When there is substantial unemployment and underemployment, austerity is known to be a stupid policy, particularly when a country has a fiat currency and a floating exchange rate.

With the destruction of the manufacturing industry in Australia this country is heading for an atrocious Current Account situation. Stiff-necked state politicians hate being subservient to a Commonwealth Government managed Loans Council. The Commonwealth though its Reserve Bank could provide the money for the public works and manufacturing industries that would return each state to full employment and at the same time, largely overcome the looming CA disaster. The Reserve Bank money would be much cheaper that any private bank loans that a particular state could organise as the interest charges only have to cover the cost of the Reserve Bank and does not contribute to the obscene profits of the private banks.

If anyone doesn't understand where Australia is heading they need to learn about the fiscal space available to the currency issuing (the sovereign) government.

While there is a persistent CA deficit any move towards a lower SG deficit will increase the indebtedness of the Private Sector. In other words, in that situation the private sector loses financial health. Anyone who has paying attention to economics over the last twenty or so years knows this.

The USA is only a source of what is called capital because the $US is the trading and reserve currency. That is why the possible development of another dominant trading currency (the Chinese currency?) is causing such angst in the USA.

When I read articles like this I have to wonder if the author actually studied any math in high school, or if it is just primary school arithmetic backing the ideas.

Tell us Kellie, in your private life, how much more than your gross income do you spend on restaurants & entertainment, or is it just countries you believe should spend more than they earn?

Reading the views of someone else on any subject has never hurt anyone. I recently read a book by an American law professor detailing natural laws that, in a democracy, have often been found to over-rule statute law. These natural laws are even found in Roman Law. They certainly were clearly in the minds of the US Founding Fathers.

The laws clearly restrict this generation from taking actions that could be to seriously thought to bring disadvantages to future generations.

A few particular restrictions stand out. This generation must not adversely affect air and water supply and quality, nor inhibit coming generations' ability to produce the needs of life, nor over-fish, nor be deprived of access to common property such as beaches, shoreline, ports or navigable waters such as harbours, rivers and the oceans. The book I enjoyed was Nature's Trust by Mary Christina Wood, from the University of Oregon.

I am sure that the author of this article would benefit from reading it.

Hasbeen,
You do not understand the role of the currency issuing government. A growing economy needs new money. The only way that permanent money can come into existence is for the currency issuing government to spend more than it removes from circulation through taxes and charges.
When a country imports more than it earns from exports the country becomes indebted to foreigners, usually through the purchases of private citizens.

If more taxes are paid than the sovereign government spends the private sector becomes more in debt two ways. So while there is a CA deficit it never makes sense to have the sovereign government spent less than it obtains through taxes. Too many so called think tanks use propaganda with the aim of protecting the well-being of the already wealthy.

Spending to increase employment increases private incomes , business profits and overall tax collections and reduces support payments so a large proportion of the spending to increase employment is returned to the government.

The point is a sovereign (currency issuing) government is not constrained in the same was as private citizens or local and state governments. Such governments are in reality, or should be, limited to administrative roles. That argument shows that regional administrations with no state governments would make more sense.

Kellie and Has been,
You seem to think that, as long as a State has a fiat currency, the State can always spend more than it raises in taxes. If that is true why have taxes at all ?
Argentina (and Germany in the 1920s)made that mistake and their people have suffered severely for that folly.
A currency has value only when the State's people have faith in it. That faith was lost in Germany and Argentina.
I am the proud owner of bank note, validly issued by the Reserve Bank of Zimbabwe, for ONE HUNDRED TRILLION DOLLARS- I understand some time after it was issued it would have bought about one loaf of bread, now not even that. Zimbabwe junked its currency and started a new one treated as a joke and almost dealings of any substance in the country are made in foreign currency.
If Greece is kicked out of the Eurozone and reverts to a fiat currency it will be Zimbabwe all over again.
Are you sure you know what you a saying. DO you think there are no lessons in history? No consequences of spending more than is raised?
The establishment of the Eurozone brought reality of government finances to the surface. Your views lead me to believe we need a world or regional currency here to keep us in touch with reality.

I find myself mostly agreeing with Foyle and Kellie.

However, we have other options, which include massive streamlining of our tax collection system; so that around 100% of the money collected finds its way into government coffers, instead of the alleged 60%, that is what is apparently left after all the "collection costs" have been met.

And without question official double dipping, also allows us to live beyond our means or spend more than we collect; sorry, allow to find its way to intended/deserving recipients.

You could do worse than read Graham's current blog on super and the comments on tax and one explanation of official double dipping, contributed by one A.B. Goulding.

And germane to the thread, given you can't have one (affordable super) without the other. (Vastly overdue, real tax reform and massive simplification!)
Rhrosty.

Dear Old Man,

Kellie is no fool and when you as a proud owner of a bank note mention Zimbabwe and Argentina she is not surprised either - she actually wants your bank note to lose its value as it's in her very interest that the fruits of your hard work over the years be junked and lost forever, so that the young will no longer be indebted to care for you once you are old, require their care and are no longer "useful".

