Foreign Investment and the Money System

Like immigration, Australian citizens are berated weekly by politicians and the media with the assertation of the importance of foreign investment in Australia, as if the country and citizen’s lifestyles are totally dependent on ever increasing foreign investment. How true is this?

The answer is a mixed bag with certain types of foreign investment being a cost to the Australian Money supply, while others are beneficial. Let’s go through this in steps.

Let us define foreign investment as both an equity investment, and lending Money to Australia and Australian business. As we have previously discussed, foreign investment can increase the Money supply by injecting foreign money into Australia. So on the face of it, foreign investment is beneficial. The issue is not the extra Money, it is the terms and conditions that come with foreign Money. Foreign investment is not a one-sided story.

In the most basic case, an investor would bring both Money and technology that is partnered with Australian resources and labour, to produce productive goods and services that are sold both onshore and offshore. The Money is invested as equity where the return is paid by way of dividends. This form of investment would be highly beneficial to Australia and would increase the Money supply and its value. However, where that is not the case the benefits and cost may be very different.

At this juncture I’d like to state that Australia does not need offshore Money to fund any project or business. Australia borrows offshore to fund its cumulative current account deficit and this borrowing is mostly done by the government or Megabank. The Money required to build mines, gas trains, farms, buildings or factories is available within Australia as equity or debt. Debt as explained creates its own Money.

It is not Money that Australia is lacking, it is the technology to develop export orientated businesses that is missing.

Foreign investment is necessary to buy or licence technology that is owned offshore and is very important to Australia. Under no other circumstances is it necessary for Australia to need foreign investment for the capital to build almost anything. However, the view that foreign investment is a necessity has become a political weapon for Rent seekers (offshore and onshore), where Australian citizens are the losers and pay the price. There is no end of foreign Rent seekers that will invest when Australia or any other country is willing to give away or undercharge for its resources, and not because those investors have technology to sell.

There is no ‘sovereign risk’ in charging foreign investors for the resources they exploit, as there is no penalty to Australia in offshore investors charging for technology they own and bring to Australia. Howling about ‘sovereign risk’ is the rent seeker’s business model, and a distraction from the truth. Australia does not need them. Unfortunately Rent seekers are winning that media and political battle, to the detriment of Australian citizens.

If Australia has the technology or the knowledge to build productive mines, gas trains, farms and factories then importing foreign investment is not only unnecessary, but also negative for the Money supply and its value. It must be negative, as returns of and on that investment must be paid offshore to foreign investors rather than earned through the investment of Australian Money. So why is Australia as a country so tied up with excessive foreign investment structured in such detrimental ways to our citizens?

Australia needs foreign investment in the form of debt and equity to fund the aggregate current account deficit, but we must be careful not to make our current account worse due to the terms or nature of that investment. Every foreign investment needs careful consideration on whether it is needed, as well as the terms of payment. Neo-liberal dogma, political considerations on trade and plain ignorance get in the way and greatly distort the need and structure of the foreign investments. The world of foreign investment is owned by the Rent seekers.

Rule 20: Foreign Investments

Rule 20: Foreign Investment is beneficial when Australia is buying technology and selling resources at fair rates for contribution as this both increases the Money supply and its value. While Australia funds its aggregate current account deficit by foreign investment, Australia has the Money (debt and equity) to fund any project it could undertake. Every Foreign Investment needs careful consideration on the terms to ensure there are benefits to Australia’s Money supply and value.

Before leaving foreign investments we should have a brief word on foreign investment in Australian housing. There is no circumstance in which allowing foreign investors to purchase but not rent those houses is beneficial to Australia. This is not just about Money laundering. There are always Australian citizens that will purchase the houses sold to foreign buyers either to live in or rent. So foreign buyers can only drive up house prices by outbidding citizens and decreasing the local housing supply. Renting houses purchased by foreign investors does not make it beneficial but only lessens the cost.

While it is correct that foreign buyers of Australian housing increase the Money supply in the short term, it comes at great cost to citizens trying to buy houses for productive purposes by increasing house prices. It also reduces the Money supply when the house is sold, and capital returned offshore. While there are short term benefits, allowing foreign investment in Australian housing without a large tax is just dumb policy, smacking of desperation by policy makers and costing Australian citizens greatly in the long term. Foreign investors in Australian housing distorts the Money supply and is altogether unproductive.