Dream Caused by the Beating of Philip Lowe a Second Before Awakening

All this happened after reading this article in Canberra Times: https://www.canberratimes.com.au/story/6879351/cheaper-housing-should-be-a-priority-rba/

Australians are scared. The holy cow of Australia, our precious property market, is cracking at the seams, shedding pieces, large and small, dragging along into oblivion our jobs, businesses, tax revenues, hopes and dreams. Despicable foreign buyers betrayed us. Youngsters that were supposed to buy and run the property prices up, live and enjoy life, instead of working hard, saving every penny to purchase properties and deliver long-awaited profit for the retirees to the oldsters. As if the entire world turned from buyers into scoffing onlookers right when those sales are needed the most.

It is becoming increasingly difficult for the sellers to pretend they are overwhelmed with offers. Fear and loathing have bloomed where pride and snobbery were blossoming just yesterday. Some sellers panic, others are in denial, trying to convince themselves and everyone around that “She’ll be alright, mate”. It is cyclical. The prices are falling somewhere out there, but not in my area. If I don’t sell, I don’t lose.”

Yes, babe, prices are falling everywhere. It is cyclical, but you will not survive till the end of the cycle. And before she is alright, she will become much worse for much longer. One lucky bastard in your neighbourhood who bought cheap and sells cheap, instantly damages the historical sales statistics of the entire neighbourhood. From this moment on, you owe more on your property than it is worth. Confess to yourself, you refrain from selling not because you do not want to lose profit, but because you have to bring money to the settlement table, and you do not have it.

But instead, you convince yourself to never give up. Keep your pride. Do not entertain ridiculous offers. In 200 years, the prices will be high again. You despise the faint-hearted who cannot bear an 80% price drop. You are above all of it. Property is the king. You will proudly sit on it for the rest of your life and watch it go fifty, thirty, twenty per cent of today’s value. Eventually, your patience will pay off and your grandchildren will remember you as the most stubborn property owner in town, who could make a fortune by selling before the crash and buying at the bottom, but was not smart enough to see the opportunity.

Do you like high property prices? Not Philip Lowe, the RBA Governor. He understands that high property prices cripple the economy. When people can invest in houses and receive effortless rents and appreciation, why would they take a risk of investing in manufacturing and production? All these years we were losing industry after industry, while everything increasingly gravitated towards real estate: manufacturing and services, thoughts and dreams, crime and penalties.

High property prices restrict consumer spendings, as more and more money goes towards housing. Decrease in consumer spendings translates into lower revenue of local businesses, causing them to lay off staff, which in turn leads to lower consumer spendings, and the entire vicious cycle starts again. High property prices chain people to their places and restrict their freedom of movement. The higher the prices, the lower the quality. Instead of building homes to last for centuries, developers build to make a profit and move on to another project as soon as possible. Most importantly, with every dollar of price increase, the end of the boom is closer.

And yet, with one little trick we can easily have another three decades of economic boom and soaring property prices. In order to see how this can be achieved, we need to look closely at how money and credit works.

We all know now that banks create money out of thin air. What is important is that every dollar in the system is created with an agreement for that dollar (debt) and is backed by this agreement. Whenever a dollar is an asset, the agreement for this dollar is a liability and vice versa. Your term deposit agreement is your asset and bank’s liability. You earn money with this asset and present it to the bank in exchange for money. The money in this deposit account is, to the contrary, the asset of the bank and your liability. The bank can use this money and make money on it, and you have to stay away from it for the term of the deposit.

When you draw a loan, the money is your asset and bank’s liability, while the loan agreement is your liability and the bank’s asset. They have to give you this money under the loan agreement and you have to pay it back.

Keep in mind that asset is different from an object. Assets earn money, whereas objects do not. Money is only an asset if it can earn more money (interest). The money that you spend on food is not an asset. That is why your living expenses are excluded from your income when your loan application is decided. Consumer credit is a pure liability backed by your wage. Creating a liability without an asset should be illegal, but hey, this is the world we live in. They create a liability for you, and you must create an asset for them by working hard.

Money comes with emotions. Everyone likes their assets and no one likes liabilities. When you blend wanted with unwanted, over time the blend separates into a fraction. When there is a panic in the market, everyone wants to save their assets and push their liabilities to someone else. When liabilities disappear, so do the assets that back them. Hard assets, such as machinery, plants or houses, remain objects but cease being assets. Paper assets, such as various option agreements, futures, CFDs, deposit agreements, etc, also transform from assets into objects — pieces of paper. If you have a million-dollar deposit in a bank, and the bank disappears, their liability disappears, as well as your asset.

