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The Forum > Article Comments > Government Debt and Economic Recovery > Comments

Government Debt and Economic Recovery : Comments

By John Freebairn, published 9/7/2009

Are all budget deficits bad?

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My understanding is that before we can talk about deficit and debt, we need to have a basic understanding of how the modern monetary economy functions.

The economy (referring specifically to Australia here) functions very differently from the days before Keating floated the dollar, vastly differently from the days of the Bretton woods system and is not even remotely like the even earlier gold standard.

Any discussion that does not begin from the starting point of recognising the differences between these outdated historical models that no longer apply and the modern fiat money system will make false assumptions when examining the range of solutions that can be placed on the table because they assume that the economy still functions in a way that it no longer does.

One of the most crucial things to realise is that in our modern fiat system, federal government borrowing in no way “finances” their spending. Despite all the deficit and debt hysteria being screamed from the rooftops and driven around town on a truck-mounted billboard by the opposition, the governments borrowing is not paying for deficit spending, it is a monetary policy tool for the maintainence of interest rates. That simple. A government that presides over a modern monetary economy utilizing a non-convertible fiat currency with a floating exchange (such as ours) has no need whatsoever to borrow or in any other way finance it’s spending in $AUSD. It is the monopoly issuer of $AUSD and is perfectly capable of spending however much it sees fit, right up to the limit of what is for sale. Regardless of how much it might have spent yesterday, it’s capacity to spend today remains unchanged. It cannot “run out of money”. Ever. Any such constraint is voluntary.

So it is quite pointless to discuss sovereign government deficit and debt without first understanding how system works TODAY, not how it worked 20 or 30 or 50 years ago. The portrayal of federal government budgets as functioning just like a household budget is completely ficticious and serves only to mislead the public and cloud the debate.
Posted by Fozz, Thursday, 9 July 2009 12:10:47 PM
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This article is based on the erroneous Keynesian beliefs that caused the depression in the first place.

The whole point of Keynesian economics is to “stabilise” the economy. Yet whenever there is a depression, the Keynesians externalise the blame. It has nothing to do with government’s endless manipulation of the price and the supply of money. It is instead because a lack of ‘confidence’ or ‘aggregate demand’. Too easy.

However this is not an economic explanation, it is a psychological one, for which there is no evidence but the depression itself: a circular argument.

“Clearly there is no easy fix to the current recession, and policy initiatives need to operate across a broad range of fronts.”

Hang on. Policy initiatives already were operating across a broad range of fronts. Can we first have the admission that
a) they failed in practice,
b) were wrong in theory?

And then, what reason is there to think that the same (government-funded) people who formulated them, have any credibility in advising on how to fix the problem that arose under their own regime of policy advice in the first place?

Just because you don’t like what the people prefer to spend their money on, doesn’t mean it’s a ‘market failure’. Or government should pay for pretty girls’ make-up, because other people, who pay no part of the price, get a benefit from looking at them, so there’s a ‘market failure’. According to this logic, there is no limit to government’s authority to spend and intervene, since it could always argue along the lines of public goods, or external benefits or costs.

Thus the Keynesian belief system is anti-capitalist and pro-state. However no-one will argue that government has the competence to manage the whole economy, as in full socialism. Nor can anyone venture to say how government obtains the economic competence to manage the part, that it lacks in managing the whole.

“…health expenditure on prevention for children is largely capital in nature”

It is, if you assume that children are chattels or assets owned by government.
Posted by Wing Ah Ling, Friday, 10 July 2009 11:44:39 AM
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Keynesian theory, by thinking that the origin of the problem is a fall in ‘aggregate demand’ assumes that the problem is one of the *level* of production, rather than the *structure*.

However the effect of government’s constantly inflating the money supply, is not even across the economy. The new money favours the people who first receive it before the general rise in prices. A bubble forms where the new money enters the economy. It distorts the *structure* of production, because it makes certain investments seem profitable that otherwise would be seen to be loss-making. The bubble or boom is caused by monetary policy, not by mysterious animal spirits. It must eventually collapse either when it becomes clear the debts cannot be repaid; or because the endless inflation threatens the function of money as a medium of exchange, a la Zimbabwe, Weimar Germany, and the way Obama is headed.

