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The Forum > Article Comments > The West's time in the economic sun may be over > Comments

The West's time in the economic sun may be over : Comments

By Chris Lewis, published 6/8/2009

Debt-bloated Western societies need to cut spending for many years to make their economies more competitive.

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"And governments need to finance debt"

Chris, sovereign governments do not need to finance debt nor indeed take on any debt at all in order to spend whatever they please in their own currency.

The constraints in place are voluntary and political - they are not in any way economic or financial.

The biggest problem I see is an already debt saturated private sector reaching the point of being unable to continue to drive growth through endless debt expansion and sovereign governments, because of political and ideological pressures being unwilling to do what is necessary - keep running deficits - in order to facilitiate growth.
Posted by Fozz, Thursday, 6 August 2009 5:49:57 PM
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Where Asia's economies have the advantage over ours is that most of them have no welfare system in place. Since their fiscal expenditure is consequently far less, they tax less. Thus, with increased disposable income, savings rates are high and the extra consumer spending drives growth.
Posted by benny tea, Friday, 7 August 2009 9:12:38 AM
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Chris, fozz & benny tea, i am afraid that you all may be correct. Krudd the dud's stimulus packages have probably only delayed the inevitable, while simultaneously increasing both public and private debt.

The last time we had a recession after the stock market crash in 1987, our economy lagged, a long way behind the rest of the world on the way down. The party continued for us, through bicentenary/expo '88 and did not grind to a halt until about 89/90 a good 2 years behind every other economy in the world.

Sometimes the sheeple are too optimistic for their own good.
Posted by Formersnag, Friday, 7 August 2009 1:19:32 PM
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The real purpose of the stimulus package is to put the local economy on some sort of "life support" and buy time in the hope that somebody will find an overall cure and maintaining optimism is a vital component.

As much as many are opposed to it, do have done nothing would have been rather worse.

If you think that the Liberals would have done anything different, (except maybe giving further tax breaks to the higher income earners) you're deluding yourself.

In reality the current system is so flakey it can't be fixed and should be replaced but I'm afraid we're stuck with it.
Posted by wobbles, Friday, 7 August 2009 3:57:02 PM
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Remember when the asian so called Tiger economies all collapsed. We were expected to go into terminal decline.

It didn't happen. The libs held their nerve, or at least their leader did, & we came out of it scott free, even stronger, & smelling like daises.

Well this time we had a wimp, who was the first to blink, with his spending party.

I don't know if it has bought any time, I doubt we needed to buy any, but it sure has bought a lot of sh#t. Sh#t we will still be paying for when we change government, again.

I wonder if we will have leader then, who doesn't blink, or another wimp, like the current leader of the libs.

Pretty much of a pair, aren't they, & to think we could have had old Bommer Beasley, a much more likely bloke than either of these two.
Posted by Hasbeen, Friday, 7 August 2009 4:37:42 PM
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Hasbeen,

Great confusion arises when we equate a sovereign government budget with a household budget. They are not remotely the same thing. We all must finance our spending by earning or borrowing (or stealing!). Our federal government does not. Borrowing while running a deficit serves mostly as a tool for maintaining interest rates. They do not need to levvy taxes or borrow money in order to spend it.

If EVERYBODY has to earn or borrow Australian currency before they are able to spend Australian currency - then where did it come from? What is the source?

If you check modern history, you will see that for 3 decades, our government was almost permanently in deficit. Are today's generations still paying for this spending? You will also note that this same period was the most prosperous in our history, with unemployment averaging around 2.5% (compared to 7.6% in the period we are in now) and nation building going ahead in leaps and bounds.

The hue and cry that our children will be burdened with debt because of the current deficit is complete nonsense and serves only to confuse and mislead.
Posted by Fozz, Friday, 7 August 2009 6:18:24 PM
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Fozz you said

"If you check modern history, you will see that for 3 decades, our government was almost permanently in deficit. Are today's generations still paying for this spending? You will also note that this same period was the most prosperous in our history, with unemployment averaging around 2.5% (compared to 7.6% in the period we are in now) and nation building going ahead in leaps and bounds.
The hue and cry that our children will be burdened with debt because of the current deficit is complete nonsense and serves only to confuse and mislead".

