The Myth of Inter-generational Debt

July 5, 2016
Written by: John Kelly
232 Replies

The Commonwealth government gross national debt, which currently stands at $421 billion is not debt in the true sense of the word. When the government borrows, it issues Treasury bonds and only accepts payment for those bonds in Australian dollars, not US dollars, not Pounds or Euros.

But it is also the issuer of Australian dollars. Every time the government spends, it spends in Australian dollars. Not US dollars; not Pounds or Euros; it only spends Australian dollars that it creates itself.

On the other side of the ledger, it also collects taxation, but again, only in Australian dollars. If I were to walk into a taxation office with a swag of US dollars and offer them as payment of my taxes, the taxation office would not accept them.

I would first have to convert them to Australian currency, at whatever the conversion rate was at the time. The taxation office would not do that for me. If you think otherwise, ask them.

This then begs more than one question. If the government creates Australian dollars, why does it borrow in Australian dollars and how could it ever default on payment of interest and principle?

We will leave the question of why it borrows for another day, but the short answer on how could it default is: it can’t.

This matter came to light last night on the ABC’s Q&A program when an audience member ask a question about inter-generational debt.

Both politician, Josh Frydenberg and celebrated journalist, Paul Kelly responded by warning of the burden we were placing on our grandchildren if we did not bring the budget under control and pay down debt.

Clearly, neither understood how a fiat economy works. No generation ever pays down, or is burdened by, a previous generation’s spending. Each generation pays only for what it consumes itself.

Frydenberg also raised the question of the payment of interest on debt, i.e. the sale of treasury bonds. Again, the government pays interest (currently approximately $1 billion a month), to the holders of those bonds. So who is holding them?

The short answer is: it doesn’t matter. But in reality a large proportion is held by banks on behalf of clients, either here or overseas. A large proportion is also held by Australian superannuation funds and cash management funds.

Think about that for a moment. A good slice of that $1 billion of interest paid by the government each month goes to benefit ordinary Australians saving for retirement.

So, those who take issue with the so-called “inter-generational debt burden” are probably, nay certainly, beneficiaries of it: Josh Frydenberg and Paul Kelly included.

Then there is the question of paying back the principle. When the bond matures, the government credits the money back to the bondholders, i.e. the superannuation fund where most of us have our retirement nest egg. And so the process starts all over again.

At any point in time, ordinary Australians benefit from the “debt burden” thus relieving the government of the expense of welfare in later life.

Subsequent generations do the very same thing. No one is burdened by a previous generation’s spending.

So, the next time you hear people screaming about how this fictional national debt is crippling the nation, ask them if they belong to a superannuation fund.

If they do, then ask them if they are happy to have government interest paid into their account or would they prefer to give it back to help their “broke” government avoid creating a future debt burden upon their grandchildren.

I think you know what the answer will be. It’s time we stopped this nonsense about the national debt.

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IAO PRISMJuly 5, 2016 at 7:32 am

Lefty thinks that the government creating debt denominated in their own debt based currency isn’t really debt or a burden on the next generation because the government can pay off their debt by creating more debt based currency or bonds denominated in their debt based currency. Only adults could be convinced of such a fantasy.

FreethinkerJuly 5, 2016 at 7:58 am

Why do people have to always come with the word lefty to categorize others that have a different view from them?
It just discredits their argument and I do not bother to continuing reading.
I just hope that one day the economists will realize that the current model does not work.

John KellyJuly 5, 2016 at 7:59 am

IAO PRISM, are you saying that you are not an adult?

AthenaJuly 5, 2016 at 8:08 am

Well everyone knows we borrow Australian dollars from the Chinese when only Australia can generate Australian currency.

Möbius EckoJuly 5, 2016 at 8:14 am

OK IAO PRISM fair enough. Can you then please explain to me how a fiat currency works as you seem to be at odds with a lot of economists?

Peter PerfectJuly 5, 2016 at 8:33 am

Prism is firing one last nasty shot following the massive election defeat.

AthenaJuly 5, 2016 at 8:45 am

Warren Mosler’s book in its entirety, 7 Deadly Innocent Frauds of Economic Policy

http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf

michael laceyJuly 5, 2016 at 8:51 am

Free thinker! Well by saying lefty they feel the argument is won! Bill Mitchell has spoken also about the Myth. There is very little economics in these reports. What parades as economic analysis is just the usual neo-liberal mainstream nonsense that currency-issuing governments have run out of money and fiscal deficits are dangerous. A little more reading by freethinker might free up his mind!
http://bilbo.economicoutlook.net/blog/?p=30351

Al CutmoreJuly 5, 2016 at 9:06 am

You can only print money to the value of the gold holdings you have. One you over print the value of your dollar drops and if you keep printing it will get to a point where the value of the dollar is less than the paper it is printed on and you are broke.

Al, you are 33 years too late. We went off the gold standard in 1983. Then later in 2006 Peter Costello sold all our gold off.

Möbius EckoJuly 5, 2016 at 9:19 am

Al Cutmore. Gold has not been used a monetary standard for a long time now. Remember Costello sold off our gold holdings for a bargain.

Nowadays its all just entries in a ledger. To way overly simplify it, fiat money is created out of thin air and disappears the same way, one side of a ledger to another.

FreethinkerJuly 5, 2016 at 9:21 am

michael lacey my mind it is free enough to think that the current model it is not good enough.
I am more inclined to Manfred max Neef views

geeJuly 5, 2016 at 9:29 am

i am so glad the reality of how money works is finally cutting through.

the government spends money into existence, so too does its proxies (banks) through the creation of debt and the application of interest. Taxation and loan repayments destroy the money so created in order to manage the supply of money to moderate inflation.

Anyone who says the federal government is like a household and needs to live within its means is completely ignorant of the most fundamental truth about a sovereign currency.

Sadly, this includes pretty much all politicians, mainstream economists and economics journalists.

Kaye LeeJuly 5, 2016 at 9:37 am

This “live within your means” crap totally ignores the reality that NO business “lives within its means”. Businesses borrow and invest in things that will bring a greater return. Provided you invest in the right things, the only consideration is the ability to service the debt. Considering our interest repayments are less than 1% of GDP (and the fact that we have a sovereign currency so cannot default), there is no question about our ability to service our debt.

The unused productive capacity in our economy gives us plenty of room for growth. The fears of inflation or devaluation of currency are unfounded.

Interest rates are at record lows. If governments stopped being scared of debt we could be borrowing and investing in infrastructure, education, health, childcare, job creation etc all of which will bring a far greater return than the miniscule interest it would cost (which cannot go up – it is fixed for the term of the bond).

The debt scare campaign is the true handbrake on our economy.

Troy PrideauxJuly 5, 2016 at 9:44 am

I’m still confused – the way I read this (correct me if I’m wrong please) – the beneficiaries of government spending today are the current recipients of the spending (current generation) yes? and the beneficiaries of the interest paid on that debt are predominantly bankers and super funds and in-turn the investors within such ie. the current generation with capital yes? So, I’m trying to figure out how the next gen benefits from all this?

Troy, the next generation inherits the infrastructure, the standard of living and creates its own wealth on top of that.

Jennifer Meyer-SmithJuly 5, 2016 at 9:58 am

This election has been a winner for anybody, who takes an interest in how macro economics works because it has opened up frequent enlightening discussions like this one.

These discussions need to continue so that uninformed people like Paul Kelly and Josh Freydenberg and their counterparts in less conservative spheres, don’t continue the fallacies of Trickle Down Economics and inter-generational debt.

jimhazJuly 5, 2016 at 10:14 am

[Provided you invest in the right things]

and this excludes recurrent expenditure, namely everything this website would want implemented (excluding perhaps renewable energy over a longer cycle).

Importantly to me this includes education, health, childcare. I know people like to regard additional public education spending in particular as an investment, but I suspect the link is tenuous above a certain level – giving a return of less than a dollar for each additional dollar spent. It is not going to create enough jobs to cover the cost.

Perhaps this is why private schools supposedly don’t do any better than public overall (which I suspect is another furphy).

[will bring a far greater return than the miniscule interest it would cost]

Yep, 16b now rising to 30b on current interest rates. If interest rates doubled in the next 5 years of spending, then the interest bill could rise to over 50b per annum.

To me Mosler is a crank and you’ve all fallen under the spell of his wishful thinking. In any case it is irrelevant as there is no chance of either the LNP or ALP paying any attention to this theory.

Möbius EckoJuly 5, 2016 at 10:28 am

“So, I’m trying to figure out how the next gen benefits from all this?”

Troy Prideaux because things like infrastructure, health, education, security, environment, science, arts etc. are all long term investments over many generations, some that depreciate, some that appreciate and some that give returns. Neglect them as Howard did and then future generations have to repair and rebuild at a greater cost, but it will still be deficit spending created by the government. That still doesn’t give any government the right to ideologically neglect and cut those things now in the hope some future government will repair what it has destroyed, or worse farm out those things to private enterprise where profit comes ahead of all other considerations.

Neil of SydneyJuly 5, 2016 at 11:03 am

A large proportion is also held by Australian superannuation funds and cash management funds.

Think about that for a moment. A good slice of that $1 billion of interest paid by the government each month goes to benefit ordinary Australians saving for retirement.

Bit deceitful. The largest proportion is held by foreigners. Something like 70% i believe which means $700M leaves the country every month never to return.

It annoys when people compare our debt to other countries. Japan, USA, Western Europe can fund the majority of their debt from their own people. They all have large companies like Toyota, Sony, Apple, Ford, Ciba Gigy etc who can plonk their savings in govt bonds. We don’t have companies like that.

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totaramJuly 5, 2016 at 11:29 am

“Bit deceitful. The largest proportion is held by foreigners. Something like 70% i believe which means $700M leaves the country every month never to return.”

Would you care to tell us how much in dividends for the mining companies leave this country, literally never to return? (because once the resources are gone they are indeed gone). An annual figure will do.

economicreformJuly 5, 2016 at 11:32 am

Deficit hawks are everywhere. I saw that Q&A program too, and was unexpectedly surprised to see a person of the vintage and otherwise intelligent disposition of Paul Kelly falling for the debt and deficit story that we see so often peddled by the politicians in the mainstream parties. The arguments against maintaining federal government “debt” (aka Treasury securities issued to the private sector) fail at the the most elementary level. These risk-free securities denominated in Australian dollars are needed by large institutional investors (e.g. super and pension funds) in order to balance the risks in their investment portfolios. The volume of these securities therefore needs to increase in line with the growth of the real economy. And if they are issued in Australian dollars to local investors then the federal government has nothing to fear from the corrupted credit rating agencies. The arguments of neoclassical economists that federal government borrowing “crowds out” private sector borrowing (which, they claim, leads to rising interest rates and inflationary pressures) is not based on any empirical or statistical evidence. In any case there is no inflationary pressure anywhere in the world at the present time; the real problem we currently face and need to overcome is the tendency to deflation. And the reason for the existence of that deflationary tendency is an all-time record level of private debt — not public debt.

JasonJuly 5, 2016 at 11:33 am

Jimhaz, the reserve bank controls the interest rates. Japan is selling 30 year bonds at negative interest rates and still huge demand. Regardless interest is just new money created by typing characters into a keyboard. Not investing in things now for the future is the real theft from future generations. We could cut the deficit by coming as hooks for example. Then how do we prosper in future? Same with NBN had other infrastructure we will need in the future. Neo-liberalism since the 80s has brainwashed everyone into thinking a government budget is like a perfect household. It’s the opposite, it builds the house we all live in! Also what household has no debt? http://bilbo.economicoutlook.net/blog/?p=33094

Neil of Sydney, we have a huge export sector for minerals in particular. Yes we need more value add industries but the deficit fears stop governments investing for the future to do this. The EU countries are all using a foreign currency unlike Australia. Our currency is one of the major currencies traded and the government can set the interest rate at whatever rate wants to. About 80% of bonds are in super funds I believe. Either way bonds are just the safety lace to store our currency. If we buy things from China they hold the AUD in bonds till they buy something back from us and vice versa.
http://bilbo.economicoutlook.net/blog/?p=31715

Prism, grow up and at least learn some macroeconomics. It’s counterintituve but there’s plenty of info here and on the web. Here’s a short 3 min clip explaining modern money: http://youtu.be/bTZGU9s0idM

totaramJuly 5, 2016 at 11:51 am

Jimhaz: You can add to your list of cranks:

James Kenneth Galbraith, Professor of economics, U texas at Austin (he wrote the foreword to Mosler’s book)
Professor Randal Wray, Univ. of Missouri
Professor Stephanie Kelton (nee Bell) Univ. of Missouri-Kansas
Professor Bill Mitchell, Univ. of Newcastle, Australia

I’m sure there are many others who write in other European Languages. If you look, you will find.

Don A KellyJuly 5, 2016 at 11:57 am

Bond sales are also a tool used to manipulate the level of reserves in the banking system in order to set interest rates. Who else buys bonds? Mostly affluent people. I haven’t heard of many poor or middle class people who are wondering what Treasury Securities they are going to buy with their ‘extra savings’. Only rich people have that worry. According to Prof.Bill Mitchell, Governments do not have to issue debt to fund their spending. The main reason they issue debt, a hangover from the ‘Gold Standard’, is because of pressure placed on them by neoliberals to restrict their spending. Conservatives know that rising public debt can be politically manipulated and demonised. They do this to put a brake on spending. There is no operational necessity to issue debt in a fiat monetary system.
Conservatives are schizophrenic on the question of public debt. Public borrowing provides corporate welfare in the form of risk – free income flows to to the rich. It allows them to safely keep their funds in bonds during uncertain times and provides a risk – free benchmark on which to price other, riskier financial products.
Prof.Mitchell also states, “The issuance of Treasury bonds is akin to corporate welfare for purchasers who are typically finance instituations and foreign governments. Why should they enjoy a risk – free government annuity?”