Another fierce attack on a straw man

The "Washington Consensus" imagined by Kellie bears scant relationship to the consensus among international financial organisation that the term originally described.

http://en.wikipedia.org/wiki/Washington_Consensus#Original_sense:_Williamson.27s_Ten_Points

When a nation overspends its budget and takes on massive debt (thanks Kevin and Julia)it is 100% prudent and sensible to curtail spending and sell some assets if necessary. It is also necessary to stop handing out taxpayers' funds to persons who do not need the handouts - and that is an large number of people in Australia. The 'I expect a handout - it's my right' mentality is alive and well in this nation. May I recommend you stop taking the denial tablets and start on the reality tablets.

I think you misread me Old Man.

Was my post that obtuse?

Well finally some people are waking up. Both Labor and the Coalition are controlled by the banking system. We no longer have any Govt Banks thus 95% of our money is created as debt by the private system.

The real rate of inflation is far greater than 3%, more like 7% and our growth is lucky to be 2.5%. This means the debt will always be greater than growth and cannot be repaid.

Foyle,
You say "The only way that permanent money can come into existence is for the currency issuing government to spend more than it removes from circulation through taxes and charges." But why do you think money from the government spending more than it receives is permanent but money from the private sector spending more than it receives is temporary?

It's possible, and not that difficult, to engineer either set of conditions (on average over the economic cycle).

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Old Man,

Taxes are needed to create (and increase) demand for the currency and to control inflation, as your examples prove.

Are you sure Zimbabwe introduced a new currency? Wikipedia doesn't seem to mention it.

If Greece is kicked out of the Eurozone and reverts to a fiat currency it WON'T be Zimbabwe all over again (Greece exports to much for that to be a real threat). However their economy is still rather unbalanced so it would be very hard hit it it were done immediately. The effect would probably be more like the Asian Currency Crisis in the 1990s.

Spending more money than is raised does have consequences, but not the consequences you seem to think it has. Every hyperinflation episode ever has had other causes as well:
devoting the economy to fighting a war,
foreign currency loans,
failure to tax adequately,
currency pegging,
attacking exporters while discouraging foreign investment.

Avoid those five mistakes and you won't have hyperinflation.

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Arjay, what is the source of your 7% figure?

We're one of a half doze or so countries who have never ever tried extremely popular elsewhere, thirty year self terminating bonds, to get our infrastructure built!

This creates additional economic activity and allows the revenue raised by the finished projects to actually pay for themselves!

Whereas, if we wait a couple of decades until there's sufficient money in government coffers, we invariably pay treble what it costs today.

Paying triple for something you can build today as self funded projects, is what I call living beyond your means.

And if we live beyond our means, we also do so with unaffordable negative gearing, and tax subsidies on super for the rich.

Alan Jones said on Q+A recently, "The top tax rate is 48 cents in the dollar, yet if I invest a large portion of my salary in super, I can get 33 cents in the dollar knocked off my tax bill"! "Meaning, my rate is effectively reduced to 15 cents in the dollar".

Lots of ordinary folk can't get much lower than 30 cents in the dollar, and will soon pay more than that even though their circumstances remain largely unchanged, thanks to bracket creep. Someone else is then living beyond their means for them!

And don't start me on the PM's even more unaffordable PPL!

And yes, it has gone in the too hard basket never ever to be tried or rolled out ever again. NEVER EVER!

Reportedly around 40% of our tax dollars disappears as part of the cost to us of collecting and reconciling it. Paying for that, is also how we live beyond our means!

And as Foyle suggests, we'd save some money if we didn't have state governments?

With one single exception we are the most over-governed country in the world! 70 billions per for something we just don't need is what I call living beyond your means.
Rhrosty.

There are many sides to this problem, but in Australia’s case, we need to start looking at the behaviour of the speculators, especially in the currency markets and real estate.

Ireland and Spain experienced a 500% rise in real estate prices in the first decade after 2000, when the European banks were flush with money and poured their funds into these countries’ real estate markets. In the case of Portugal, currency speculators drove up interest rates on borrowing beyond what the government could afford. In the case of Greece, Goldman Sachs cooked the books to allow it to enter the Euro.

In all these cases, the EU troika kept on lending despite the warning signs that it was creating massive speculative bubbles waiting to pop. When the bubble did burst, rather than allow the affected countries to trade out of their distress, they forced on them a crippling austerity regime that effectively destroyed their economies, making it impossible for them to ever repay their speculative debts.

Australia should heed the warnings. A massively overpriced real estate market, an increasingly unstable currency and banks that are pushing to inflate their already overpriced profits by lending like it’s going out of fashion are red flag alerts. The more austerity measures inflicted on the Australian economy now, the less chance we will ever have of addressing the speculative bubble crisis when it finally bursts.

And it WILL burst. It’s only a case of when, not if.