Actually, at least in regard to federal govt budgets, 1974-75 to 2007-08, 16 surpluses, 17 deficits. $68 billion deficit from 1991-92 to 1996-97.
Posted by Chris Lewis, Friday, 7 August 2009 7:25:05 PM
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Yes, that's what I said Chris. Check modern history.

WW2 to the early 1970's counts as modern history. Now check the unemployment rate over that period and compare it with the periods before and since.

I take it that you understand the functional differences between our economy under the gold standard and the Bretton woods system of days gone by and the modern day fiat monetary system characterised by a non-convertable currency and a flexible exchange rate?
Posted by Fozz, Friday, 7 August 2009 8:52:11 PM
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The biggest deficit in Australia's history as a proportion of GDP was run up by Treasurer John Howard.

For comparison, America's net debt is currently 50% of GDP, Germany's is 60% and Japan's is 90%.

In 1945, after the Great Depression and WW2, Australia's net debt was 45% of GDP.

That didn't take generations to pay off.

Menzies won all his elections without ever having a surplus.
Posted by rache, Saturday, 8 August 2009 2:23:10 AM
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Fozz and Rache

True.

But please inform me about how we can go on to counter higher budget levels today? 1950s and 1960s saw a boom in manufacturing in a climate of high tariffs, wages and taxe rates. Are we going to have that now?

And what about Japan? It's reliance upon private savings to counter budget deficits appears over for now.

Comparing the debt levels and budgets of the past to today is ridiculous.
Posted by Chris Lewis, Saturday, 8 August 2009 8:01:52 AM
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Our time in the sun by historical standards has been brief but bright (or dark depending on your perspective). Normal equilibrium is being restored.
Or is it? Slowly a World Government is coming about, at this stage through ever more integrated regional groups like the EU, AU, NAFTA and ASEAN.
The question is whether this "New World Order" will be benevolent to mankind or to corporations? http://www.openyoureyesnews.com/?tag=new-world-order
Posted by Historian, Saturday, 8 August 2009 6:09:27 PM
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Chris,

I share some of the concerns you have raised. But the points raised by Rache and myself are in no way invalid as long as we understand the differences between the economy of the past and the one of today.

You appear to be presenting the argument based on how the economy functioned in times gone by. The constraints on government budgets in the days of the gold standard, the Bretton woods system and before Keating floated the dollar no longer exist because they do not apply to a modern fiat monetary system. But it is broadly conceived that they do and a great many economic arguments are based on assumptions that the economy still functions in ways that it no longer does, leading to erroneous conclusions about what government can and cannot do.

The private sector does not fund federal government spending in Japan, the US or here. When federal (not state) government runs a deficit, it spends first then borrows a $ for $ matching sum in order to drain the excess reserves created in the banking sector by the deficit which would otherwise make it extremely difficult for the central bank to set interest rates. It may give the appearance of borrowing to spend but it is in fact borrowing as a matter of MONETARY policy, not fiscal policy.

If the government found it had no buyers at a bond auction, it would have no impact on their ability to spend whatsoever. They issue the currency that we use. As long as the debt is in their own currency, they cannot “run out of money”. Ever. Government spending is not constrained by any need for prior revenue.

In fact, it is much more accurate to say that deficits fund private savings rather than the reverse.

There is no structural need for them to be a problem and they may continue indefinitely without any possibility of government being unable to fund them.

If our government never ran deficits, we would not be able to acquire Australian dollars.
Posted by Fozz, Saturday, 8 August 2009 7:57:19 PM
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The big problem with all the world economies is that they are based on the idea of being able to borrow against tomorrow's growth.

Given that the human race has bred past the point of being able to feed itself in a sustainable way that does not destroy the environment we are heading towards an inevitable crisis.