Möbius EckoJuly 5, 2016 at 12:05 pm

Jimhaz. “Perhaps this is why private schools supposedly don’t do any better than public overall (which I suspect is another furphy).”

“supposedly”, “suspect” but no definitives or evidence. A little research will show that there’s no supposed or furphy about it, and it’s almost universal with US, German and other studies showing the same outcomes.

Indeed in many cases the only way parents who are paying small fortunes sending their kids to private schools can get better outcomes is to spend even more money on out of school tutorage. Also students from public schools do better in university than those from private schools, yet they stack the system to favour those coming through the private system.

Sorry off topic.

Möbius EckoJuly 5, 2016 at 12:12 pm

Don A Kelly. Also the aim of business lobbies in pushing for surpluses is to make a claim for more public money either as subsidies or tax breaks. This is hard for them to do whilst there are deficits, as we can see with Turnbull’s failure to sell $50b in business tax cuts, tax cuts business and the IPA are still demanding.

I don’t know the reason why ratings agencies push for reductions in debt for sovereign countries.

economicreformJuly 5, 2016 at 12:13 pm

Don A Kelly said that purchasers of Treasury securities are “typically finance institutions and foreign governments”. I don’t think this is correct. It’s true that financial service institutions hold a proportion. However most of these financial investments within the private sector are held by large institutional (non-bank) investors, such as mutual funds, superannuation funds, pension funds, and insurance companies.

Möbius EckoJuly 5, 2016 at 12:15 pm

John. Who would these people be that are lending the government money in Australian dollars that the government has to pay them back in Australian dollars? Where do the Australian dollars come from in the first place?

economicreformJuly 5, 2016 at 12:18 pm

The comments by John (in the entry as few back) reveal a very poor understanding of macroeconomics. I suggest a crash course in the subject before issuing any further comments, if he wants to be taken seriously.

Neil of SydneyJuly 5, 2016 at 12:23 pm

Remember those stupid graphs produced by the ALP showing how low our debt is compared to other countries? you know with the arrow saying “we are down here” Well it is not as low as it used to be.

Costello celebrated debt free day in 2006. In 2007 debt was minus $44b ie money in the bank. Now we are back to debt being 18% of GDP where it was in 1996. Does not take long to get into debt. Rudd/Gillard started a runaway debt truck.It will most probably double every 10 years. In 20 years time we will be at 72% of GDP debt.

stephentardrewJuly 5, 2016 at 12:31 pm

Great posts. Thanks to John and all contributors for keeping this issue alive. We cannot relent.

FreethinkerJuly 5, 2016 at 12:43 pm

economicreform, I am interested in which sources you recommend to have a “crash course” in macroeconomics.
If they are the ones that “educate” people with the current model, I am not interested.

Dan RowdenJuly 5, 2016 at 12:51 pm

NoS,

In 20 years time we will be at 72% of GDP debt.

“Hyperbole” is an entirely inadequate word to characterise that statement. Well done, Neil, I think you’ve managed to achieve the ineffable.

Steve Laing - makeourvoiceheard.comJuly 5, 2016 at 12:55 pm

Another excellent post. I am sick of the triteness of the “can’t be in debt/must return to surplus”, “live within our means”, “like a household economy” bullshit.

Many of the households I know are significantly in debt. Its called a mortgage. And they are paying it off, interest and all, over time because they can (largely) afford to do so, and because they don’t have the money up front. So going into debt is sometimes a sensible thing to do, when you know that you’ll be able to pay it back. Would the LNP government call these people crazy? Would they suggest they stop using petrol, buying food, paying for healthcare and their kids education so they can pay the mortgage off quicker? Of course not! And guess what! Sometimes they invest in a bigger house because they are thinking about their future needs, BEFORE THEY’VE EVEN FINISHED PAYING FOR THE FIRST ONE! OMG! The world will collapse! Think of the intergenerational debt!

But what really irks me is that the MSM refuse to actually use the same analogy that the Libs use to debunk it, in exactly the same way that I have. It really isn’t that hard.

John KellyJuly 5, 2016 at 12:59 pm

@economicreform, were you referring to me or Don Kelly in your comment above?

economicreformJuly 5, 2016 at 1:14 pm

Hi John, I responded to Don A Kelly and also to another set of comments from someone named “John”. I am in agreement with everything you have written in the lead article.

jimhazJuly 5, 2016 at 1:17 pm

If someone can address the concerns pointed out here then do so, otherwise I’ll continue to reject the use of MMT as neither being wise or workable long term.

http://www.mercenarytrader.com/2010/12/weekender-the-trouble-with-modern-monetary-theory-mmt/

This theory is not like the trickle down rubbish, I agree that that theory is one sponsored by vested interests. MMT tries to place a country outside of the rest of the world, outside the set of causes that hold finance markets together and outside of any successful countries history that I know.

Even if we spent 400b in printing money over 10 years to give everyone a suitable job you still need all the other conditions to work out or you just have to keep spending.

@Totaram

That is a bit like citing a few global warming scientists. Wray worked with Mitchell and looks a bit nutty. Galbriath and Sanders mate Kelton look like people whose empathy has affected their thinking.

Anyway I am simply not going to spend the time on something that appears to be intuitively incorrect.

The sort of contrarian economics I feel is more realistic is stuff like in this article.

http://thenewdaily.com.au/news/2016/06/30/best-way-grow-jobs/

By the way how much would you propose spending over X years and if that doesn’t produce the results you expected what would you then do?

@ Mobius

[“supposedly”, “suspect” but no definitives or evidence. A little research will show that there’s no supposed or furphy about it, and it’s almost universal with US, German and other studies showing the same outcomes]

Nope I have no evidence. It is a gut feel. I just do not trust the studies in relation to their scope and purpose. I think those who go to private schools end up more wealthier than those of the same IQ and a similar socio-economic background who go to public schools – I think it is to do with the job links and attitudes prevalent in private schools.

Btw though I’ve no desire to support private schools. The current level of federal funding of wealthy and religious schools appalls me.

economicreformJuly 5, 2016 at 1:27 pm

Freethinker, I don’t mind which course you undertake in macroeconomics. As long as you make the effort to try to understand how our monetary and financial systems operate.

A good place to start, and one which you will find in most macroeconomics courses, is the sectoral balance equation. This is a mathematical identity, not a theory. It tells us that for a sovereign country the sum of the government budget balance and the private sector balance (which includes the foreign sector) is zero.

In other words a government deficit equals a private sector surplus, and a government sector surplus equals a private sector deficit. A private sector deficit is generally not good news for the health of any economy, because it implies a contraction in private sector spending, saving and investment.

economicreformJuly 5, 2016 at 1:36 pm

Jimhaz: Gut feelings are often wrong. Ask any working scientist. Two of the most brilliantly successful scientific theories developed during the past hundred years (quantum mechanics and general/special relativity) are highly counter-intuitive. So I would advise you to avoid the temptation of dismissing counter-intuitive ideas.

FreethinkerJuly 5, 2016 at 1:41 pm

economicreform, no problem with how our monetary and financial systems operate, I understand it well. I was thinking more about the macroeconomics model, but that is another topic.

FreethinkerJuly 5, 2016 at 1:44 pm

The problem is that any scientist that honestly tell that fully understand quantum mechanics is mad or trying hard to be one.

Feynman once said, ‘Science is imagination in a straitjacket.’ It is ironic that in the case of quantum mechanics, the people without the straitjackets are generally the nuts. Lawrence M. Krauss

Just a tongue in cheek comment………………..

jimhazJuly 5, 2016 at 1:46 pm

lol, I do not accept many of those scientific theories as well. Not so much the evidence gathering, but the ultimate conclusions they draw from that evidence. I see those conclusions as simply an option, not necessarily the correct one. Much of the many QM theories appear as just maths wankery to me – maths made to fit a preconceived idea. I’m OK with pretty much anything Einstein produced, and consider him correct to reject QM for so long.

economicreformJuly 5, 2016 at 2:12 pm

Responding to both Freethinker and Jimhaz, it is true that quantum mechanics is counter-intuitive, i.e. conceptually very difficult, but that does not make the theory false or inappropriate in any sense. The test of any scientific theory is its ability to predict what can be observed and measured. And in this respect quantum mechanics has been brilliantly successful. The first success of quantum theory was Planck’s explanation of black-body radiation in 1901, which simply could not be explained using the classical electromagnetic theory of Maxwell. There has been a long line of successful explanations and predictions since then. For example, many people do not understand that a laser is a quantum-mechanical device — one cannot construct a laser using classical electromagnetic principles. The counter-intuitive special and general theories of relativity have also been rigorously tested experimentally – on hundreds of occasions – and have never been found wanting. The various successful applications of signal transmissions via satellites rely on using relativistic formulae; they simply would not work without relativity.

Incidentally JimhazAlbert Einstein did not reject quantum mechanics, and in fact he was one of its developers. His disagreement was with the philosophical interpretation of the Copenhagen school, not with the accuracy of the predictions of QM. Subsequent research – backed up by convincing experimental evidence – has demonstrated that Einstein’s view on this matter was incorrect. This is one of the very few areas where he was wrong.

Neil of SydneyJuly 5, 2016 at 2:55 pm

I am sick of the triteness of the “can’t be in debt/must return to surplus”, “live within our means”, “like a household economy” bullshit

I am not. I think leftist brains are different to Conservative brains. I think MMT is rubbish.

totaramJuly 5, 2016 at 3:50 pm

Jimhaz: You display your ignorance. Einstein got his Nobel Prize for his work on photo-electricity, which he explained using quantum concepts. Economicreform is correct. Einstein disagreed about the interpretation of the QMech math. (“Der gute Gott wuerfelt nicht” is the quote I believe). The math is of course proved correct whenever tested. To call it wankery just because you haven’t bothered to understand it is a bit rich. Do you understand the tensor calculus used by Einstein in his General Theory of Relativity? How do you explain that as not being mathematical wankery?

All off-topic but tangentially relevant. People readily dismiss facts that don’t accord with their prejudices. This is a serious problem for the human race as it continues to build an ever more technologically sophisticated civilisation. Already no one person can understand more than a few of these technologies and most people don’t understand any of them. How then, should they conduct their politics? There is vast scope for spin, and misinformation. Just look at what happened to the NBN. By now most people have woken up to the fact that they were fooled, but it is a bit late. Much damage has been done.

Neil of SydneyJuly 5, 2016 at 4:08 pm

By the way Bacchus i still cannot believe you said we should set our interest rates at zero like Japan. If we had zero interest rates nobody would lend us any money. Why would they? Japan has lots of organisations with spare cash eg Sony,Toyota, Pension Funds who for some reason want to leave their cash with the Japanese govt.

Why would they plonk their funds in Australia? The only way we can get the 70% of money we need to fund govt deficits is because our interest rates are higher than most other countries

JasonJuly 5, 2016 at 4:42 pm

Neil the government doesn’t need to borrow its own currency. How does Japan lend us AUD? Hint they don’t, they can store AUD we’ve given them for cars etc until they want to buy something back from us. Interest is a huge corporate welfare program to give the rich money for doing nothing.

Here’s Alan Greenspan explaining the limits to spending money. He’s not exactly a lefty: https://m.youtube.com/watch?v=Ccb_BNdRN80

MMT can be studied in a number of universities now and has official academic text books: https://www.maastrichtuniversity.nl/education/course/modern-monetary-theory-and-european-macroeconomics it’s not an imaginary concept it actually explains how the monetary system currently works.

economicreformJuly 5, 2016 at 5:19 pm

Neil said: ” I think MMT is rubbish.”

Could I suggest Neil, that such assertions – in the absence of rational argumentation, empirical evidence, or reference to the mountain of scholarship and research which supports MMT – do not entitle you to the privilege of being taken seriously. I realize that you regard such things as pesky little impediments, but there it is.

jimhazJuly 5, 2016 at 5:31 pm

@ totaram

On stuff like this it simply makes no difference to me whether they or I are wrong or right.

Due to heaps of dissatisfaction with loose ends in mainstream science I just spend some hours years ago looking to create my own amatuer Theory of Everything using a philosophical perspective. Science no longer cuts the mustard in terms of my needs – they delve too much into detail and can’t see the forest for the trees. There are lots and lots of theory to choose from and I think that says something about scientific fact.

I’m happy enough with my own personal explanation – it is a form of inflation theory with Time being the sole inherent entity with the attribute of expansion. I haven’t revisited the general topic for a fair while and have forgotten much of the basics.

economicreformJuly 5, 2016 at 5:59 pm

Jimhaz .. perhaps you never even understood the basics?

Neil of SydneyJuly 5, 2016 at 6:17 pm

Yes you can suggest. But i still think MMT is rubbish.

Bacchus are you around? At the moment we fund 70% of our budget deficit from foreign lenders. If we drop our interest rates to zero like Japan has done do you think any foreign investors will lend us money?

AthenaJuly 5, 2016 at 6:51 pm

“Science no longer cuts the mustard in terms of my needs ”

Indeed. Why let facts get in the way of personal opinion?

In years gone by the treatment for many ailments was bloodletting. It led to anaemia, iron deficiency, death from exsanguination and other insignificant inconveniences. Then science actually investigated the concept properly and it was determined that bloodletting is only of benefit for those with polycythemia vera. Hence the reason why bloodletting went out of fashion.

When we choose to not let science get in the way of personal opinion we end up voting for politicians who are stark raving mad. We end up wasting money on the wrong solutions to problems facing our communities and we end up ignoring very serious problems that can have significant consequences.

