required, but we already do this for the minimum wage every year, so not an impossibility. No deduction of output tax versus input tax as the GST does (or VAT in the UK). The idea is to tax activity but not wealth creation. Just imagine if you did this what blatant injustices would be removed such as saving for your old age and having… Read more »
Dan
Guest

Joe, income tax because if you are going to tax services, then hiring someone is buying a service. Nothing difficult about that I thought. It’s only the government that singled out ‘income’ as a separate entity requiring a specific form of taxation (so they can practice socialism and prevent the middle classes from rising). Let’s face it, they basically tax anything that moves, and even things that don’t move, and now they want to tax your farts.

Joe
Guest

Oh dear … they wanna tax farts now …
Damn I’ll be skint.
Of course the unintended consequences would be a collapse in Indian cusine placing a whole ethnic community on the dole, a downturn of catastrophic proportions for the Heinz corporation, and of course cabbage and brussel sprout surplus mountains popping up all of the country.

harry anderson
Guest
“Taking from the manufacturers to give to the consumers will hardly help reduce emissions in a meaningful way.” There’s another (more realistic) interpretation of what may happen that Greg seems to dismiss. Let’s say the price of electricity rises by 10%, and this is offset by an equivalent tax break to low and middle income households. (These households make up the lion’s share of all consumers.) There is not a simple substitution of using the tax to offset the higher price of electricity. The tax incentive and the increase in price are not linked by most consumers, as the tax… Read more »
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