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.

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.

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.

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.

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

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.