FreethinkerJuly 5, 2016 at 6:59 pm

It is interesting that those that do not believe in science still going to a doctor when sick or are taken prescribed drugs.
Why do not go to a witch doctor instead?

Matters NotJuly 5, 2016 at 7:01 pm

What economicreform at 5:59 pm said.

No wonder the concept of ‘common sense’ is so misleading. Neither ‘common’ nor ‘sensible’ much of the time.

Very depressing!

Don A KellyJuly 5, 2016 at 7:07 pm

economicreform……Don A Kelly said that purchasers of Treasury securities are “typically finance institutions and foreign governments”. I don’t think this is correct. It’s true that financial service institutions hold a proportion. However most of these financial investments within the private sector are held by large institutional (non-bank) investors, such as mutual funds, superannuation funds, pension funds, and insurance companies.

I didn’t say this, if you re-read my post you will see that I was quoting Prof. Bill Mitchell, one of the worlds most respected economists.
For anyone interested in a quick course in macroeconomics, a good starting point would be Macroeconomics – The Circular Flow of Income by PAJ.Holden https://www.youtube.com/watch?v=gaEY-p-21F8

RossleighJuly 5, 2016 at 7:17 pm

It puzzles me when people assert that CO2 can’t do us any harm because we need it to live.
I always want to ask them if they’re aware of what happens when you lock someone in airtight room with no plants. Eventually, they suffocate because the room fills up with carbon dioxide and they die from a lack of oxygen… But I guess that must be wrong because there’s no way that carbon dioxide could ever do you damage.

P.S. Can we get the Dunning Kruger syndrome renamed the “Neil of Sydney Syndrome”?

totaramJuly 5, 2016 at 7:25 pm

NoS: You are still putting out that theory that we have higher interest rates than anyone else because “otherwise no one will lend us any money – especially those kind foreigners”

Well, well, even as we speak the RBA board is reviewing this dire situation. It seems the “kind foreigners” are falling over each other in droves to lend money to us. In order to stem this onslaught, the RBA has been desperately cutting interest rates time and time again, until they have reached historic lows. I note how they have heaved a sigh of relief that these deterrent measures have worked (for now) to stop all those kind foreigners, so they have left the rates on hold. Should there be renewed onslaughts, we may be forced to send in the Border Farce!

Please read the deliberations of the RBA board. There will never be a reference to “kind foreigners” who need to be attracted to lend us money. The RBA sets its interest rate entirely on the basis of how this rate will affect the domestic economy. That is its charter, which is on the web. Read it.

totaramJuly 5, 2016 at 7:40 pm

Rossleigh: If you study toxicology (Wikipedia for a start), you will very early be introduced to the definition of what is toxic. Any substance can be toxic, depending (among other things) on its dose. Surprisingly, if someone breathes only pure oxygen for any length of time, they can become very ill. The example I like to give is for someone to eat one gram of Vit B12 every day and see what happens. They will surely die. In fact even water can be toxic in very high doses. There have been water-drinking competitions in which participants have died. CO2 is most famously referred to by “denialists” as plant food, so it must be good. Experiments show that it is good for some plants and bad for others (as you might have guessed – every plant is different). It is bad for the corals as we can see.

Well Dunning and Kruger were the “discoverers” of the syndrome. To rename it after some prime example would be grossly unfair.

Neil of SydneyJuly 5, 2016 at 7:42 pm

totaram

Not sure what you are trying to say. Our interest rates may be at record lows but they are much higher than other countries. I believe japan now has negative interest rates which apparently means you have to pay money to deposit money with the Jap govt.

I suspect nobody would lend us any money if our interest rates were the same as other Western countries. I am sure the Reserve Bank takes that into account when they set the rates.

rossleighbrisbaneJuly 5, 2016 at 7:58 pm

And yet, Neil demonstrates his worthiness of having it named after him in the most spectacular fashion.

I wonder if he understands how negative interest rates work, or whether he just uses his “intuition” because he knows without bothering to research it.

He clearly has no idea on the Budget, the deficit and, if you pointed him to the work of any economist, he’d just say that they don’t know what they’re talking about…

Oh wait, he already did that a few comments ago!

totaramJuly 5, 2016 at 7:59 pm

ist[edit]
Country or
currency union Central bank
interest rate (%) Date of last
change
Belarus 25.00 9 January 2015[1]
Ghana 25.00 14 September 2015[1]
Malawi 25.00 31 October 2014[1]
Moldova 19.50 26 August 2015[1]
Ukraine 19.00 24 September 2015[1]
Uganda 17.00 20 October 2015[1]
Kazakhstan 16.00 2 October 2015[1]
Argentina 13.00 3 August 2014[1]
Nigeria 13.00 25 November 2014[1]
Zambia 12.50 19 November 2014[1]
Kenya 11.50 7 July 2015[1]
Mongolia 11.50 5 April 2013[1]
Egypt 10.75 17 March 2016[1]
Angola 10.50 28 August 2015[1]
Russia 10.50 10 June 2016[1][3]
Armenia 10.25 11 August 2015[1]
Kyrgyzstan 10.00 29 September 2015[1]
Sierra Leone 9.50 23 March 2015[1]
Uruguay 9.25 28 December 2012[1]
Uzbekistan 9.00 1 January 2015[1]
Tajikistan 8.00 22 December 2014[1]
Bangladesh 7.75 5 January 2012[1]
Mozambique 7.75 14 October 2015[1]
Turkey 7.50 24 February 2015[1][3]
Georgia 7.00 23 September 2015[1]
Indonesia 7.00 18 February 2016[1][3]
India 6.75 29 September 2015[1][3]
Namibia 6.50 17 June 2015[1]
Vietnam 6.50 17 March 2014[1]
Iceland 6.25 19 August 2015[1]
Botswana 6.00 6 August 2015[1]
DRC 6.00 27 September 2012[1]
Pakistan 6.00 12 September 2015[1]
South Africa 6.00 23 July 2015[1][3]
Sri Lanka 6.00 15 April 2015[1]
Jamaica 5.25 17 August 2015[1]
Croatia 5.00 28 November 2013[1]
Dominican Republic 5.00 31 May 2015[1]
Samoa 5.00 30 January 2009[1]
Colombia 4.75 25 September 2015[1]
Mauritius 4.65 18 June 2013[1]
Bahamas 4.50 [1]
Qatar 4.50 10 August 2011[1]
Serbia 4.50 14 October 2015[1]
Trinidad and Tobago 4.50 25 September 2015[1]
Tunisia 4.50 27 December 2013[1]
China 4.35 23 October 2015[1][3]
Mexico 4.25 30 June 2016[1][3]
Philippines 4.00 11 September 2014[1]
Jordan 3.75 8 July 2015[1]
Cape Verde 3.50 16 February 2015[1]
Chile 3.50 17 December 2015[1]
Peru 3.50 10 September 2015[1]
Macedonia 3.25 10 July 2013[1]
Malaysia 3.25 10 July 2014[1]
Azerbaijan 3.00 10 July 2015[1]
Morocco 2.50 16 December 2014[1]
New Zealand 2.25 10 March 2016[1][3]
Kuwait 2.00 3 October 2012[1]
Saudi Arabia 2.00 19 January 2009[1][3]
Australia 1.75 3 May 2016[1]
Romania 1.75 6 May 2015[1]
Poland 1.50 4 March 2015[1][3]
South Korea 1.50 11 June 2015[1][3]
Taiwan 1.50 24 March 2016[1]
Thailand 1.50 29 April 2015[1]
Hungary 1.35 21 July 2015[1][3]
Brazil 1[2]25 30 July 2015[1][3]
UAE 1.00 19 January 2009[1]
Hong Kong 0.75 17 December 2015[1]
Norway 0.75 24 September 2015[1][3]
Bahrain 0.50 15 September 2009[1]
Canada 0.50 15 July 2015[1][3]
Fiji 0.50 2 November 2011[1]
United Kingdom 0.50 5 March 2009[1][3]
United States 0.50 16 December 2015[1][3]
Israel 0.10 23 February 2015[1][3]
Czech Republic 0.05 1 November 2012[1][3]
Denmark 0.05 19 January 2015[1][3]
Bulgaria 0.01 31 July 2015[1]
Albania .00 28 January 2015[1]
Eurozone 0.00 10 March 2016[1][3]
Japan -0.10 1 February 2016[1]
Sweden -0.50 17 February 2016[1][3]
Switzerland -0.75 15 January 2015[1][3]

List of interest rates set by countries. Australia is right near the bottom, below even Saudi Arabia. Does Saudi Arabia need to borrow money from “kind foreigners”?

“. I am sure the Reserve Bank takes that into account when they set the rates.”

Wrong, They don’t -read their board minutes. Don’t “be sure” and bullshit us.

AthenaJuly 5, 2016 at 8:09 pm

Thank you totaram. You beat me to it re: oxygen and water being harmful in excess. The dose makes the poison.

Jennifer Meyer-SmithJuly 5, 2016 at 8:23 pm

Who are the good guys out of the RBA, Treasury, and other top government gatekeepers? I’m aware some, if not all, are ruled by neoliberalists, who are happy with the status quo.

Why do the suspect neoliberalists in the government authorities that allegedly advise the government, always talk about Australia’s interest rates, as though they are something to be feared?

Neil is naughty, true, But I think even he is trying to learn by putting up opposite arguments.

Neil of SydneyJuly 5, 2016 at 8:50 pm

Australia is right near the bottom

True but our rates are much higher than those below us in the list and they are the comparable countries.

I suspect nobody would lend us any money if our rates were the same as the Eurozone ie zero

Jennifer Meyer-SmithJuly 5, 2016 at 8:57 pm

Neil,

Australia has protection that comparable countries don’t enjoy because we are in control of our own currency.

Interest rates on our currency would still be influenced by our own sovereincy. If influenced by outside private forces, that’s where you need to direct your attention to call for protection on behalf of the Australian people. Hence, take the control away from private banks, super funds, share trading etc.

That is the bottom line that even novices like me, comprehend!

RossleighJuly 5, 2016 at 9:00 pm

I think, Neil, that you’ll find that our rates have always been higher than those below us on the list. Without exception. There’s never been a time that our rates have been lower than those higher than those below us…

Although, I suspect that you’ll probably dispute that and suggest that under a Labor government, that interest rates were higher. No, wait lower.

Anyway, you may think that what I suspect has no value. However, I also suspect that Australia shouldn’t base its monetary policy on the fact that you “suspect that nobody would lend us any money” when clearly countries with lower INTERNAL interest rates still manage to borrow money!

Now, I could engage in an intelligent debate about economic policy, but Neil of Sydney, you have even less idea than Joe Hockey. And he was deported for his crimes against the economy. No other Treasurer has ever had to leave the country because of what they did….

Name me one other Treasurer that was ever sent to Washington because of their economic incompetence.

You can’t, can you?

Gee, Mum, was right. I should have been a lawyer. Not sure if she thought it because I was intelligent or because I could just talk bullshit.

Maybe, Neil should have been a lawyer. Clearly though, not for the former reason!

Jennifer Meyer-SmithJuly 5, 2016 at 9:03 pm

Oops, sovereignty.

🙁

In answer to Rossleigh’s reminder of Hokey Pokey in Washington for being a failed Treasurer and public purse rorter, now that the LNPees are on the skids, he needs or we need him, to be in our sights for taking legal actions that will have serious criminal consequences for him.

totaramJuly 5, 2016 at 9:08 pm

J. M-S: All the top positions in these organisations have been stacked with neo-liberals. But you must understand that Paul Keating was an enthusiastic neo-liberal. The last good one, in treasury, a neoliberal who also had a brain, was Ken Henry. He was the one who advised Rudd on the stimulus which saved us from a GFC-induced recession. He left soon after and is now a non-exec director of NAB (of course they snapped him up – do you think they are stupid?).

As I keep pointing out, the “coalition” fire all the previous staff and stack all the top positions with their chosen puppets (this is now the US style of functioning) and when the Labor govt. wins they don’t do anything to remove these vermin. Time to change the M.O. As they do unto you, do unto them and if possible do it first! That is the only solution. Can you imagine they have a failed “venture capitalist” running the CSIRO implementing their cuts and firing climate scientists. This moron thinks “water-divining” has some merit. Then they imported another “investment banker” to be head of treasury, to ensure no more Keynesian ideas would come out of that place. To add to his qualifications, he is also a climate change denier. Then there is Michelle Guthrie from the Murdoch stable to run the ABC! She just shut down the Drum online and if you have noticed any change in the ABC coverage you can put it down to her influence.

The list goes on. A Herculean task awaits, before this country can be returned to normality.

Jennifer Meyer-SmithJuly 5, 2016 at 9:13 pm

I 100% agree, totaram, with the emphases of both your paragraphs.

Neil of SydneyJuly 5, 2016 at 9:21 pm

That is the bottom line that even novices like me, comprehend!

If you were an American Pension fund where would you invest your spare cash? In US govt bonds where you get 0.5% interest or Australian govt bonds where you can get 1.75% interest according to the list?

I guess risk also comes into it. You can get Argentina bonds at 13% but i guess there is a risk they may default.

I don’t think that we are in control of our currency has anything to do where people plonk their spare cash.

PS I think Hockey was sent to Washington because he could not work with Turnbull.

RossleighJuly 5, 2016 at 9:21 pm

Ok, I think this worth re-reading. Cheers everyone.

My name is Ozymandias, King of Kings: Look on my works, ye mighty, and despair

RossleighJuly 5, 2016 at 9:24 pm

And totaram.

Never forget the enormous task it was to actually establish democracy when all those who held power were the aristocracy.

Power comes from those who refuse to accept that they are powerless.

RossleighJuly 5, 2016 at 9:26 pm

Good night, Neil.

