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The False Debt-Scare ‘Own Goal’

So, inflation has gone down further to 1.3% for the year to September 2016 from 1.7% in the first quarter of 2016. This is against the RBA’s target rate of 2-3% and all the economic boffins are turning their eyes toward the Reserve Bank guessing as to whether Governor Philip Lowe will reduce interest rates further to 1.25% on Cup Day.

Why do they bother? None of the past half dozen or so rate reductions have stimulated spending. Neither will another rate cut. RBA governor, Philip Lowe has already suggested that reducing rates has run its course and some form of fiscal stimulus is necessary.

What rate reductions have done is inflate housing prices. That is not what they were intended to do. So, now we have the usual suspects (the wealthy) being the beneficiaries of a housing boom while those who most need to buy a house lose out, or place themselves at financial risk by borrowing beyond their capacity to repay.

So, why is inflation so low? The short answer is people are not spending enough to generate increased sales growth that will convince businesses to invest and thus stimulate employment. Sales are the lifeblood of an economy. The 3% GDP growth experienced over the past year has come, not from increased sales, but on the back of government spending.

So who is responsible for scaring people enough to stop them spending? Firstly, it was Joe Hockey and Tony Abbott. Now it is Scott Morrison and Malcolm Turnbull.

People will not spend when they are convinced, as they have been by this government, that the economy is tanking, that we must live within our means, that we have a spending problem, that we must reduce the debt or go broke. That false debt-scare has frightened everyone to such a degree that they have resorted to paying down debt and/or saving.

art-hilzinger-420x0But here’s the thing about our national debt. We know the government recovers an equivalent amount of currency in circulation (a pre-existing government liability) in exchange for the issuance of Commonwealth Government Securities, i.e. security ‘paper’ – but the transaction is recorded on national fiscal balance sheets as an increase in government liabilities.

When that same transaction is recorded on the private investor’s balance sheet with the RBA, the purchase of that ‘security’ is recorded as:

1) A reduction in available ‘Current assets’ equal to the amount of money withdrawn to pay the purchase cost of the purchased bonds;

2)    An increased in the value of long term ‘Investments’ held – of an equal amount to the reduction recorded in ‘current assets’.

In other words, the transaction, at the time of purchase, represents a transfer of money from a readily convertible ‘liquid’ form (cash) to an (interest earning) not so readily convertible investment form (security contract).

At that instant in time, there has been no increase in the net wealth of the investor, though ‘interest’ dividends will be received per agreed investment terms. The interest paid on the bonds is a Reserve Bank transaction, not a fiscal one. That interest should not be a budgetary consideration.

This is what we call our national debt. Yet this government won office in 2013 on the back of a giant scare tactic, saying that our economy was going down the toilet; that we had to balance the budget and pay down debt. In fact they are still doing it.

da9aa5c89393e149e30ff3c04d9e2991So now, through their own ignorance, they are reaping what they have sown. They have frightened the community so well that any growth recorded is the product of the very thing they are trying to reduce….their own spending. In soccer parlance, I think that’s called an ‘own goal’.

If you doubt that our national debt is a myth, that all government spending is new money, that taxes withdraw money from circulation AFTER it has been spent into existence by the government, consider the contradiction of the fiscal balance sheet liability when juxtaposed upon the RBA transactions that simply swap one account across to another and credit interest as agreed.

When one views the transaction this way, it is easier to see how our national debt (so-called) is a myth; one can see that bond sales do not fund government spending. The money received in exchange for the bonds remains in an account at the RBA on behalf of the investor.

The commercial accounting condition that every asset has a corresponding liability is not being applied to federal government accounts. One can see that the entry of the bond sale revenue onto the fiscal balance sheet as a liability only, is false accounting.

This has been written in collaboration with John Bloomfield.

22 comments

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  1. townsvilleblog

    John, Just to put you right, I’m almost certain Roy Morgan Research found that there were 19 job seekers for every job. They also found unemployment for July 16′ at 10.5% August 10.4% and September at 8.5% contrary to government ABS figures of July 5.8% August 5.7% and so on. They also found the number of unemployed was 1,101,000 and further the under-employed was 1,002,000 so the bloke in the past thread was not having a go, he was quoting what he believed to be correct figures, as the govt figures show only 5 applicants for each job available whereas Morgan Research found 19 applicants for every job.

