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The Forum > Article Comments > It doesn’t have to be a circus > Comments

It doesn’t have to be a circus : Comments

By Don Aitkin, published 8/7/2016

If Malcolm Turnbull cannot bring himself to negotiate he needs to find colleagues who can, and who can deliver afterwards.

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Geoff of Perth,

I think you misunderstand what I'm saying. Debt is indeed of great significance, but its effects, particularly in sovereign currency issuing nations, aren't what most people think they are. A shortage of debt is holding the economy back. Companies are unwilling to take it on because it's not sufficiently profitable to do so. Individuals are unwilling to take it on because they're uncertain of their future income (and hence their ability to repay it). Governments are unwilling to take it on because although doing so would be good for the economy, people believe it would be bad for the economy. So instead they try to cut spending, which further weakens the economy.

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SAINTS,

You may regard basic maths knowledge as priceless, but I suggest you look beyond that; you'll find more advanced maths knowledge to be even more valuable. In particular, you should try to understand infinity, because that's what the nation's credit limit is (providing we stick to borrowing only in our own currency).

Once you understand that, you'll see that the debt problem is imaginary. Instead you should look at the deficit, which has real effects which vary enormously according to where we are in the economic cycle.

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Loudmouth,

Greece is not financially sovereign. Nor is any other Eurozone country, as they've all surrendered their sovereignty to the ECB.
China is technically not financially sovereign, as it has a fixed exchange rate. However it could float its currency at any time, after which it would be financially sovereign.

Australia is financially sovereign. Although we choose to issue bonds for reasons of bank liquidity (and historical reasons) we don't actually need to. We could instead borrow directly from the RBA with no ill effects. Because of this, it is IMPOSSIBLE for us to be in a position where we have to default on the bonds.

The main determinant of bond rates is the official interest rate. The risk factor's added to that where applicable. But the ratings agencies are becoming less relevant. When they cut the USA's credit rating, the market didn't believe them.
Posted by Aidan, Sunday, 10 July 2016 7:26:38 PM
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Why can't posters such as Aidan realise that the level of our foreign debt is of overriding importance? The fact is that as far as foreign debt is concerned, Australia is in exactly the same position as a household. This is because the Federal Government cannot print foreign exchange, and neither can it make a foreigner lend Australia foreign exchange,

An additional problem is that most of our debt is in another currency, so if the $A collapses the local value of the debt and interest payments goes through the roof. In addition, if our level of debt becomes such that overseas lenders will only continue to lend if their interest rate is substantially increased, there is absolutely nothing that anyone here can do except grin and bear it. If we were to default on our overseas debt (which we did in 1932), the result would be that no-one would export to us unless they were paid cash on delivery, as our credit rating would have been devastated.

The economic action that is needed includes a substantial reduction in the living standard of ordinary people (with no reduction for the rich), and massive incentives for people to save money. Every dollar saved is dollar less that has to be borrowed, and unless we experience another boom period such as the late 1940's, it would have to last for some years.
Posted by plerdsus, Sunday, 10 July 2016 9:08:52 PM
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Aidan, there is no magic pudding.

Printing money has its downsides. One is to increase inflation making investors wary of further lending to us at low rates. Another is our downgrading by ratings agencies with consequent higher interest rates on our borrowings.

If want to argue that a path can be taken by the Reserve Bank which alleviates us from the austerity measures that our newly elected gov't policy intends, fine, but do point out its downsides and don't talk them down with the blithe argument that they may not happen.

Also, it would be ethical and prudent to advise lenders that we intend to repay massive infrastructure loans with printed money, rather than give them a nasty surprise, don't you think?
Posted by Luciferase, Sunday, 10 July 2016 9:46:15 PM
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Luciferase,

Right now the inflation rate's below the RBA's target rate. That's mainly because the private sector's currently reluctant to borrow money. Under these circumstances it makes sense for the government to run a bigger deficit.