Go and get a law degree and I’ll meet you in court someday where it’s not about the truth… It’s just about sounding convincing.

I know I’ll win because you wouldn’t sound convincing by just saying that you suspect this is the case….

Jennifer Meyer-SmithJuly 5, 2016 at 9:30 pm

Why don’t I get a good night?? 🙂

KizhmetJuly 5, 2016 at 9:44 pm

Good night JMS 🙂

Jennifer Meyer-SmithJuly 5, 2016 at 9:50 pm

Thanks Kizhmet! 🙂

jimhazJuly 5, 2016 at 10:14 pm

@ Athena

[Indeed. Why let facts get in the way of personal opinion?]

Yeah, sorry. I was referring to the more abstract area of astrophysics, not science generally. I only had the context of what I was replying to in mind.

I suppose what I don’t trust is people. Even though I would consider scientists in general to be superior, to have a far higher degree of rationality than the norm, they are nonetheless still fallible to the same set of failings as anyone else, such as egotism and authoritarianism and herd behaviours.

The vast bulk of science that I’ve seen I’m completely happy with. Science is generally pretty darn good.

Still, I’ve seen enough ‘unscientific’ science to not automatically always give them a sort of auto-authority over what I might think, should it be something that does not gel or seems incomplete. Take the proper diet area as an example of how bad science can be over time, or the influence of industry generally. Lots of things in the social sciences deserve questioning.

I just sometimes like to stick my neck out and question even in areas that I don’t have the ability, or desire due to length of learning issues, to fully grasp. When looking for a way to explain how the universe could exist I found too much confusion in the theoretical science ideas I looked at. There were always casual dead ends. Things like Higgs bosuns/fields can only be some form of intermediary step.

I’d even be willing to question climate change science were there any point in doing so.

An example: On another thread Brad someone said “There has been no increase in the rate of temperature rise over the past 18 years.” I found that interesting as we do know that CO2 levels have been increasing, so why would the rate thus also not increase, as would normally apply to something that caused a blocking effect?

Didn’t bother researching as I know that this would have already been considered. Ie I trust the veracity of the science as I know the deniers would have forced all angles to be considered. Nothing in the bigger picture stands out as illogical. There is nothing counterintuitive in the idea that we are causing the rises, and many other forms of pollution and degradation.

Partly though I don’t bother questioning the science as I know the sooner we have renewables, the more choices and opportunities this will give the next generations of humans. It may allow more focus on other forms of sustainability.

BacchusJuly 5, 2016 at 10:26 pm

Yes Neil, I’m around again – you’ve been so utterly destroyed in this thread, there is no need for me to comment further, EXCEPT perhaps to advise you to go and learn some very basic economics before poking your head above the parapet…

Michael TaylorJuly 5, 2016 at 10:30 pm

Bacchus, you know where this is going to go then, don’t you? “Hey, look over there”.

BacchusJuly 5, 2016 at 10:50 pm

Yep Michael – been there, done that, got the post card hundreds of times!

The most annoying aspect for me is that I don’t really think Neil is as stupid as he pretends, BUT he refuses to educate himself, to grow!

Maybe I need to re-read some of Ad Astra’s articles on the difference between progressive and conservative minds and thinking – it may cure me of a desire to see an “educated and thinking” Neil 😉

JasonJuly 5, 2016 at 11:39 pm

Jimhaz, worthy article I read today about scientific theories and the evidence required to back them up: https://www.quora.com/?digest_story=16185445

In regards to climate science this site will answer everything the deniers throw at you: http://www.skepticalscience.com/does-global-warming-pause-mean-what-you-think.html

MichaelJuly 5, 2016 at 11:57 pm

I don’t know why, but I read that mercenytrader site that jimhaz believed shot down MMT.
I say I don’t know why as having a debate over the internet is largely pointless and I wasn’t impressed by what else jimhaz had to say.

but anyway, it was a self serving piece by market traders who claim they (the market) have more power than the government they operate under. thats basically it. its laissez faire capitalism, the belief the market is the single most powerful entity.

They repel the idea of MMT as every MMT proponent I’ve read calls for *much* more market scrutiny and regulation. I’m sure the ‘humble traders’, who ‘are just straight up swing traders looking to book 40% annual returns with reasonably controlled drawdowns’ don’t want regulation on their money games, so it makes perfect sense to oppose MMT and anyone that aligns to it.

They have multiple attacks, first to claim that paying interest would be a waste of funds when the interest largely goes into their market playpen, I stifled a laugh.

However they didn’t go into why the bonds exist, there isn’t a physical reason for it, rather in the US they made it law to restrict the treasury operations. before 1935 the US federal reserve could buy an unlimited amount of treasury debt by using its ability to make money. after 1935 restrictions were put in place to prohibit the reserve from taking bonds that the private market could have. it was an exercise of giving the private sector safe investment vehicles, and led to the belief the borrowing was funding the government, that the private sector was funding the government. This though is strictly false.

Remove the idea that debt funds the government and you can phase out the debt, removing safe investments for them too, oh the irony.

They then also claim people can hold assets in other currencies and then convert it instantly to pay taxes, etc and this makes the sovereign currency weaker. Somehow that makes sense to them and means the USD becomes irrelevant. rightio. should I point out they are still converting to USD, so its still there, or should I point out all the fees and losses to this kind of conversion will eat away your wealth? seemed too obvious so maybe they are buying low and selling high into perpetuity.

to be frank their drivel is just that from a group of traders who want to continue to pull the wool over peoples eyes, so they can continue making money with money. They say the facts of MMT are right, but then claim basically all of the things that make a government a government don’t count. They claim the government is really just a really large household, and if they do something the market doesn’t like the market will abandon the government en mass, you just see!

Well I don’t know any households that can go to war but I sure hope the governments around the world do just that against these fcking capitalists. maybe they would stop believing their market is the pinnacle of everything as they find it doesn’t provide all those things a government supplies that they appear to be taking for granted

other than that I must say I was happy to see this article appear, I really want the basics of government funding to come to light, there will be a lot of effort to overcome the fear mongering out there.

Neil of SydneyJuly 6, 2016 at 9:10 am

Yes Neil, I’m around again – you’ve been so utterly destroyed in this thread

I don’t think i was destroyed in this thread. The other day you suggested we should be like Japan and drop our interest rates to zero. If we did that do you think foreign investors would lend us the 70% of our budget deficits we need to fund from overseas investors?

AthenaJuly 6, 2016 at 10:15 am

Japan has been running huge deficits for decades. If they are borrowing it all from foreigners as Neil asserts, why are they still able to borrow with zero interest rates? I realise it’s an LNP tactic to repeat BS ad nauseum in the hope that people finally believe it, and I’m impressed that Neil can manage to repeat more than three words, but perhaps Neil you should look for the inconsistencies in your logic before repeatedly bleating it at us.

economicreformJuly 6, 2016 at 10:21 am

Neil is a LNP troll? Interesting.

Neil of SydneyJuly 6, 2016 at 10:23 am

If they are borrowing it all from foreigners as Neil asserts, why are they still able to borrow with zero interest rates?

You obviously do not read my posts carefully enough. That is actually my point. We are DIFFERENT from Japan, USA, Western Europe. They do not need to borrow from foreigners as much as we do.

Get it? Japan does not need to borrow from foreigners. WE do. That is why our interest rates are close to being the highest in the Western world otherwise nobody would lend us any money.

Jennifer Meyer-SmithJuly 6, 2016 at 10:36 am

Neil,

I’ll ask you a question. Why do we borrow from foreigners considering we have our own sovereign currency? Makes us look stupid, don’t you think?

Neil of SydneyJuly 6, 2016 at 11:16 am

We borrow from foreigners because printing money dilutes the currency and creates inflation.

I am starting to think that you people are stupid. Look at the recent comment by Athena. She says the exact opposite of what i have been saying. Japan does not need to borrow from foreigners as much as we do because they have huge companies like Toyota, Mitsubishi, Honda, Hitachi, Nissan etc etc etc willing to lend the govt money at zero interest rates

We don’t have companies like that in Australia and that is why we have to go offshore and even at our currently low interest rates, they are amongst the highest in the Western world. They have to be otherwise nobody would lend us any money.

AthenaJuly 6, 2016 at 12:04 pm

The government, that creates its own currency, needs to borrow from the nation’s businesses? Pull the other one, Neil.

JohnBJuly 6, 2016 at 12:11 pm

NoS,
“foreign investors would lend us the 70% of our budget deficits”
Australia has almost no ‘foreign debt’ borrowings (.pdf) – all commonwealth bonds/securities/loans are issued only in $AU – has been that way since 1986.

What is your evidence for the 70% foreign debt claim?

Further to the nationality of holders of Australian bonds/securities:
1) -The nationality status of owners of treasury issued bonds/securities (denominated in $AU) is irrelevant to the functioning of the Australian economy;
2) Having researched the subject of bond/security holders national identity I have found there is virtually no solid data available, only vague estimates. Most are held via financial establishments, the transaction ownership of those establishments/banks etc is often purposely obfuscated to avoid trace – shrouded in corporate 'commercial' secrecy.
Australian (and US) treasury make no particular effort to ascertain national ownership other than to provide a 'tick-box' to applicants to indicate 'local' or 'foreign'.
Treasury published estimates of foreign ownership state their estimate is unreliable due lack of available data.

Neil of SydneyJuly 6, 2016 at 12:15 pm

Athena

How about you first apologise for your wrong comment? You said this

If they are borrowing it all from foreigners as Neil asserts, why are they still able to borrow with zero interest rates?

I never said Japan is borrowing all the money from foreigners. It is the exact opposite.They get most of the money to fund their govt deficits from their own people.

jimhazJuly 6, 2016 at 12:17 pm

No point in continuing Neil. Neither side will give an inch.

MMT reminds me of the Goose that Laid the Golden Egg story.

“A cottager and his wife had a Hen that laid a golden egg every day. They supposed that the Hen must contain a great lump of gold in its inside, and in order to get the gold they killed [her]. Having done so, they found to their surprise that the Hen differed in no respect from their other hens. The foolish pair, thus hoping to become rich all at once, deprived themselves of the gain of which they were assured day by day.”

AthenaJuly 6, 2016 at 12:18 pm

I don’t need to apologise for anything Neil. Why don’t you provide some evidence to support your ridiculous claims?

Neil of SydneyJuly 6, 2016 at 12:30 pm

I don’t need to apologise for anything Neil. Why don’t you provide some evidence to support your ridiculous claims?

OK i was wrong. Our current level of offshore borrowings is not 70% it is about 63%. It was 70% in 2012. This diagram is from the last budget

http://budget.gov.au/2016-17/content/bp1/image/bp1_bs6-3.gif

AthenaJuly 6, 2016 at 12:32 pm

Neil, I don’t think non-resident holdings means what you think it means.

Neil of SydneyJuly 6, 2016 at 12:41 pm

Neil, I don’t think

I know you do not think.

However the fact is and Kaye is big on facts, is that we have to fund 70% of our budget debt from overseas. Of our current interest bill of $1B/month, $700M goes to foreigners never to return

JohnBJuly 6, 2016 at 12:44 pm

NoS,
“…printing money dilutes the currency and creates inflation”
Inflation occurs as the result of demand exceeding available supply. Research it – it’s true.

In a recessed economy, issuing more spending lifts economic activity and boosts productivity – just as Rudd’s stimulus so magnificently achieved with the 2008-9 stimulus – the spending’s positive effect can be clearly seen in this graph from the LNP’s own ‘Budget overview’ document.
The EU and the US/Japan are still reeling from the GFC aftermath – Australia avoided major impact to the extent that LNP can ‘overlook’ its obvious impact on budget ‘deficits’.

If “printing money dilutes the currency and creates inflation” please explain how, given the US has injected over $4.7Trillion (keystroke money, QE1,2,3 etc)) into the US economy the US inflation rate has remained steady at around 2%?

AthenaJuly 6, 2016 at 12:47 pm

Neil, where does it state that investment in government bonds has limits for domestic and foreign investors?

Möbius EckoJuly 6, 2016 at 1:01 pm

So Neil then why is Turnbull giving $50b in tax cuts that mostly goes overseas, benefits foreign companies to a greater degree than local and only sees a teensy piddling return to Australia after a decade?

Möbius EckoJuly 6, 2016 at 1:04 pm

Reasons not to worry

Indeed, according to economist Saul Eslake, there are four main reasons not to worry about our foreign debt.

First, while the trillion dollar figure might sound significant, in reality, our net foreign debt has been growing more slowly in recent times. Many mining companies have been able to finance huge investments by raising new equity from shareholders or from their retained earnings.

Second, more of our debt today is written in Aussie dollars than in the 1980s when we worried about such things. All government debt is all written in Aussie dollars, of course, and an increasing share of corporate debt is too. That’s good because, in the event of a credit markets crash, we would only have to repay in Aussie dollars, not in US dollars which would be more expensive.

Third, more of our debt to foreigners is written over longer time periods than previously. One of the main risks in having debt is that you may need to get a new loan during a time of market volatility. Debts are written over a certain time period, leaving you vulnerable when it comes time to refinance.

The global financial crisis really highlighted how reliant our banks had become on borrowing in offshore wholesale funding markets. They have since reduced their offshore borrowings and finance an increasing share of their funding from deposits, leaving them less exposed.

The fourth reason to be less concerned about our foreign liabilities is the seldom noted but extraordinary phenomenon – unusual in all our history – that Australia has become a net owner of foreign equity. That means we own more foreign assets than they own of ours. That’s mostly due to our large and ever growing pool of superannuation money, much of which is invested directly offshore.