Greenhouse or simple overpopulation the point is that the planet needs to be able to devote a sizeabel protion of its total biosynthetic product to maintaining the systems that sustain us all.

When the pay for everything on debt model runs up against this hard reality we will be in deep trouble unless we have already planned for the transition to the new reality.

All the clever economics and differences between household and national economies are just ways for us to hide our heads in the sand and professors of economics to get paid.
Posted by Barliman, Saturday, 8 August 2009 10:12:33 PM
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Chris,

Then consider today's debt levels.

If nothing else our comparative position puts us way ahead of comparable countries.

I suppose it depends on what the debt is being used to finance.

Spending on infrastructure will pay dividends later on - distributing it on "sandwich and a milkshake" tax cuts won't. Also, much of the money being spent now will eventually find it's way back into government coffers as it moves through the economy and is taxed.

Also I was incorrect about the post WW2 levels. The correct debt figures are - increasing from 2.2% of GDP to 50% during WW1 and later from 40% in 1939 to 120% in 1945.
Posted by rache, Sunday, 9 August 2009 1:54:14 AM
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Fozz and Rache

I agree there are very important differences today when compared to the past whe we talks about debt and other eco data.

I also agree that Aust is in a much better position than other Western democracies. It does have low debt levels. And spending is needed to help our future needs.

However, main point of article was to indicate that still many things can go wrong, especially given plight of US, EU, and Japan.

We can not go on forever based on recent trends. And there are political considerations to be made.

As I have stated before, I am a supporter of freer trade, but I think we are facing immense problems ahead. I hope I am wrong, but that is my call based on my assessemnt of trends.
Posted by Chris Lewis, Sunday, 9 August 2009 8:53:55 AM
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Barliman

You are right on most counts with your argument.

Unfortunately, the mjaority of people still look to those you critise for their material well being.

Good luck to you. Your type of argument needs to be listended to so keep arguing it.
Posted by Chris Lewis, Sunday, 9 August 2009 9:09:30 AM
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Wobbles, the real reason for the stimulus was to buy time for a possible early election before the worst of it really hits us.

To have done nothing would not necessarily have been worse, the economy is going down, no matter what. There is that little matter of market forces, what goes up, too far, must come down, what goes down, too far, must come back up again.

There is no cure, other than market forces. If the yanks had done nothing about bailouts/stimulus then their economy would have gone down a bit further, but, be less burdened with debt, than it is now, and be able to bounce back more quickly. Ditto for us, without the bank guarantee/stimulus our economy, would be worse off now, but better able to bounce back again with more carefully targeted infrastructure spending.

Fozz, Rache & all other optimists/labour supporters, need to remember that in the post war boom period, the entire world economy was booming/growing along with the yanks. More important however is that those deficits, went into real infrastructure, like the "snowy mountains scheme" not into either left wing handouts or right wing tax cuts.

Chris is correct, "Rudd our savior" can go down to the beach and throw as many $1400/$900 cheques into the ocean as he likes. He will not succeed at either holding back the tide or walking on water.

The Chinese economic strength is based on savings, until we in the west, start saving more, and spending less, then our short term, gain will bring medium/long term pain. The only matter up for debate, is how long, before the chinese, who work and save harder than we do, take over.
Posted by Formersnag, Sunday, 9 August 2009 12:53:13 PM
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Chris,

I agree with your assessment that many things can still go wrong, that we cannot go on forever down the current private debt (it is CRITICAL that we distinguish between private sector debt and sovereign government debt if we are to properly understand what we are debating and reach conclusions consistent with modern economic reality) growth fuelled path. Indeed, with private debt having hit 300% of GDP just before the meltdown – and the only other time in modern history to even approach that was just prior to the great depression, at around 246% - the US may well have reached the limits of growth through private debt expansion.

I further agree that political considerations will continue to hamper progress. After all, they have prevented our government from ever using it’s full fiscal capacity since we became a modern fiat monetary economy.