The inflationary impact of borrowing money directly from the RBA would not be significantly different from borrowing it on the bond market, as the processes are functionally equivalent. The RBA still controls inflation by adjusting the interest rates it charges/pays commercial banks, which indirectly controls the amount of money in the economy.

I'm not blithely talking down anything that merely may not happen. But nor am I willing to pretend impossible outcomes are possible.

FWIW if our government debt were in a foreign currency, your concerns would be valid.

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Don Aitkin,

The line between what constitutes investment in our future and what constitutes "weekly shopping" is very blurred - it's not just infrastructure but also education and science, and even some of our health spending that gives positive future returns. I'm certainly not advocating wasting money, but a lot of cuts do turn out to be false economies.

And if a person knew they'd soon be getting a pay rise, it may well make sense for them to spend more than they were earning. And if the size of the pay rise depended on how much they were spending, that would certainly be the case.

More government deficit spending grows the economy and results in more tax revenue. Less government deficit spending shrinks the economy and results in less tax revenue, unless and until the private sector is strong enough to drive growth.
Posted by Aidan, Monday, 11 July 2016 12:58:00 AM
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plerdsus,

It doesn't matter that the Federal government can't print foreign exchange, as 100% of its debt is in Australian dollars. So is most of the state government debt, and the small proportion that isn't is hedged against currency movements. Most of the foreign currency debt of the commercial banks is also hedged.

The Aussie dollar is not at risk of collapsing, as its level is self correcting. When it goes down we export more and import less; when it goes up we import more and export less.

We should stop needlessly worrying about the impact of impossible events, and instead try to maximize its long term value.

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ttbn,
"You must be the only person in Australia not concerned about the interest accrued by politicians' borrowing."
No, not all the population is under the same illusion as you are.

"If big borrowing and high interest is OK, why are politicians, but more importantly respected economists, worried about our current credit rating."
Because they still don't understand the implications of financial sovereignty. They think of economies the way they used to be when exchange rates were centrally planned. Indeed many countries do still have centrally planned exchange rates despite the severe dangers these cause.

I should make it clear that this is far from universal. Some economists do understand, but the press tends no to discuss their position in detail (though it has been mentioned in the SMH).

"Why are ratings agencies, now looking very hard at Australia - even suggesting they might lower our rating - not saying, 'But we are not too worried because Australia is financially sovereign.'?"
Because they are incompetent. We saw that in the GFC.

(TBC)
Posted by Aidan, Monday, 11 July 2016 1:01:00 AM
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ttbn(continued),

"I have only ever heard that phrase from you - certainly not from any well-credentialled, professional finanance experts. It sounds like money printing to me."
It is effectively the ability to print money. But the implications of that are very different to what you might think. Increasing the money supply is an everyday occurrence, not something that collapses an economy. And whether the government borrows from the RBA or on the bond market, the result is the same: government debt increases, the total gross debt in the economy increases, and the total net debt in the economy stays the same.

"What are the policies you say that 'people like (me)' support that are harming the economy?"
Trying to cut the government's deficit while the private sector is weak. Keynes proved in the 1930s that we should be doing the opposite.

"Do they have any policies except borrow big and spend big, and to hell with future."
Who do you mean by "they"?
Generally the ones who want to borrow big and spend big want to build a better future, while the ones who oppose it are under the illusion that they can't do anything better for the next generation than pay off government debt, even though that doesn't really benefit the next generation at all.

"I do not have any formal qualifications in economics. Do you?"
Although I did do a bit of economics as part of my Civil Engineering degree, all the stuff about financial sovereignty I've learned since then in an informal setting.

"If you were convincing, surely somebody in authority would listen to you?"
If you know how to convince those in authority, I'm all ears!

What would it take to convince you?

"Finally, is it logical that Australia and the rest of the Western is going down the gurgler when, if you are right, you have the solutions?"
It depends what you mean. It's not logical for them to ignore the solutions, but it is logical to conclude that's what they're doing.
Posted by Aidan, Monday, 11 July 2016 1:02:48 AM
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