Neil of SydneyJuly 6, 2016 at 1:11 pm

Athena

You first need to apologise for making this false statement

Japan has been running huge deficits for decades. If they are borrowing it all from foreigners as Neil asserts, why are they still able to borrow with zero interest rates?

The majority of money to fund Japanese deficits comes from their own people. Japan does not need to go offshore like we have to.

Please apologise

Michael TaylorJuly 6, 2016 at 1:15 pm

Athena, you don’t have to apologise to Neil. He’s being ridiculous.

Neil, leave it alone. If you follow it up with more of these stupid demands I will have your comment removed. End of story.

AthenaJuly 6, 2016 at 1:24 pm

Thanks Michael. I have no intention of apologising to Neil.

totaramJuly 6, 2016 at 1:27 pm

NoS: The minutes of the last RBA board meeting are here:

http://www.rba.gov.au/monetary-policy/rba-board-minutes/2016/2016-06-07.html

There is only one occurrence of the word “treasury” and that has to do with the list of members, one of whom is the secretary to treasury.
The word “borrowing” does not occur anywhere in the minutes. Ergo, the entire discussion has nothing to do with borrowing by treasury. A further perusal of the RBA web-site will inform you about monetary policy, which is what the setting of the RBA’s interest rate is all about. It has nothing to do with borrowing by govt.

The fact that a large percentage of our treasury bonds are held by foreign entities is simply a reflection of how valuable foreigners find them. They are sold by auction, by the way and foreign financial institutions are allowed to bid. This does not mean that if foreign institutions were barred from bidding, there would not be enough buyers for the bonds. The worst that can happen is that the bids for the bonds would be lower than they are now, meaning the “yields” would be higher. The yields are at historic lows, which means the govt. can “borrow” at very low rates of interest. I am afraid there is no support whatsoever for your very fanciful hypothesis that we HAVE to borrow from “kind” foreigners. That is not how auctions work.

Here endeth the neo-liberal explanation of the functions of the RBA.

BTW if the yields on bonds go outside the band for the setting of the RBA’s interest rate, the RBA will intervene in the secondary bond market to bring the yields back into line. But don’t bother about that as it might cause serious mental damage.

Nice try at constructing a hypothesis though. Where did you get this from? I can’t believe you thought it up all by yourself. It has the hall-marks of a cunningly delusional conspiracy theorist of the highest order.

I shall studiously ignore any further posts from you on this topic.

HarquebusJuly 6, 2016 at 1:29 pm

For inter-generational debt or not, first one needs to ensure that there will be subsequent generations. Let’s get our priorities right. You are all arguing about something that is not going to happen and are a perfect example of why we are all doomed.
No debts on a planet devoid of human beings.

“Although the original authors of The Limits to Growth, led by Donella Meadows, caution against tying their predictions too tightly to a specific year, the actual trends of the past four decades are not far off from the what was predicted by the study’s models. A recent paper examining the original 1972 study goes so far as to say that the study’s predictions are well on course to being borne out.”
“All the while, governments cling to the idea that “green capitalism” will magically pull humanity out of the frying pan.”
“As long as we have an economic system that allows private capital to accumulate without limit on a finite planet, and externalize the costs, in a system that requires endless growth, there is no real prospect of making the drastic changes necessary to head off a very painful future.”

Limits to Growth is on schedule. Collapse likely around 2020

“Any social system based on the use of non-renewable resources is by definition unsustainable. Non-renewable means it will eventually run out. If you hyper-exploit your non-renewable surroundings, you will deplete them and die.”
“Due to industrial civilization’s insatiable appetite for growth, we have exceeded the planet’s carrying capacity.”
“changing light bulbs, going vegan, shorter showers, recycling, taking public transport — have nothing to do with shifting power away from corporations, or stopping the growth economy that is destroying the planet.”
“”Those in power get too many benefits from destroying the planet to allow systematic changes which would reduce their privilege.”
“those in power are killing the planet and they are exploiting the poor”
“We need to fight for what we love, fight harder than we have ever thought we could fight, because the bottom line is that any option in which industrial civilization remains, results in a dead planet.”

Time is Short: Reasoning to Resistance

Neil of SydneyJuly 6, 2016 at 1:46 pm

This does not mean that if foreign institutions were barred from bidding, there would not be enough buyers for the bonds

Then why do banks go offshore to fund our mortgages? We do not have the necessary savings in this country to fund our debt.

Möbius EckoJuly 6, 2016 at 2:22 pm

Oh Neil why don’t you ever read what’s really there instead of reading what you want to be there so as to fit you very ideological closeted view of the world?

The global financial crisis really highlighted how reliant our banks had become on borrowing in offshore wholesale funding markets. They have since reduced their offshore borrowings and finance an increasing share of their funding from deposits, leaving them less exposed.

It’s not the necessary savings but exposure to risk.

BacchusJuly 6, 2016 at 2:49 pm

“By the way Bacchus i still cannot believe you said we should set our interest rates at zero like Japan.”

WHO needs to apologise Neil? I didn’t say any such thing…

Neil of SydneyJuly 6, 2016 at 3:30 pm

WHO needs to apologise Neil? I didn’t say any such thing…

Maybe not but it was the meaning i got from your statements. You did say we should ignore the rating agencies because it has no effect on Japanese interest rates.

Japanese interest rates are lower than ours because they do not need to attract offshore funds like we need to. If we lose our AAA our interest rates will go up because we are regarded as a higher risk.

totaramJuly 6, 2016 at 3:40 pm

For those interested in Japanese Govt. Bonds (JGBs)

“Foreign buyers have been investing in JGBs all year, said Mr Chandler, with the exception of March when dollar-yen was trading sideways. Since the end of March, foreign investments in JGBs have reached ¥2.5tn”

http://www.ft.com/cms/s/0/d273626a-20a8-11e6-9d4d-c11776a5124d.html#axzz4DbUf1xho

Goldman Sachs is managing the latest bond sale of JGBs. A little Googling goes a long way to dispel bullshit.

BacchusJuly 6, 2016 at 3:41 pm

So you can demand an apology, but not give one? Hypocrite, thy name is NoS!

You’ve still VERY wrong by the way – have you been doing any research to find out why yet?

How come interest rates were going UP from 2003 onwards? How come interest rates were coming DOWN from 2008 onwards, just as government “debt” was ramping up? The data doesn’t match your contentions Neil – why? Explain “crowding-out” to me and how that theory matches the data as the “debt” ramped up… 😉

totaramJuly 6, 2016 at 3:45 pm

You can read here about AAA ratings for the nth time:(it is from the smh and not some “lefty” site)

http://www.smh.com.au/business/markets/what-is-a-aaa-credit-rating-and-why-does-australia-need-one-20150430-1mwkrh.html

Neil of SydneyJuly 6, 2016 at 4:00 pm

You can read here about AAA ratings for the nth time:

AAA ratings are more important for us than countries like Japan because we have to get 70% of our money to fund govt deficits from offshore.

Yes why don’t we start selling our bonds at negative interest rates like Japan does and lets see who buys them

AthenaJuly 6, 2016 at 4:43 pm

The banks don’t go offshore to fund mortgages, Neil. They just create money when they loan it to the homeowner. There are numerous videos on Youtube explaining that principle. There are reports about it on current affairs/news shows. It’s taught in first year economics degrees.

jimhazJuly 6, 2016 at 4:44 pm

Rubbish Athena, total rubbish.

economicreformJuly 6, 2016 at 4:44 pm

As has been demonstrated in various articles by Prof Bill Mitchell, the three largest credit rating agencies have not only made monumental mistakes over the years, but also have been paid handsomely by the companies they have been rating. This does not merely pass the smell test, but it has all the hallmarks of straight out corruption.

To date there have been no criminal prosecutions of the wrongdoers within these organisations. On the basis of their appalling track record, Mitchell recommends that the rating agencies should simply be made illegal, rather than the alternative of regulating them out of existence or legislating to make them pay cash for their mistakes.
Mitchell also refers to the experience of the Japanese government following the large-scale fiscal stimulus that it applied to its ailing economy – first announced in November 1998. The day after this announcement, the Moody’s agency began a series of downgradings of Japanese government yen-denominated bonds from AAA to eventually A2 (i.e. below that given to Botswana, Chile & Hungary).

The then Japanese finance minister stated “They’re doing it for business. Just because they do such things we won’t change our policies … and the market doesn’t seem to be paying attention”. Moreover the government continued having no problems finding buyers for their securities, which are entirely yen-denominated and sold mainly to domestic investors.

What this story demonstrates is that a sovereign government can usually afford to thumb its nose at the rating agencies, whose ratings are widely supposed to be a measure of the risk of default by a company or government on their securities. In other words, securities issued by a sovereign government which are denominated in its own currency and issued to its domestic investors are understood and accepted by the market as having zero risk of default.

AthenaJuly 6, 2016 at 4:48 pm

So Jimhaz, all those economists who tell us what is taught in their first year are just making it up, are they? Well I’m sure you would know!

FreethinkerJuly 6, 2016 at 4:53 pm

economicreform, I share your views, I just wonder if it is sovereign government which can usually afford to thumb its nose at the rating agencies or have more to do how big is the economy of that particular country.

jimhazJuly 6, 2016 at 5:00 pm

[What this story demonstrates is that a sovereign government can usually afford to thumb its nose at the rating agencies]

Now that is something I can agree with to a point. We can snub them unless our ratings go on a downward trend and interest rates begin to rise as a result. I heard a drop from AAA to AA+ wouldn’t have much effect seeing as so many other countries have worse conditions.

And yes, they should be investigated for fraud as they are corrupt. I recall major issues in the early 2000s when I was trying to learn how to day trade and nothing has changed.

totaramJuly 6, 2016 at 5:02 pm

Athena: The banks need to have reserves to cover a fraction of the loans they make. It is these reserves they borrow from offshore, the reason being of course, that interest rates there are lower. NoS could have told you that, but he won’t because in this case it goes against his narrative.

He also won’t read the smh link about AAA again trotting out the nonsense about borrowing from abroad. By his own logic, the risk has increased because our debt has increased, but the interest rate (RBA’s) has gone down. How is that? Then he asks us to borrow at negative rates. Why would we? NoS will also not read the minutes of the RBA Board. The RBA’s rate is set with respect to the domestic economy, which is not so bad as to require a negative rate (which is a silly neo-liberal approach to stimulus for a deflating economy anyway).

Do not engage with such persons, especially when they go beyond ludicrous.

Neil of SydneyJuly 6, 2016 at 6:05 pm

What this story demonstrates is that a sovereign government can usually afford to thumb its nose at the rating agencies

No, what it means is that countries who can fund their own debt from their own people can snub the ratings agencies.

We do not have enough Gery Harvies, Kerrie Packers et al to fund our debt hence we have to go offshore. You cannot compare Australia and its debt with other Western countries and their debt.

By his own logic, the risk has increased because our debt has increased, but the interest rate (RBA’s) has gone down.

Our interest rates only have to be higher than other comparable Western countries to attract lenders. That is all.

JohnBJuly 6, 2016 at 6:58 pm

But NoS…
Australia does fund its own debt Australia has almost no ‘foreign currency’ borrowings (.pdf)
No new foreign currency borrowings since 1986 – external currency securities diminished to $0 in 2012.

Since we don’t ‘borrow’ foreign currency, and can’t domestically use foreign currency, can you name one country that has Australian dollars to lend?…and while your at it explain why Australia needs to borrow the currency of which Australia is sole monopoly issuer?

Even Gerry Harvey’s & Kerrie Packer’s stack of AU$s were issued originally by the Aust. treasury as ‘spending’.
If they (or other financiers) choose to borrow in foreign currencies, the risk and exposure to loss is theirs; it is a commercial transaction for gain, the consequences of such are not the responsibility of the Australian govt.

Neil of SydneyJuly 6, 2016 at 7:09 pm

I gave the foreign holdings in an earlier post

http://budget.gov.au/2016-17/content/bp1/image/bp1_bs6-3.gif

I am not sure what you are raving on about

Neil of SydneyJuly 6, 2016 at 7:16 pm

http://budget.gov.au/2016-17/content/bp1/html/bp1_bs6-01.htm

Non‑resident holdings of CGS on issue

The sale of CGS is not restricted to Australian residents. As at the December quarter 2015, 63.5 per cent of total CGS on issue was held by non-residents of Australia (Chart 3). The proportion of CGS held by non-residents rose significantly between 2009 and 2012. The proportion has fallen from historically high levels in 2012 but remains elevated.

BacchusJuly 6, 2016 at 7:29 pm

Two words Neil – foreign currency…

Now read JohnB’s post again… 😉

JohnBJuly 6, 2016 at 8:07 pm

You miss the point NoS,
you quote 63% as the residency status of CGS holders – that number it bears no relationship to Australia’s exposure to foreign debt.

The residential status of a CGS holder is irrelevant – all CGS sales/redemptions are transacted in AU$, the interest payments are paid in AU$.
If those funds flow offshore, the currency must eventually return to Australia to buy something – even if converted on the forex market, the next buyer of the AU$ still has AU$ that can only be used to buy or invest in Australia.
The money must come back, no matter how many entities/processes it passes through.
Without international currency mobility we can have no trade – our import suppliers must be able to spend/convert the money we pay to them.
As Aust. is a net importer $2.5 billion/month ($30 billion/annum) we are a currency exporter; exporting $30 billion AU$ each year at the current rate.

As I said earlier, in practice the residency status of security holders is unable to be accurately determined, the rate is likely higher than the 63.5% indicated, as many bond/security purchasers buy through an intermediary.
That intermediary is not obliged to disclose the identity of its customer, and when the purchase is made by an Australian registered bank or finance agent that transaction is deemed by treasury to be a ‘resident’ purchase, even though the banks customer may well be ‘non resident’.
The ‘residency’ figures are a best guess – and no one has the interest, requirement, capacity or authority to demand commercial-in-confidence purchaser details from intermediaries.