Each market panic would turn the world into a Mad Max style desert, if not for the hard and tireless work of central banks. They untangle the money-debt entanglement by creating pure assets from toxic debts. Central banks buy toxic debt and create nice and new money. Supposedly, this should jump-start the markets, push asset prices up, and allow the central bank to sell the once toxic and now well-performing debts back to the market. The latter hardly ever happens. When the central bank starts selling its assets, it sucks up money from the market, the market crashes, and the central bank has to print money again. We are doomed to print money until it loses its meaning entirely.

And yet, it is becoming more and more obvious that efforts of central banks improve the equity markets and the lives of a few privileged ones, but not the economy nor the lives of the general public. All because central banks buy debts of the big guys, such as governments, municipalities, banks and large corporations, and never notice the struggle of a small guy. Every time the central bank prints money, the rich become richer and the poor become poorer.

We, Australians, can show an example of how to change that and make the entire society benefit from the emission. All RBA should do is start buying debts of ordinary people in hardship.

Basically, we need a new law that would allow anyone who can prove hardship to apply for debt cancellation. Central bank allows the creditor bank to write off up to 90% of the loan agreement and the person is relieved of the obligation to repay without recourse. The debtor still has to make payments of the remaining 10% of the loan, until paid.

RBA does not even have to print the entire loan amount. The loan is simply written off. The creditor bank wanted to make interest on the money it created from nothing? The government will reimburse the interest to the bank. 10 years worth of interest at 2% per year instead of default and no gains whatsoever is a good deal. To settle a million dollar loan, the central bank will only have to print $180,000, plus the borrower will have to continue making payments on the $100,000 remainder. Hardship is not a default. It should not prohibit the person who used the hardship option from borrowing in the future, subject to lending criteria. Once their situation improves, they can go and borrow again.

It might sound like a radically new measure, but it is still better than waiting for an avalanche of public defaults, then for an avalanche of institutional defaults, then for defaults in the banking sector, and only then purchasing toxic debt from banks. By then, the economy will be in ruins, people will lose jobs, businesses, homes and families, and many will not recover for the rest of their lives.

All we have to do is determine what a genuine hardship is. Loss of income is a sufficient reason. Another reason is reaching a certain level of debt to income ration. Whenever someone is unable to make mortgage payments, after a month in default, the house must be listed for sale. If it does not sell in 6 months, the mortgage is considered in hardship and the government steps in. This is certainly much easier and faster than going through a foreclosure, spending money on lawyers and destroying the life of the mortgagor. Those destroyed lives accumulate into a huge economic disaster for the entire country. The hardship forgiveness law should be retroactive and applicable to everyone who has ever been in default. They should all be forgiven.

If we want a true economic recovery, not just a financial benefit for the elites, central banks should have a way to relieve people from liabilities.

Now, let us look at the possible consequences of such reform.

Firstly, we increase the disposable income of the entire country. This leads to a consumption boom, which, in turn, leads to a boom in all sectors of the economy: manufacturing, agriculture, services. If we impose tariffs on imports, we can fully rebuild domestic production of everything and turn into a self-sufficient nation. A new economic boom can give jobs to millions of people, earn billions to businesses and governments, and allow the improvements of the lives of all Australians.

Secondly, we will finally see lower home prices, as everything that doesn’t sell for six months can be sold for 10% of the mortgage amount. It may look like a disaster for homeowners, but it is the best thing that can happen to Australia. If you are not in hardship, you do not have to sell. And if you are, you have an option. Can you be sure that you may never need this option? You will probably exercise this option only if you are upside down on your mortgage. All you want in this situation is to get out of your mortgage and keep your record clean. This is what this option provides for you.

32% of Australians that have to rent now (source) will finally be able to fulfil their dream of homeownership. But there is another scary statistic. 56% of young Australian adults between 19 and 30 (source) live with their parents. Fifty-six per cent! By running property prices to the sky we left an entire generation chained to their parents. This can be changed by allowing sales of highly mortgaged properties for 10% of the mortgage amount.

Thirdly, we will prevent the imminent crash of the market and all the consequences thereof.

One may say that relieving people of debt the minute there is a hardship teaches them irresponsibility. I have to agree with that. I just think that irresponsible elites are much more dangerous than the irresponsible public, yet we save the few top billionaires and let everyone else rot in their debts. Ideally, we should not print money nor save anyone, but that would lead us to the greatest depression of all, destruction of the world economy, wars and calamities. We have accumulated debts for three generations ahead. We cannot repay it by simply working and making things. We have to unload this debt somehow. Writing off the debts of people in hardship might be a fair way to start. If we have to do a wrong thing anyways, let us at least do it right.

Of course, this all was just a dream, and we will wake up in a second. But the memory of this dream may linger for a while…

Rodney Morris, Denis Bulavin