    Didn’t want to interrupt this article, but did want to assure you that the other bloke was quoting what he believed to be correct figures.

  2. townsvilleblog

    John, I have no concern about our supposed debt, my concern lies with the increasing number of Australians living in poverty due to the incompetence of the L&NP government’s failure to produce a jobs policy. It seems as though their only concern is selling off all State and Federal govt services to the globally rich 1% who already own 50%+ of the global economy. These foreign corporations who pay no tax instead use their savings in tax to buy our government services (privatization) so we will become another State of the United States of America and be owned by their corporations.

    This is a cruel fate to befall this once great country, to be downgraded to a comparison of the US of A. This had always been an egalitarian nation until this latest extremist ultra right wing controlling faction within the Liberal Party emerged, along with One Nation to drive our “people” into the depths of despair, without work, without income, having to rely on an ever shrinking pension to survive, which itself will be taken away from many, with the support of the extremist One Nation spiteful reactions to the life of its leader, who finds it impossible to find a partner in life, and whose only partner left her to make her a single mother,

    Yes hates everyone and everything, but sides with the L&NP who so damaged her brand two decades ago that it has taken this long to return to the Australian parliament, not to help the people who elected her, but to pour scorn over everything she despises, a dark witch indeed.

  3. Andreas Bimba

    We really should prosecute those responsible for imposing mass unemployment, underemployment, economic destruction, homelessness, poverty and government services cutbacks on the Australian population based on the lie of federal government debt.

    Governments acting for the Kleptocracy and not for the electorate also deserve prosecution.

  4. Peter F

    John, no matter what the debt level, this crew have, as you say, convinced the population that we must reduce spending: The stupidity is that they people have listened, and the government have not. ( I agree that it is time for the government to stimulate the economy, I am merely alluding to the stupidity of their actions.)

  5. Möbius Ecko

    “Firstly, it was Joe Hockey and Tony Abbott.”

    Don’t forget that those two started the scare from opposition and almost immediately after Labor (Rudd) won the election. So this message has been running for quite a number of years, and with the aid of the MSM, especially Murdoch’s, it has become ingrained.

    When Hockey attempted to change tack and lost his financial crisis, the message had become so set in with the people he could not remove the fear.

    https://www.crikey.com.au/2013/09/16/stimulating-hypocrisy-from-hockey-joes-changed-tune/

  6. Steve Laing - makeourvoiceheard.com

    You are right John. When I had my business, I noted a drop in sales about two months prior to the first Abbott/Hockey budget – when they started the dialogue about the need to tighten belts. Everyone stopped spending, and the economy began to nose dive.

    The party of business? Only if you are a big business…

  7. totaram

    PeterF: I wish the actions of the present govt. were stupid. They are not. They are designed to trickle wealth upwards. Simple. The excuse given is that “we are all in debt and have no money”!.

  8. Robert

    Correct John. There is no debt. Unfortunately both major parties in Australia conduct anti-fiscal operations where spending in a boom increases and in a recession decreases. Completely contrary to the fiscal idealogy. Why may you ask because they have only one interest in mind, their success with no respect for why they are suppossed to be elected for, the public. Only will proportional representation in all 3 Government levels start to rectify this completley corrupt form of Government in Australia.

  9. Harquebus

    We don’t use money, we use currency.
    Energy makes money, printing currency does not make energy. No amount of fiat creation can offset diminishing energy returns.
    Physics trumps economic gobbledygook every time.

    Only when reality slaps the likes of John Kelly in the face will they realize what it is.