The Australian govt. has virtually no debt exposure to foreign currency.

AthenaJuly 6, 2016 at 8:20 pm

From your link, Neil

“All new CGS issuance is undertaken in Australian dollars. There is a very small amount of foreign currency denominated debt securities on issue remaining from issuance undertaken before 1988. Most of these securities mature in March 2017.”

http://budget.gov.au/2016-17/content/bp1/html/bp1_bs6-01.htm

As I said previously, the chart you supplied is not representing what you think it represents. I believe you accused me of not thinking.

Jennifer Meyer-SmithJuly 6, 2016 at 8:21 pm

Hence Neil,

JohnB answers my question @ 10.36 am.

I suspect you like coming to AIMN because you are a latent progressive and you are just seeking assurance that you won’t turn to salt by abandoning neoliberal economics that has seriously damaged Australia for 35 years.

Neil of SydneyJuly 6, 2016 at 8:22 pm

you quote 63% as the residency status of CGS holders – that number it bears no relationship to Australia’s exposure to foreign debt.

Yada yada yada blah blah blah.

You may be right but at the moment i think you are insane. I may come to a different opinion some time in the future.

But at the moment i think you lefties are false prophets.

AthenaJuly 6, 2016 at 8:27 pm

Neil, you posted a link to support your views. How did you decide what to believe and what not to believe on that page?

Neil of SydneyJuly 6, 2016 at 8:30 pm

As Kaye says , facts are facts.

At the moment 63.5% of our debt is held by foreigners. Not sure what JohnB is raving on about

AthenaJuly 6, 2016 at 8:35 pm

Bwahahaha JMS. Actually Neil’s trolling is very useful, because we get the opportunity to explain and post more links for other readers who are new to all this. Neil is helping us to spread the word.

Neil of SydneyJuly 6, 2016 at 8:49 pm

Rubbish Athena, total rubbish.

totaramJuly 6, 2016 at 8:53 pm

“Neil is helping us to spread the word.”

I’ve always maintained that, and argued that he should not be banned. It’s just that sometimes engaging with him becomes unproductive.. He just keeps repeating his talking points, without looking at the facts put forward by someone else.

jimhazJuly 6, 2016 at 9:01 pm

When it comes to Neil’s underlying concern, isn’t what Neil is actually worried about this statistic:

“INTERNATIONAL INVESTMENT POSITION (IIP)
Australia’s net IIP liability position was $1,012.1b at 31 March 2016, an increase of $51.4b (5%) on the revised 31 December 2015 position of $960.8b. Australia’s net foreign debt liability increased $9.2b (1%) to a net liability position of $1,027.8b. Australia’s net foreign equity asset decreased $42.2b (73%) to a net asset position of $15.7b at 31 March 2016.’

I’ve a feeling I’ll be castigated for my economic illiteracy, but anyway.

Isn’t this saying that foreign entities own more than $1 trillion than we do of everyone else’s assets?

Perhaps the power of that ownership insists on the highest interest rate we can afford to improve their return, but not so high as to reduce other forms of profit by damaging our economic growth.

What I hate about the above stat, is that there is a trillion dollar private debt that I put down as being primarily due to housing inflation.

economicreformJuly 6, 2016 at 9:04 pm

The reason NoS keeps mindlessly repeating his talking points is because he seems incapable of handling logical arguments or factual information which contradict his claims. As for his disregard of the facts … hey, lets not allow the facts to get in the way of a good story.

JohnBJuly 7, 2016 at 1:38 am

Jimhaz,
I am no expert on IIP, but from reading the (linked) report it is clear the IIP is a running tally of the amount of foreign sourced investment into Australia’s private sector, less the amount of Aust. private sector investments held in foreign economies.
International investment position (IIP)
“..Australia’s IIP is a balance sheet of the stock of foreign financial assets and liabilities at a point in time. The IIP may be viewed more broadly as a reconciliation statement showing the levels of Australia’s international assets and liabilities at two points of time and the components of change, namely flows and other changes (such as price changes, exchange rate movements and other adjustments).”

$1027.8b is the amount invested in Australia from foreign sources,
$15.7b is the amount invested by Australians (net assets) in foreign countries,
$1012.1b is the net total of foreign investment in Australia.

It means that ~$1 trillion of foreign sourced money is currently invested in Australian industries/ shares/ companies/ assets etc.; – and it records that $15.7 billion of Australian sourced money is invested in foreign assets/industries etc.
The $1 trillion of foreign investment level is a practical indication of investor confidence in the Australian economy.
The composition of of that $1 trillion foreign investment is listed in table 19 on page 60 in the document linked above. Only a small percentage (3%) of that investment is in Australian real estate.

Domestic ‘household’ debt is where the housing price bubble resides – approx 60% of household debt is primary residence mortgage – ninety per cent of Australian household debt is being used to buy a home or to build wealth through investing.
During Howards run of federal surpluses (when net federal debt fell by 22% of GDP) private debt rose from 90% of GDP to 160% of GDP – it has come down little since.

Neil of SydneyJuly 7, 2016 at 8:38 am

Isn’t this saying that foreign entities own more than $1 trillion than we do of everyone else’s assets?

And that is another big difference between us and other countries. The USA does borrow some money to fund its deficit from offshore eg from China but they have vast overseas assets to cover the borrowed money eg Ford GM, Apple etc We don’t have multinational companies like most Western countries do.

Our interest rates are a combination of need and risk. Stupid Bacchus says we should be like Japan, ignore the ratings agencies and charge zero interest like Japan does. Bacchus- nobody would lend us any money if we charged zero interest on our govt bonds

AthenaJuly 7, 2016 at 8:51 am

I love how all these countries who are allegedly borrowing from each other are all running a deficit. If they can afford to lend, why are they borrowing from others and paying interest?

Neil of SydneyJuly 7, 2016 at 9:06 am

I have never been able to work that out. If somebody is in deficit somebody should be in surplus. It should all balance out but everybody seems to be in deficit and nobody is in surplus

AthenaJuly 7, 2016 at 9:10 am

But you would never consider that maybe your premise is wrong. Way to go, Neil.

Neil of SydneyJuly 7, 2016 at 9:19 am

What premise?

Jennifer Meyer-SmithJuly 7, 2016 at 9:28 am

Neil,

I appreciate you giving a contrary point of view because it helps me learn macro economics.

I obviously am still green on this but your comment @ 9.06 am makes me think there is something peculiar in the neoliberalist desire of the LNP and Labor to want to be in surplus and out of deficit, and this is at odds with everybody else according to what you say.

John ArmourJuly 7, 2016 at 9:54 am

“During Howards run of federal surpluses (when net federal debt fell by 22% of GDP) private debt rose from 90% of GDP to 160% of GDP – it has come down little since.”

Indeed, it would have been impossible to rack up those surpluses without the private sector going massively into debt.

That’s the remorseless logic of the sectoral balances, a core foundation of modern monetary theory.

“Flow of funds and sectoral balances”

Möbius EckoJuly 7, 2016 at 9:59 am

Indeed NoS, the world is in so much debt now that there are not enough resources and service provision in it to ever pay it off. This maybe the reason they are planning to mine the ocean beds thus destroying them, and are looking to asteroid mining in a big way.

A question for you NoS. If we do run surpluses what are we going to do with them?

The only way to achieve them is to have extraordinary resources booms, sell off public assets and by massively cutting government infrastructure and services. So once they have their surplus it won’t be able to cover everything they have taken and given away, so just what do they use it for, bragging rights?

John ArmourJuly 7, 2016 at 10:22 am

“Bacchus- nobody would lend us any money if we charged zero interest on our govt bonds”

For about the one-hundredth time Neil, we don’t borrow money to fund government spending.

It’s a monetary operation (that is, not fiscal policy) by the RBA to manage the interest rate.

“OPEN MARKET OPERATIONS AND DOMESTIC SECURITIES”

Your dire predictions are meaningless. If there were no bids for our so-called “debt”, the RBA could simply pay interest equal to the desired target rate on bank reserves, and that would be the end of bond sales.

rossleighbrisbaneJuly 7, 2016 at 10:42 am

Neil seems to think that we “charge” interest on Government bonds and the interest that the government pays on money it borrows from overseas is set by the Reserve Bank of Australia.

Honestly, as he dismisses anyone who tries to point out to him his totally lack of economic understanding a Labor apologist, could someone contact Peter Costello and ask him to explain to Neil exactly how wrong he is on almost everything!

economicreformJuly 7, 2016 at 10:46 am

Jennifer’s suspicions are well founded. If you look at the national government budgets for almost every country (including Australia) over the past 100 years you will discover that deficits are the norm and surpluses are the exception. There is a good reason for this. Moreover every regime of federal government budgetary surplus has been followed by recession.

Troy PrideauxJuly 7, 2016 at 10:56 am

“There is a good reason for this. Moreover every regime of federal government budgetary surplus has been followed by recession.”

econoref, is that surprising though – giving that surpluses are normally associated with “boom” times (from a macro perspective)?

Neil of SydneyJuly 7, 2016 at 11:02 am

The only way to achieve them is to have extraordinary resources booms, sell off public assets and by massively cutting government infrastructure and services.

Howard ran surplus budgets without any of the things you listed happening. The resources boom did not start until 2004 and exploded from 2008-2013, Costello asset sales were not included in the budget as revenue and from what i have seen Howard spent more on infrastructure than any previous govt

For about the one-hundredth time Neil, we don’t borrow money to fund government spending.

So all those Pension and Superannuation funds both here and offshore don’t have any Aust govt bonds?

If we do run surpluses what are we going to do with them?

When Costello paid off debt he started HEEF and other funds and the interest from those funds was going into medical and scientific research. No point in talking about it now because we will never be debt free again thanks to Rudd/Gillard

Troy PrideauxJuly 7, 2016 at 11:03 am

“Indeed, it would have been impossible to rack up those surpluses without the private sector going massively into debt.”

I just can’t see the logic in this argument. Just about every economist I’ve listened to including the Treasury and RBA primarily attributes most of those surpluses to the resource and mining booms (unless I’ve misinterpreted them?) which involved a lot of money coming into our economy from outside the economy resulting in a non-trivial fraction of such paid as federal tax and royalties (state revenue).

John ArmourJuly 7, 2016 at 11:08 am

econoref, is that surprising though – giving that surpluses are normally associated with “boom” times (from a macro perspective)?

It’s not surpluses per se, but an ideologically driven belief in the need to cut/reduce deficits, like now. Hardly a “boom” time.

Fiscal surpluses are in the DNA of conservatives.

One of the best historical examples was the US in 1937.

jimhazJuly 7, 2016 at 11:20 am

[nobody would lend us any money if we charged zero interest on our govt bonds]

They still might if considered a safe haven.

That is only one aspect of monetary policy. The relationship between the currency value and interest rates also plays a part.

“Japan surprised markets in January when it set a minus 0.1 per cent rate on some deposits that banks place at the central bank, effective from mid-February. Its move was designed to encourage banks to lend more, spurring higher spending and inflation. Yet that has not been the case so far.

Demand is coming from an unusual source: foreign investors, who in the past have largely remained out of the low-yield market but have recently jumped in because of rising returns on Japanese-bond trades thanks to the cheaply funded yen”

And for me. Well I don’t want us to borrow money even for private investment as I think growth in the form it occurs now is utter bullshit that only assists the rich in rent seeking and increases immigration. The 2nd half of the mining investment splurge was not positive on a net basis – we’d have been better off without it.

BacchusJuly 7, 2016 at 11:22 am

“If somebody is in deficit somebody should be in surplus.”

Correct Neil – now go and read the link on John Armour’s post at 9:54 am 😉

John ArmourJuly 7, 2016 at 11:25 am

“I just can’t see the logic in this argument.”

I can’t understand how you can say that if you’d read (and understood) the link to that article on sectoral balances.

This isn’t about politics or opinion Troy, it’s just arithmetic.

The simple truth is you can’t run a fiscal surplus at the same time as you’re running a current account deficit.

Well, you can, but only if the private sector is running down its savings. And that’s not a sustainable proposition as we’ve learned.

Costello’s surpluses were mirrored by record private sector debt.

All through the so-called boom, we still ran current account deficits. That meant there was no net surplus on the external account to allow us to sustainably run fiscal surpluses.

Here’s another link making the same argument but from a different perspective:

“Norway and sectoral balances”

BacchusJuly 7, 2016 at 11:25 am

So jimhaz – the Howard government should have introduced a MRRT in 2004 to dampen the overheated mining sector, and also got rid of the discount on capital gains tax to take the heat out of the housing sector?

Would other sectors of the economy then had a better chance at survival or even growth?

John ArmourJuly 7, 2016 at 11:52 am

“So all those Pension and Superannuation funds both here and offshore don’t have any Aust govt bonds?”

Those bonds are just another form of money, just an expression of portfolio preferences Neil.

And just like other forms of money, they were created out of thin air, not borrowing.

Neil of SydneyJuly 7, 2016 at 12:15 pm

And just like other forms of money, they were created out of thin air, not borrowing.

So nobody with any cash buys govt bonds? Either locally or from offshore?

Neil of SydneyJuly 7, 2016 at 1:40 pm

nd just like other forms of money, they were created out of thin air, not borrowing.

John Armour- you did not reply. Nobody with cash in the bank either locally or offshore buys Australian govt binds?

JasonJuly 7, 2016 at 2:22 pm

Neil read this: https://petermartin2001.wordpress.com/2014/03/30/the-world-owes-57-trillion-who-the-f-to-mars-jupiter-2-its-high-time-for-some-clear-thinking-on-the-subject-of-debt/comment-page-1/

Read the comment at bottom explaining why Norway still has debts.

