Hi Aidan,

Any country or government could be like Greece, eventually, if it continues with a level of spending commitments that consistently outweigh its revenue stream. After all, no country can get out of dealing with that chronic deficit by just printing money: it has to borrow on international markets at market rates, determined in part by its credit rating, i.e. its ability to pay back loans.

So the question is: how does a government reduce the gap between expenditure and income, not just to zero, but in order to pay back existing foreign debt, ideally to produce a surplus, but at least to bring debt down to a manageable level, and keep it below that level ?

So what spending programs does it reduce, or keep on hold, and how can it generate higher revenues to pay for spending commitments ?

Am I missing something ?

Cheers,

Joe

Simples, Loudy, when they want their money, with interest, we just print them some. They'll be happy with that.

Hi Joe,

Yes you're missing something. Or rather you're missing several things.

Countries don't have to borrow on international markets. They can instead borrow on domestic markets (as Australia does). Or they can just borrow from their own central bank. And because they can borrow from their own central bank, they can never ever be unable to pay back loans in their own currency.

There is a widespread myth (that I used to believe myself) that a country borrowing from its own central bank causes hyperinflation. But the truth is rather different:
Hyperinflation is caused by holding the currency above the market rate until the government loses the ability to do so. Borrowing from the central bank to fund foreign currency repayments can also cause hyperinflation under some circumstances, but just borrowing from the central bank to fund a domestic budget deficit has NEVER resulted in hyperinflation and it never will.

The above is important, so if you don't believe it then I strongly encourage you to search for a counterexample. You won't find one, because it's functionally equivalent to borrowing on the domestic market.

The more money that goes into the economy, the more the government get out in taxation if the tax rate stays the same. Ensuring enough money goes into the economy is vital if you want to maximise economic growth. But government spending only one way of getting money into the economy; encouraging more private spending is another. And too much spending in one area can cause too much inflation. So it makes sense for the government to spend more when (and where) the private sector's spending less, and less when (and where) the private sector's spending more. Right now private sector spending is well below trend.

But despite borrowing from the central bank not endangering currencies, Greece can't do so because it's surrendered its financial sovereignty to the European Central Bank, and the ECB's refusing to lend it money.

Aidan,

Someone up-thread asked you how, in your world, you would find that Yen necessary to buy things in Japan, and the USD to buy things in the US. Are you assuming that the country will always be selling things? It's all very well to borrow from our central bank, but if you need foreign currency the central bank has to have some...

Like Joe, I think I'm missing something. We are spending a lot of money on interest at the moment. That means we have less money to spend on necessary items from overseas. What you have been saying simply doesn't make sense to me.

Don Aitkin,

Exactly the same way as we currently do! When we need to buy things from Japan, we use Aussie dollars to buy yen. When we need to buy things from the US, we use Aussie dollars to buy US dollars.

It's been that way since Keating floated our dollar. And yes, it does mean our dollar devalues every time we buy something from overseas. But that stimulates exports, which have the opposite effect. And of course I'm assuming we'll always be selling things... just like every other country!

Hypothetically, if we had nothing to sell, it would be irresponsible to buy anything.

The claim that we're spending a lot on interest is a bit dubious, as our debt to GDP ratio is fairly low by historic standards, and interest rates are at an all time low. But even when we do spend a lot on interest, it shouldn't be a problem. You seem to be assuming that we have a fixed amount of money to spend on interest and imports. That's not the case at all. We can spend as much as we like on imports (regardless of the interest we're paying, which is all in Aussie Dollars) but there are consequences for our dollar's value. Not catastrophic consequences, but consequences nonetheless.

I'm of the opinion that we should try to maximise the long term value of our dollar by investing in the infrastructure and education we need to make our economy more competitive, but we shouldn't worry much about its short term value; that's largely self correcting. One small but significant exception to this is when its short term value's unsustainably high and likely to damage our industries; in that situation the best option is for the government to invest in a sovereign wealth fund (regardless of whether there's a deficit or surplus).

Anyway, I'm glad you no longer consider it footling, and I hope it makes sense to you now. Please let me know if there's anything you still don't understand.

Aidan

You say - "I believe it because it's what the evidence shows. A few senators making false assumptions does not disprove it. There is no plausible way we could run out of money".

So you're basically saying "your" evidence is more credible than government agents - under oath - providing factual evidence to Government in Senate Estimate Committees.

Try viewing a Senate Estimate Committee meeting, or if you're too busy one can obtain a copy of Hansard for perusal and edification.