  10. king1394

    Some people might be ‘scared’ to spend, but there is a huge number of people who have no money to spend. And not only people who are unemployed but anyone paying rent or a new mortgage or loan repayment are tightening their belts. When the costs of electricity, water/sewerage, rates, insurances, car maintenance and registration are all so high in relation to an average wage, every cafe meal and trip to the cinema is weighed up seriously. Christmas is becoming a nightmare more than a joyful celebration for the same reasons

  11. John Kelly

    King1394, it also has a lot to do with wages growth over the last 8 years, which has been well below earlier trends.

  12. Harquebus

    “Gone is the wealth-producing economy; now we have one that adds debt and subtracts real wealth.”
    http://www.dailyreckoning.com.au/politics-poisoned-economy/2016/10/31/

    “Economists have ruined the economy. The working man knows it.”
    “So they do all they can to encourage borrowing, spending, making, using, forcing, wars and destruction, burning, diddling, throwing away, subsidising, outlawing — everything possible to create activity they can measure, mismeasure, and mislead.”
    http://www.dailyreckoning.com.au/economists-ruined-economy/2016/10/26/

  13. Matters Not

    How long do we have to have advertisements for Bill Bonner associated companies promoted for free on this site? Or is there a commission involved that hasn’t been disclosed?

    One of the big problems we have is the lack of ‘critical consciousness’ in the wider populace. An inability to separate the wheat from the chaff. To separate bullshit from ‘reality’. An inability to entertain the notion that just reading something doesn’t make it valid. A lack that Bill Bonner exploits ruthlessly as his wealth expands exponentially.

    And the evidence of the naivety can be found above.

    Did you know for example that ‘cancer can be evaporated in 6 weeks’, if only Obama allowed it to be known? And there are so many other ‘plots’ that only Bill Bonner knows about. But they can be revealed to you for a small amount.

    I won’t provide links to Bonner. That only compounds the problem.

  14. Steve Laing - makeourvoiceheard.com

    Matters Not – you’ll find that the adverts that Google puts up on the AIMN site when YOU look at it are specifically aimed at YOU and YOU only. We all see different adverts. If you’ve been looking at Bill Bonner, Google assumes you are interested and this will follow you around to any site that has signed up to “AdSense”, as I assume that AIMN has. I, for example, am seeing adverts for flights to Fiji because my daughter is going there as a volunteer for six months next year.

  15. Matters Not

    SL

    find that the adverts that Google puts up on the AIMN site when YOU look at it are specifically aimed at YOU and YOU only.

    So that’s why I am inundated with sites that advertise por .. Just joking, by the way.

    No I am not talking about ‘cookies’ and how they track you, rather I am talking about the advertisements, promotions and the like which ‘consciously or unconsciously’ are advanced by a very small minority on this site. I strongly suspect – they know not what they do.

    Bill Bonner and his nonsense isn’t for me but apparently it has a profound effect and affect on a particular ‘contributor’. The references are ongoing. The evaluations are sadly lacking.

  16. Harquebus

    Steve Laing

    Matters Not is referring to the Daily Reckoning links that I provided which were written by Bill Bonner.
    I had not heard of any criticism of Bill Bonner until Matters Not. If it is just his opinion then, it can probably be safely ignored.

  17. Matters Not

    I had not heard of any criticism of Bill Bonner

    I can believe that! (Shakes head.)

    Now what did I write about the problems we have with the lack of ‘critical consciousness’ among the broader populace.

    If Bill Bonner was linked he would immediately advertise the number of bridges he has for sale. And be very, very confident of a sale.

  18. Harquebus

    Matters Not
    Please provide some evidence to back your statements.
    Cheers.

  19. Harquebus

    “At a delicatessen counter in eastern Caracas, Humberto Gonzalez removes slices of salty white cheese from his scale and replaces them with a stack of bolivar notes handed over by his customer.
    “It’s sad,” Gonzalez says. “At this point, I think the cheese is worth more.””
    “Sadly, Venezuela is the canary in the coalmine for what will happen to all currencies in a world where there is now simply too much debt.”
    http://www.zerohedge.com/news/2016-10-31/i-feel-pablo-escobar-venezuelans-resort-weighing-cash-hyperinflation-builds

  20. Pingback: The False Debt-Scare ‘Own Goal’ | THE VIEW FROM MY GARDEN

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