Also think about how much all the contents of even one city in Australia would cost to buy. All the land, products, cars, houses etc etc not to mention the educated and healthy productive populations value over decades and you might get the idea ( $multiples of billions?) if you’re willing to open your mind.

How does America borrow its currency from China. It could pay back all those bonds overnight if it wanted to it never needs to default on its own debts.

More info:

Why central banks never need default: http://www.bloomberg.com/news/articles/2016-04-05/the-ecb-explains-why-central-banks-can-t-go-bankrupt-in-a-footnote

Greenspan explains limit to paying for the pension system ie. Real resources not money: https://m.youtube.com/watch?v=Ccb_BNdRN80

BacchusJuly 7, 2016 at 2:28 pm

I’m guessing John didn’t answer you because it’s such a nonsensical question Neil – he probably can’t believe you asked it… 😉

Neil of SydneyJuly 7, 2016 at 2:49 pm

Bacchus why don’t you tell us why we should be like Japan and ignore the ratings agencies and have us have zero interest rates?

jimhazJuly 7, 2016 at 2:57 pm

@ Bacchus

[So jimhaz – the Howard government should have introduced a MRRT in 2004 to dampen the overheated mining sector, and also got rid of the discount on capital gains tax to take the heat out of the housing sector?
Would other sectors of the economy then had a better chance at survival or even growth?]

YES, absolutely on every point.

To be completely honest, as I seek lower immigration (a third of current levels) a policy to reduce it would cause a recession.

Under such circumstances I’d even be willing to utilise MMT ideas, as in spend enough via increasing the money supply to gain 4.5% employment.

The main reason I object to MMT is because the spending of the left has no limits whatsoever and the spending of the right is totally corrupt.

BacchusJuly 7, 2016 at 4:04 pm

Why 4.5% unemployment jimhaz? You don’t believe that NAIRU rubbish do you?

MMT certainly doesn’t advocate spending without limits – perhaps you need to understand what MMT says before dismissing it?

JohnBJuly 7, 2016 at 4:09 pm

Is the govt. in debt to CSG holders…. a simple synopsis:

An investor has a net worth of $1bn; he invests an idle $500m cash in buying govt. bonds.
Has the investors net worth increased through the act of buying those bonds? (ignoring future interest accrual).
Has the govt,’s debt increased?

Basic accounting mathematics say no; neither parties net worth has changed on contract exchange.

Spelling it out…$1bn – $500mn cash paid + $500m capital value bond = $1bn.
That is the investor’s net worth is unchanged – it is a zero sum transaction except for future interest receipts.

Given the above (and on condition that all transactions are in $AU), if the investors net worth has not changed due to the purchase of that $500m bond, why is it that MSM/neolibs & most ‘mainstream’ economists maintain that the Govt. is now $500m deeper in debt?

Basic accounting principles dictate that one entities debt is another entities asset. As there was no increase of the investors asset holding, there was correspondingly no decrease in the Govts. net worth (except for future int. liability)

To put it in even simpler terms – the Govt. received from the investor $500m cash (issued govt. debt, circulating as ‘currency’ – remember, at one (long past) time cash was exchangeable for gold) ) and issued in exchange a paper (interest bearing) IOU to the same $500m value.
From the Govt. point of view it is merely a debt swap – like a layperson shifting money from a ‘cheque’ account to a ‘deposit’ account – a zero sum transaction – except for interest accrual costs.

Bond investors love it for what it is – a secure investment with Australian Govt. guaranteed returns – ideal for conserving the real value of idle capital.

BacchusJuly 7, 2016 at 4:10 pm

Neil – I have never said we “should be like Japan … and have zero interest rates“.

We definitely should however ignore the ratings agencies – they’re corrupt businesses that have absolutely no effect on interest rates for countries sovereign in their own currencies.

Do you even understand what their ratings mean Neil? The rating they give is supposed to be a measure of how certain someone who lends them money is of getting their money back. In the case of our government (and the Japanese, and UK & US and many others), that measure is always 100% – none of those countries can involuntarily default on their “debt”.

jimhazJuly 7, 2016 at 4:18 pm

@ Bacchus

[Why 4.5% unemployment jimhaz? ]

In rough terms I would allow 2% for temporary job vacancies and the other 2% for those who are better off not being employed as they advance society or advance themselves in other ways or for those are simply a waste of space (brains permanently damaged by drugs and bogansim generally). The other 0.5% is to limit wage inflation due to a lack of labour supply.

Neil of SydneyJuly 7, 2016 at 4:29 pm

We definitely should however ignore the ratings agencies – they’re corrupt businesses that have absolutely no effect on interest rates for countries sovereign in their own currencies.

Well we are about to find out. This current election is a good one to lose since we will lose our AAA soon thanks to Rudd/Gillard

via increasing the money supply to gain 4.5% employment.

Unemployment was at 4.3% and falling in 2007 until you deadbeats voted for Rudd/Gillard

AthenaJuly 7, 2016 at 4:49 pm

“Well we are about to find out. This current election is a good one to lose since we will lose our AAA soon thanks to Rudd/Gillard”

Ah… but it doesn’t look like your team is about to lose the election, Neil. And in three years’ time when they’ve screwed up even further they will still be blaming Labor. Or perhaps they will be blaming GetUp for their downgrading instead. One thing is for sure, the “adults” never accept responsibility for their own actions.

Neil of SydneyJuly 7, 2016 at 4:54 pm

One thing is for sure, the “adults” never accept responsibility for their own actions.

It was not the Coalition who trashed our budget and locked up 50,000 people and caused unemployment to rise from 4.3% to 5.8%. It was Rudd/Gillard and the people who voted for them. The Coalition tried to do something about the trashed budget but were called mean and nasty.

I refuse to take responsibility for something caused by the ALP

jimhazJuly 7, 2016 at 5:02 pm

[Unemployment was at 4.3% and falling in 2007 until you deadbeats voted for Rudd/Gillard]

umm Neil, I can agree on a small number of issues with you, but this is not one due to the GFC – even though I would agree with you that Rudd had sort of “I want to be remembered like Whitlam” syndrome and tried to do too much too soon. It seems to happen after conservative govs rule for long periods in the social policy dead end way they do.

AthenaJuly 7, 2016 at 5:02 pm

Neil, it has been pointed out to you many times that the Liberal Party has almost trebled that deficit. Stop waffling shit all the time. We don’t need single use orange boats, years of searching the oceans for another nation’s jet, a heap of submarines or fighter jets, spending on a few thousand refugees as much as the UNHRC spends on 60 million refugees every year, corporate welfare and tax cuts for businesses. It’s the LNP’s choice to waste all that money.

Neil of SydneyJuly 7, 2016 at 5:18 pm

Neil, it has been pointed out to you many times that the Liberal Party has almost trebled that deficit.

And that comment is wrong if you are talking about the budget deficit.

Swan ran budget deficits of $27B, $54B, $47B, $43B, $18B and $48B. Hockeys first budget was a $38B deficit.

Jennifer Meyer-SmithJuly 7, 2016 at 6:04 pm

Jimhaz,

NO unemployment percentage is acceptable.

Neil,

regardless of what figures you use, you cannot ignore the LNP economic mismanagers have decreased meaningful employment opportunities for ready, willing and capable people while shrinking our grassroots homegrown industries.

Although I have come to disregard the bogey of the debt and deficit fallacies of neoliberal thinking, even in your eyes your above figures incriminate this Abbott/Hockey/Turnbull/Morrison bunch of twats.

Neil of SydneyJuly 7, 2016 at 7:45 pm

I think you people should look in the mirror more often. Have you compared the economic numbers in 2007 to 2013? And the GFC had nothing to do with Labor locking up 50,000 people.

In 2006 we made 25% of cars in this country. In 2013 only 10% were made in Australia. The GFC had nothing to do with that.

It would have been nice if the Senate had passed Hockeys first budget but Australians do not like spending cuts.

corporate welfare and tax cuts for businesses

You mean the billions of dollars the govt gave the car industry? All they ended up doing is making cars nobody wanted to buy

Jennifer Meyer-SmithJuly 7, 2016 at 8:11 pm

Neil,

you waste your argumentative skills against your allies while you let the perpetrators get away with more of the same neoliberal abuse of grassroots people.

Also, why do you feel so self-confident as to take on a collection of obviously intelligent economic thinkers? Do you lack introspective skills?

I agree you won’t be challenged by going to the LNP Degenerate social media sites because they don’t know what they’re talking about.

You however, have some understanding, but you’re wasting it on the LNP Degenerates in the vain attempt of keeping your job.

I understand your sadness. Make new friends, Neil.

AthenaJuly 7, 2016 at 8:35 pm

FFS Neil, the ALP has absolutely no control over the number of asylum seekers who board boats in other countries and head to our shores. you know damned well that many of the regulars here are not in favour of the ALP’s asylum seeker policies. I notice you repeatedly refuse to acknowledge that the great bastion of humanity, the Liberal Party, locks up asylum seekers for much longer than the ALP ever did.

Hockey’s doubling of the deficit has been clearly shown here many times.

http://www.abc.net.au/news/2014-05-06/has-the-government-doubled-the-budget-deficit/5423392

Oh and that cigar-smoking village idiot also promised a budget surplus in the first year. Three years on and there’s no surplus in sight.

Don’t forget the corporate welfare for the miners, Neil. All that cheap fuel for Gina and co to the tune of at least $10 billion per year. The poor woman is struggling badly and needs a hand.

Australians certainly don’t like spending cuts. The wealthiest Australians don’t like paying income tax either.

Neil of SydneyJuly 7, 2016 at 9:14 pm

Hockey’s doubling of the deficit has been clearly shown here many times.

And it is rubbish of course. I gave you the actual figures at 5.18PM. The budget deficits the Coalition are running are similar to Labors. That link you gave is just playing funny buggers with PEFO/Treasury forecasts which are never accurate. I could never work out how Hockey could be accused of doubling the deficit in January 2014 when he did not bring down his first budget until May 2014. Then i realised Labor supporters were using Treasury forecasts for political purposes.

the Liberal Party, locks up asylum seekers for much longer than the ALP ever did.

Don’t think so. I think processing times are unchanged. Once again Labor supporters are playing funny buggers with statistics.

the ALP has absolutely no control over the number of asylum seekers who board boats in other countries and head to our shores.

Neither does the Coalition but they stopped the boats.

AthenaJuly 7, 2016 at 9:28 pm

Next Neil you will be telling us that Hockey never lifted the ceiling on the deficit either.

The Liberal Party has kept asylum seekers locked up for longer than the ALP. The figures have been included in reports by the Australian Human Rights Commission. So keep on living in denial and clearly demonstrating why no one can take you seriously. The Liberal Party hasn’t stopped the boats either. They stopped reporting the arrivals. There’s a big difference.

Neil of SydneyJuly 7, 2016 at 9:40 pm

Yes I have seen the figures but i do not think they are figures which give processing times, which is the figure of interest. They give average time in detention and there is a big difference in meaning between processing time and average time in detention.

They say there are lies damned lies and statistics. And this is true.

Hockey did lift the debt ceiling. That is a fact. But Hockey did not double the deficit. Labor supporters are using Treasury forecasts for political purposes. This allegation was first made in January 2014 months before he had presented his first budget in May 2014.

AthenaJuly 7, 2016 at 9:45 pm

“Hockey did lift the debt ceiling. That is a fact. ”

I think hell just froze over.

Neil of SydneyJuly 7, 2016 at 9:54 pm

Labor are masters at presenting data to support their beliefs. That is why Kaye is so wrong when she says she just wants the facts.

I think those figures of asylum seekers in detention are not processing times. That is how long does it take to precess someone in detention. They are average time in detention which is something quite different.

How could Hockey be accused of doubling the deficit in January 2014 when he did not present his budget until May 2014?

BacchusJuly 7, 2016 at 10:00 pm

Hockey also blew out the figures for Swan’s last budget between the budget and MYEFO, by adding his own ‘spending’ to the figures (which Neil has previously acknowledged) and by using ‘dodgy’ assumptions to arrive at the MYEFO budget result.

That aside, trebling the budget deficit in and of itself is not a bad thing at this time! – pity they didn’t put the spending to supporting the productive capacity of the economy instead of ripping the heart out of the economy with their inane ‘austerity’ ideology.

BacchusJuly 7, 2016 at 10:01 pm

‘How could Hockey be accused of doubling the deficit in January 2014 when he did not present his budget until May 2014?‘

Neil – you even have to ask that???

AthenaJuly 7, 2016 at 10:07 pm

Neil, you’re the one creating the straw man out of processing times. I haven’t mentioned it at all. But since you have, let’s go with it.

The Libs have kept asylum seekers locked up for longer than the ALP did. But they have less people in detention than the ALP did. Both of those figures are contained in AHRC reports. So are their processing times much slower, or have processing times remained the same but they’re spending more time doing nothing about the asylum seekers in detention? Either way, there’s a problem and it’s not excusable from either of the major parties.

Neil of SydneyJuly 7, 2016 at 10:21 pm

Neil – you even have to ask that???

Bacchus lefties are using PEFO forecasts for political purposes. Have you seen PEFO forecasts before the 2010 election? They said Swans last two budgets would be in surplus. They were actually $18B and $48B deficits.

PS yes i acknowledge the extra $8.8B by Hockey

Neil, you’re the one creating the straw man out of processing times. I haven’t mentioned it at all

Yes you did. I do not think the numbers in the AHRC reports are processing times. They are average times in detention and there is a BIG difference.

