mhaze, your accusation that I've caved is libellous. I've never ever claimed we can borrow with impunity. All our actions have consequences; it's just that the consequences are not as you imagine them to be.

I agree devaluation is inflationary. But present devaluation does not equate to future devaluation, so the increased risk to overseas lenders is largely illusory. And the bonds would be sold whether or not foreign speculators buy them. Indeed we don't even need to sell bonds, as the government could just borrow from the RBA; the interest that RBA pays banks on excess reserves is sufficient to control inflation.

Before we go any further, let me make it clear that I am NOT advocating high inflation. If we did have high inflation I would be in favour of cutting the deficit (and possibly running a surplus) to reduce inflation. Even if we had no debt at all, I would support running a surplus if inflation and/or interest rates were high.

Do you understand my position now? I support economic responsibility, but based on the real needs of the economy (not arbitrary financial targets nor fear of impossible events).

Hyperinflation is permanently off the table. Countries with floating currencies and no foreign currency repayment obligations don't get hyperinflation. The last exception to that was the Confederate States of America, which was blockaded AND was printing money to finance a war AND had state governments printing money as well AND (crucially) did not have an effective taxation system.

I've not found a single example of a country getting hyperinflation with an effective taxation system as well as a floating currency and no foreign currency repayment obligations.

Aidan

" your accusation that I've caved is libellous.(sic) "

Libelous? Really? How dramatic. Have your people call my people. :)

It may be that you've "never ever claimed we can borrow with impunity." I can't really be bothered pawing over your past efforts to see if that's true. But you've certainly left the impression that you think borrowing at ever greater levels is without major risk and that the borrowings will never have to be faced by us or following generations...."the worst that could happen is competitive devaluation?"

Now I understand (don't agree with but understand) the notion of borrowing heavily in low interest environments. But it only makes sense if you intend to retire those debts when higher interest rates return.

So do you expect that they won't return? Or do you think we'll magically turn up some extra cash under the sofa to retire it? Or do you think that future generations will just keep borrowing to cover the ever higher interest bill and not notice the on-going competitive devaluations?

So what exactly do you think will be these adverse effects of borrowing that you now admit to?

" Even if we had no debt at all, I would support running a surplus if inflation and/or interest rates were high."

Really? So in these good times we haven't been able to run a surplus for a decade and the best we can hope for is that we might get there in 5 or so years. Yet you blithely assume we'll do it when the cost of the borrowing you encourage starts to bite. I wonder how we might get a surplus when/if interest rates rise and a tenth of the budget is devoted to repaying debt interest? I wonder if the people then laboring under that level of economic stringency might not quite agree that the worst that could happen would be a competitive devaluation.

mhaze,
Debt really doesn't matter. We can never run out of money, as Australia is a sovereign currency issuer, and the Federal Government does not borrow in other currencies. We don't have unlimited wealth, but we do have unlimited credit.

DEFICIT MATTERS A LOT, though not in the way most people think.

The deficit is the net amount of money the government puts into the economy.
(Take some time to understand the implications of that)

If the deficit is too big, it causes too much inflation.
If the deficit is too small, it adversely affects economic growth.

Right now the deficit is too small. Trying to cut it is futile, as that would shrink the economy, make people better off, and reduce tax revenue.

What we need to do now is run a bigger deficit to grow the economy. Once the private sector is stronger, it will invest more and it will be safe for the government to cut the deficit. If the private sector remains strong, it will then be appropriate for the government to run a surplus (which means take more money out of the economy than it puts in).

Were it not for the complications of foreign investment and balance of trade, the size of the government deficit and the private sector surplus would always be equal, and when the government runs a surplus the private sector would always run a deficit of equal size.

mhaze (continued)

Interest rates don't just happen. They are set by the Reserve Bank to control inflation.

When inflation is too high, the government essentially has three options:
1) Put up with it.
2) Fiscal policy: put less money into the economy and/or take more out.
3) Monetary policy: raise interest rates so the private sector puts less money into the economy/takes more out.

Option 2 is best. Policy in recent years has been based on option 3.

We will never see a return to the high interest rates of the 1980s. They occurred when the government was only just starting to get inflation under control. As inflation was high, the real interest rate was much lower than the nominal rate. And the private sector then was much less indebted than it is now, so the economy was less sensitive to interest rate movements. Nowadays smaller changes have a bigger effect.

So is it possible for our debt to GDP ratio to get so high that we will lose the option of being able to use monetary policy to control inflation? I'm not 100% sure, but I think the answer is:
In practice, no.
In theory, yes... IF the government runs continuous deficits yet fails to invest in the things that make the economy more productive.