Seen from this perspective, the depression is caused because system-wide mal-investments cannot continue making losses. The only cure is for the market to wash them out: for them to be liquidated and re-allocated to productive activities for which real demand exists. But the effect of all Keynesian policy, fixated on demand *levels*, actively retards and frustrates this process. Like Bushbama’s bailouts, these policies simply take from productive businesses where costs are lower, and give to loss-making businesses that should be allowed to fail.

If the purpose is to stop unemployment, then government should stop fixing wages above the market rate! Duh!

Government has done quite enough economic management, thanks very much.

Unfalsifiability is the sign of an irrational belief. Yet the more Keynesian dogma fails, the more Keynesians believe the cure is more of the same.

There is no easy solution to the problems caused by government’s ham-fisted central planning. But the easiest, quickest, most sound and most just solution is for government to do nothing, stop manipulating interest rates, stop fixing wage rates, and let the market clean up the mess caused by government’s greed in preying on the ignorance of its constituents.
Posted by Wing Ah Ling, Friday, 10 July 2009 11:47:27 AM
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Wing Ah Ling,

The general thrust of your argument that Keynesianism is responsable for the mess we are in now is not consistent with the facts.

Where was Keynesianism when the current crisis broke out? Neo-liberalism was running the show. Where was Keynesianism when the great depression struck? Not invented yet, that's where. The two biggest global market failures in the past 100 years have been presided over by classical and neo-classical economics.

I fail to understand how you can apportion blame for such systemic meltdowns to a system that was not in use at the time instead of honestly examining where neo-liberal economics went so disasterously wrong. Alan Greenspan admitted "I had supposed that the market would regulate itself".

I'm not sure how you can describe Keynesianism (which is by the way, an outdated theory of a bygone era, just like the deficit/debt hysteria arguments being bandied about by the opposition at present) as anti-capitalist. John Maynard Keynes was a strong believer in capitalism, was a very wealthy stock market investor and something of an elitest snob.

The fact is that the market is inherintly unstable and subject to savage cycles of boom an bust by nature. It is an extremely usefull tool but it's natural excesses must be attenuated by government. To do nothing will not suffice.
Posted by Fozz, Friday, 10 July 2009 3:40:35 PM
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Debt is never good, as it eventually needs to be paid back, and doing so will reduce available expenditure later. However, the simple answer is that under certain circumstances some debt is a necessary evil, but must be kept to the minimum required to do the job, and if possible spent on things that will generate revenue in the future.

Krudd's cash splash generates debt for very little return, and no long term benefit (other than grateful voters).
Posted by Shadow Minister, Saturday, 11 July 2009 4:24:22 PM
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Shadow Minister,

Refer to the opening paragraph of my first post. There is no point equating sovereign government debt with household or business debt because they do not function in remotely the same fashion. While households and business are the users of the currency and must finance their spending, federal (not state) government is the ISSUER of the currency. All $AUSD in existence originated from federal government spending. As long as any debt they have volunteered to take on – mostly for monetary policy reasons – is in $AUSD, they can always pay it. In today’s fiat money economy, federal government does not need to finance it’s spending. It has no need whatsoever to tax or borrow or earn $AUSD in order to spend any sum of $AUSD it sees fit. Federal government spending literally creates $AUSD while taxing and bond issuing destroys them.

I would agree that debt is a complex tool, best used in moderation but it is pointless thinking about federal government debt in the same way as private debt. For the government, debt is quite literally no issue other than whatever issue they voluntarily choose to make it, usually for political purposes rather than economic ones.

In fact, the only real issue the government has with any debts it takes on in the currency that it alone issues is that the public mistakenly believes that they MUST tax more heavily in the future to pay it back. This is completely wrong but so widespread and so powerful is this belief that any government that ignores the publics wishes to be denied the kind of spending commitments that could create full employment just for starters will be booted out at the next election.

A very sad mistake, perpetuated by general ignorance
Posted by Fozz, Sunday, 12 July 2009 11:45:54 AM
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