For a thorough explanation of how our modern fiat monetary economies function, versus the once accurate but now outdated versions still being presented as current reality, Professor Bill Mitchell is a good Australian source. In the US, Professor Randy Wray and Warren Mosler (a financial market player) are also worth reading/listening to.

I am certain that as a serious academic researcher, driven to always uncover and understand the truth, you will investigate this.

Formersnag,

Without the huge government spending packages, the US economy would almost certainly have collapsed.

Post WW2, our economy was tied to the US because currencies were pegged at fixed exchange rates to the US dollar, which was in turn pegged to gold. None of this applies any more. Our government is free to spend whatever it sees fit without needing to acquire gold or defend an exchange rate parity.

I agree that we should all save more but it must be understood that if everyone desires to save more, our government MUST run deficits – government net spending is the source of private savings.
Posted by Fozz, Sunday, 9 August 2009 2:06:13 PM
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Barliman,

I think you have hit the nail on the head.

There seems to be a some confusion between growth in money supply via governments deficits and borrowings and true wealth creation. Zimbabwe did a great job of growing its money supply and where did that get them?
Sooner or later someone will have to pay for the excessive borrowings of money not saved or likely to be saved in the shorter term. My house has doubled in dollar value in a few years but it's still the same structure as I bought in the first place. Make no mistake future generations will pay for these borrowing through increased taxes (direct or via inflation) or reduced government expenditure or both.

I also question the productivity of the infrastructure spending our governments have been engaged in for years including that spent as part of the stimulus package. It all seems to be on structures such as road modifications,port expansion and some buildings. Given peak oil, climate change and other environmental constraints we will soon have to face these "assets" will have pretty short productive lives.

Meanwhile we are busy running down our real productivity base -the human capital potential that can be released through investing more in science, education and health.
Posted by kulu, Sunday, 9 August 2009 7:28:18 PM
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Kulu,

Firstly, I could not agree more that we should be investing more in science, education and health. You will likely find that to achieve this to any great degree will necessitate deficit.

But to argue that deficit spending and borrowing (it occurs in that order) now will require that taxation must be higher or government spending lower in the future as a result is incorrect. Taxes might be higher, or lower or the same as they are now in the future. Taxation and federal government spending are not causally related, counter-intuitive as that may seem.

Our government – like many others – presides over a modern fiat monetary economy, characterised by a non-convertible currency and a floating exchange rate. This is completely different functionally from the preceeding Bretton woods and gold standard systems. The limitations that applied in the past simply do not apply now. All constraints on federal government spending are voluntary and self-imposed, often for political purposes.

In a fiat system, government spending comes in effect, from nowhere. They do not gather stocks of taxed or borrowed dollars and then spend them. Taxing and borrowing extinguish financial assets (money) and new currency is literally spent into existence. If you were to pay your taxes or buy bonds directly with cash, the cash you handed over would not be recycled and spent – it is either shredded or incinerated. Borrowing serves only as an interest rate maintenance measure and taxation serves only to create demand for the otherwise worthless fiat issued by government, giving it value.

Federal budget surpluses BTW, do not represent any kind of national savings. They are merely an accounting statement to say that the government caused a net drain of financial assets from the economy. Any attempt to run permanent surpluses is both useless (but NOT from a political viewpoint seeing as a misinformed public believes that they are saving for the future) and futile as they ultimately create recessionary conditions.

I will comment on Zimbabwe. It is completely unlike the situation faced in Australia, the US or Japan.
Posted by Fozz, Sunday, 9 August 2009 9:17:09 PM
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Fozz, How is "government net spending the source of private savings"? The only private savings i am aware of, come from, my, doing without any unnecessary luxury items, i might, otherwise waste my money on, and keeping those funds for a rainy day, house deposit, make extra payments on mortgage, retirement savings, etc.
Posted by Formersnag, Monday, 10 August 2009 6:06:31 PM
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Formersnag,

Where did the money you stashed away come from? Did you run it out on a printing press in your basement? Did you hack into the banks computer and alter the numerical entry in your account, marking it upwards? This isn’t sarcasm; it’s just posing a question.

