Sunday, May 30, 2010

Why Rudd can't get the mining tax right.

Why can't Kevin Rudd get the number correct in taxation and investment. They're not lying, they simply can't bring themselves to believe that their theory of money, profit and interest is fundamentally wrong.

Interest and profit are the product of three things. Time preference, risk cost, and inflation expectations.
K Rudd thinks he can control the first by printing money at the RBA, so do some in the RBA. He can't, we're in a mess globally because governments and central banks have the same false idea. Time preference is a personal thing. Artificially low interest doesn't change it. It just confuses investors and borrowers about what kind of investments will succeed long term. Their investments don't match their own long term demands or anyone elses.
Rudd thinks he can control risk by promising to bail out failed mining projects: he can't even spell Moral hazard but the mining industry and stock markets can. Many less viable mining projects would start, most would fail and the deficit would go exponential. That's the sovereign risk.
Rudd inflation expectations are in fairy land. If it weren't for paranoid banks reading the Austrian School warnings an dumping those bail outs into excess reserves we would have global hyperinflation by now.

Most Australians share one of these miss interpretations. Academics and public servants share them all.

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