In order to hold Australian dollars to either save or spend, you had to get them from somewhere else first.

You had to somehow earn them or borrow them or steal them (not that you would do that of course!). Point: your ability to spend or save money is constrained by the need to acquire it from elsewhere first.

So this commonsense rule must surely apply to everybody, right?

So if government, individuals and businesses all have to earn or borrow Australian dollars from elsewhere before they are able to spend or save Australian dollars…………..where is that elsewhere? What is the original source?

In fact, not everybody must get $AUSD from elsewhere before being able to spend them. The federal government is unique in this respect.

The facts are that the federal government has monopoly right of issue over Australian currency. It enters the system through their spending – it is literally spent into existence - and leaves again through taxation and borrowing – which extinguish it. So the money that you and I earn, spend, save, invest, buy govt bonds with, pay taxes with – all of it came into existence when the federal government spent previously.

They face no real constraint in their ability to spend what they themselves create and issue as they see fit. Unlike us, they are not revenue constrained and do not have to finance their spending.

The point is that we can only come to hold Australian dollars for whatever purpose because the government has spent them into existence first.
Posted by Fozz, Monday, 10 August 2009 9:12:28 PM
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Fozz,

The difference between money supply growth in Zimbabwe and Australia is just one of degree that's all. The more money circulating relative to real assets the less any given quantity of that money will buy. That is one of the major reasons why the money I paid for my house a few years ago will only get me half a house now. (In the case of property though I admit that increased demand through extraordinarily high levels of population growth via immigration and increased fertility rates also played a significant role.)

It is fiat money as you state and governments can more or less create it at will - and in the short to medium term it can without too much problem - but in the end someone will end up paying. Of course if the extra money created at any one time is consumed rather invested in productive assets that provide a real asset dividend on the "borrowings" then its worth will decline more rapidly.

Unfortunately what Australia was doing in its boom years was digging up our natural capital, sending it off to China and consuming most of the stuff we got in exchange. We cannot continue doing this ad infinitum in a world with finite resources.

For those interested; here is a link that very tidily ties together all the elements (economy, energy, environment) that are resulting in the unsustainable circumstances in which the world find itself. I give it 10 out of 10.

http://www.chrismartenson.com/crashcourse/chapter-1-three-beliefs
Posted by kulu, Tuesday, 11 August 2009 5:15:30 PM
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Hi kulu.

First, I will agree that there is a difference between a government spending 2-3% of GDP and spending 2-300% or 2-3000% or more. Zimbabwe is a strife torn, fractured nation with a despotic and dysfunctional government that has foolishly spent far in excess of this physically broken-down countries capacity to absorb and react positively to it. Zimbabwe style hyperinflation is not remotely on the horizon in our case.

But I wouldn’t say that the Australian government has done anything to expand the money supply as such. It is monetary policy that for every dollar of fiat they spend into existence when running a deficit, they borrow another from the private sector in order to drain the excess reserves created by their spending, allowing the reserve bank to continue to be able to set interest rates. The act of borrowing extinguishes or destroys what they have borrowed, so no net change has occurred.

I must disagree that an expansion of the money supply is responsible for the run up in housing prices. There is a difference between an asset bubble and general inflation. Remember that the government was running SURPLUSES over the housing boom period, shrinking the supply of Australian denominated financial assets in circulation, not expanding them.

My only concern here is that debate and the conclusions arising from it reflect the actual modern reality of our fiat monetary system. There is no reason why deficit spending now need cost anything in the future, either by increased taxes or lower government spending. Any future action that the government takes in this regard reflects political and/or ideological constructs, not financial limitations. When it comes to spending in it’s own currency, the monopoly issuer of that currency has none.

I will agree that we cannot over exploit the natural world forever.
Posted by Fozz, Tuesday, 11 August 2009 7:19:14 PM
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