If 5,000 boat people arrive on June 1 and you measure time in detention on July 1 average time in detention is 30 days. If another 5,000 boat people turn up on July 1 and you measure average time in detention the answer is 15 days for the 10,000 people. Average time in detention has halved because of the extra arrivals which always happened under Gillard. 4,000 turned up in May 2013. As soon as boat arrivals stopped average times in detention increased.

But what about processing times? AHRC reports do not say.

AHRC numbers are not processing times which is what we want to know. They are factually correct but are presented to DECEIVE.

Matters NotJuly 7, 2016 at 10:26 pm

And so it goes. Who will be the first to respond?

Already the line is long?

Intellectual masturbation writ large.

NoS makes a fool of responders each and every time.

Lots of shame to be shared around.

Neil of SydneyJuly 7, 2016 at 10:38 pm

And so it goes. Who will be the first to respond?

I will be. Labor people are masters at presenting facts to DECEIVE. That is why Kaye is soooo wrong when she says facts are all that matters.

What is worse is when an ALP politician says something like Bowen, Labor supporters bow down and worship. I would not trust anything a ALP politician says.

Facts can be twisted. AHRC reports do not present processing times. They present average times in detention to make the Coalition look mean and nasty. Processing times have not changed which is the important number which is not published.

Hockey has not doubled or tripled the deficit. They are similar to what SWan was producing.

AthenaJuly 7, 2016 at 10:40 pm

Neil, I know it’s a favourite Liberal strategy, but you do realise that repeating the same lie ad nauseum doesn’t turn it into fact, don’t you?

Matters NotJuly 7, 2016 at 10:46 pm

As I say, who will be the first to respond to ‘twisted’ facts?

Don’t bother. NoS will win again.

He always does. Yet it’s in your hands.

Realise it’s in your power. Take control. Refuse to be …. Manipulated.

But you won’t be! The evidence is there. Neil wins again.

Neil of SydneyJuly 7, 2016 at 10:55 pm

Realise it’s in your power. Take control. Refuse to be …. Manipulated.

I am not manipulating anybody. have you seen the 2010 PEFO forecasts?

http://www.treasury.gov.au/PublicationsAndMedia/Publications/2010/PEFO-2010/Report/Fiscal-Outlook

It said SWans last 2 budgets would be in surplus by $5B and $6B. Look at Table 5. They were actually deficits of $18B and $48B.

That double the deficit crap comes from 2013 PEFO forecasts which are always wrong

AthenaJuly 7, 2016 at 11:00 pm

MN, Neil has helped me to understand how people can vote for the Liberal Party.

Matters NotJuly 7, 2016 at 11:07 pm

Yep, I am awaiting for the first responder. Who will it be? Who will provide the ‘oxygen’? Who will want to accept the ‘facts’ but give different ‘meaning(s) to same?

Only the dumb and stupid..

NoS is a troll. Accept that.

Michael TaylorJuly 7, 2016 at 11:11 pm

I accept that, MN. NoS is, without doubt, a troll. That’s beyond dispute.

AthenaJuly 7, 2016 at 11:23 pm

Neil, if you do not agree with anything we say, and we’re always twisting everything, then why are you here?

John ArmourJuly 7, 2016 at 11:26 pm

MN, Neil has helped me to understand how people can vote for the Liberal Party.

Some welcome comic relief. Thank you Athena.

Matters NotJuly 7, 2016 at 11:33 pm

then why are you here?

Because NoS thrives on ‘responses’. And I think Athena you have been the ‘first responder’ on this site tonight, despite a clear warning.

At this point NoS is getting his ‘rocks off’.

John Armour, I’m not sure we need ‘comic relief’ at this point. Welcome as it might be.

But don’t be concerned, because he’s been ‘sucking’ people in for years, and years.

And clearly will do exactly the same for years to come.

Athena, he ‘loves’ responders like you.

AthenaJuly 7, 2016 at 11:44 pm

I must have missed the rule that we need MN’s permission to post here.

Matters NotJuly 7, 2016 at 11:56 pm

Athena, you don’t need a rule or even a guideline, but if you want to be ‘stupid’ then go ahead.

So far you are doing rather well in the ‘stupid’ stakes

But never mind, you join a long history of responders who feed NoS. Perhaps you will learn over time. But probably not. Nothing personal.

Shit I wish ‘history’ was compulsory. But maybe not.

John ArmourJuly 8, 2016 at 8:32 am

Matters Not,

You seem to have your nose out of joint.

I’m with Jennifer, Totaram, Athena, who also see Neil as a “useful idiot”, the one who rushes in and says things the less “brave” Tories would balk at; not so much a “devil’s advocate” but an advocate for J. S. Mill’s “stupid conservatives”.

I don’t know the ratio but I’ve heard there are perhaps 100 silent readers for every active commenter on a site like this, many of whom would be following these regular bouts with our friend Neil.

If it wasn’t for Neil giving us the platform, we’d be talking about different things.

Not so long ago John Kelly, the author this article, shared many of Neil’s monetary beliefs. I had some pretty tense exchanges with John before he “got it”.

Now John himself is a strong advocate for a better understanding of monetary economics and with his regular essays has done much to turn this site into an educational tool.

From little things…

A regular contributor at The Guardian (“Friarbird”) said recently that he had counted 76 contributors making comments that reflected the insights of MMT.

Neil has some stiff competition in the stupid stakes at The Guardian, but he could claim some “credit” for those rapidly growing numbers.

MN, at various times I’ve felt just like you, wishing people would just ignore the troll, but came around to seeing things in a more positive light.

From memory, I think you have a pretty good handle on this stuff. I suggest you join in the fun.

Troy PrideauxJuly 8, 2016 at 8:57 am

John,
Agreed that it’s actually been a useful exchange. A lot of this stuff is over my head but I’m learning with an open mind.

Neil of SydneyJuly 8, 2016 at 9:00 am

I accept that, MN. NoS is, without doubt, a troll. That’s beyond dispute.

I am not a troll. I do not believe in the majority of comments because they are factually wrong. Hockey dd not double the deficit. The budget deficits are similar to what Labor were running. Labor supporters used some PEFO budget forecasts and because Hockey did not meet those forecasts people said he had made the budget worse. Treasury forecasts are always wrong. Take this one

The four years of surpluses I announce tonight are a powerful endorsement of the strength of our economy, resilience of our people, and success of our policies.

In an uncertain and fast‑changing world, we walk tall — as a nation confidently living within its means.

This Budget delivers a surplus this coming year, on time, as promised, and surpluses each year after that, strengthening over time

Wayne Swan Budget Speech 8/5/2012

JakeJuly 8, 2016 at 9:20 am

I apologise to you now Michael about. Neil of Sydney. He’s a Joke.

John ArmourJuly 8, 2016 at 10:12 am

Troy,

That’s great…don’t give up!

Here’s something you might find helpful, or at least amusing…

“Why, sometimes I’ve believed as many as six impossible things before breakfast.” (or what’s so hard about MMT)

Edit: You’ll have to google that. The link didn’t come up.

Jennifer Meyer-SmithJuly 8, 2016 at 10:23 am

Well said, John Armour, @ 8.32 am.

Möbius EckoJuly 8, 2016 at 10:32 am

I know we can publish facts over and over again and if they don’t accord with NoS’s very narrow ideological view he will ignore them, but here goes again.

http://www.abc.net.au/news/2014-05-06/has-the-government-doubled-the-budget-deficit/5423392

Neil of SydneyJuly 8, 2016 at 10:39 am

Neil of Sydney. He’s a Joke.

Why? I get lots of comments like that but are never told why.

You ALP supporters believe you are morally superior to people like me and you believe you are much smarter than people like me. Trouble is your policies/ideas do not work

If people want to trust PEFO forecasts which is where that Hockey doubled the deficit crap came from they should look at the 2010 PEFO just before Gillard won the election

http://www.treasury.gov.au/PublicationsAndMedia/Publications/2010/PEFO-2010/Report/Fiscal-Outlook

Forecasts

Table 5 10/11 $39B deficit 11/12-$8.7B deficit 12/13 $5.1B surplus 13/14 $6B surplus

The question should be not why do these Treasury people still have a job but why are they not in jail?

Jennifer Meyer-SmithJuly 8, 2016 at 11:56 am

Good question, Neil.

I think we should herd up all the neoliberals in Treasury and the RBA, sack them, gaol them and then replace them all with innovative and progressive economists who adhere to Modern Monetary Theory and what enlightened people like Stiglitz teach us.

Neil of SydneyJuly 8, 2016 at 12:12 pm

progressive economists who adhere to Modern Monetary Theory

Has MMT been tried anywhere in the world? It sounds like a socialist wet dream. No need to work. No need to get out of bed. Just pay off our debts by money transfer.

Jennifer Meyer-SmithJuly 8, 2016 at 12:36 pm

Yes Neil,

Sovereign currency is a wonderful thing. Neoliberalists would have you believe MMT does not work but it is in existence in Australia right now.

Neil of SydneyJuly 8, 2016 at 1:01 pm

I know we can publish facts over and over again and if they don’t accord with NoS’s very narrow ideological view he will ignore them, but here goes again.

They are not facts. They are Treasury predictions/forecasts. Just because Hockey did not achieve Treasury forecasts does not mean he doubled the deficit. What it means is that Treasury forecasts were wrong and the people who made those forecasts should have lost their jobs

John ArmourJuly 8, 2016 at 5:01 pm

Has MMT been tried anywhere in the world?

China.

According to Frank Newman, former US Treasury Deputy Secretary, the PRC could be described as an example of the application of the insights embedded in MMT.

Newman worked in China for many years in banking after he left the US Treasury so he should know what he’s talking about.

What you need to understand Neil is that MMT is not a set of policy prescriptions a government adopts but rather the making use of the institutional arrangements that already exist, such as the ability to create all the money it needs to fund its spending by fiat, that is, without the need to borrow or tax.

Tax is still necessary however to drain off the government’s cash injections, and what we call “borrowing” is nothing like borrowing at all but a monetary tool to manage the interest rate.

To the extent that the PRC deficit spends with a watchful eye on the economy’s physical capacity as the only constraint on spending, rather than the West’s idiotic obsession with fiscal balance, it could rightly be called an economy running on MMT insights.

Möbius EckoJuly 8, 2016 at 5:18 pm

http://www.bennelongfunds.com/insights/175/investment-perspectives-australian#.V37tqGfVyjJ

jimhazJuly 8, 2016 at 5:38 pm

[Has MMT been tried anywhere in the world?]

I’ve been wondering that myself. In some ways the bulk of OECD countries may already be using it, including the US. When country lets its gov debt go above say 50%, and does not seek to raise taxation, then it is a form of MMT – as it becomes entirely dependent on growth to service the debt. Like MMT high debts countries have assumed the debt creation will be in productive areas that lead to income. Debt per capita seems to keep increasing however, so that is an outcome based indication the spending is not creating an adequate percentage of income producing jobs MMT supporters expect will result. The problem is markets. That a country can tool up to do things doesn’t mean they can sell stuff at the necessary price. China could because of the immensity of its spare capacity to produce saleable exports.

If that growth does not arise such as Greece, or it leads to housing inflation perhaps Ireland, or it leads to financial skullduggery perhaps Iceland, they fall. Money gets transferred out and if they just create more gov debt/MMT spending inflation skyrockets.

My only concern with the debt is not the current or pollie projected level, seeing as we will still be well below other bigger players, it is with the trend line and what it means for governments to have the power of public debt over people, when we also have high mortgage debt.

Jennifer Meyer-SmithJuly 8, 2016 at 6:06 pm

jimhaz,

why would trade be a barrier to the efficacy of a MMT economy?

Why would it necessarily be a concern for governments to have the power of public debt over people? I understand your concerns if it is Marcos or Pinochet or Putin, we’re talking about, but for now the discussion starts with Australia and I see it as 100 steps in the correct direction but with safety valves to ensure there are objective overseers that operate without fear or favour of the government of the day.

Möbius EckoJuly 8, 2016 at 6:15 pm

http://www.tradingeconomics.com/australia/government-debt-to-gdp

Neil of SydneyJuly 8, 2016 at 6:54 pm

know we can publish facts over and over again and if they don’t accord with NoS’s very narrow ideological view he will ignore them, but here goes again.

And here we go again. These are the 2010 PEFO forecasts

10/11 deficit $39B 11/12 deficit $8.7B 12/13 surplus $5.1B 13/14 surplus $6B

Actual results
10/11 deficit $47B 11/12 deficit $43B 12/13 deficit $18B 13/14 deficit $48B

That Hockey has doubled the deficit crap comes from PEFO forecasts which are always wrong.

The 11/12 deficit is 5 times higher than forecast in the 2010 PEFO

JasonJuly 9, 2016 at 12:22 am

Neil why won’t u reply to my comments and information?

Why does the Australian government need more of its own currency via taxation than it spends (surplus) while the economy grows and hence needs more AUD? Without a massive fiscal surplus like Norway how can Australians get more AUD with inflation and growth? A 5% deficit is close to break even. Aussies have the highest private debt in the world. How can they pay it down without a government deficit to give them currency?

If you won’t reply me you should be ignored.

BacchusJuly 9, 2016 at 12:26 am

He can’t reply Jason – he has no idea of what you’re talking about. It doesn’t fit into his rehearsed Lieberal sound bites. You may as well be speaking Japanese to Neil… 🙂

John ArmourJuly 9, 2016 at 7:09 am

Jimhaz,

To the extent that your last comment seems to be premised on an assumption that the so-called national debt is a debt that one day has to be “paid back”, it doesn’t make sense.

Only in economies with fixed exchange rates, pegged currencies, or, as in the case of the EU countries, foreign currencies, does the national debt have to paid back.

You mixed up such countries with others that are sovereign in their own currencies in your examples which is a classic no-no. Eurozone countries are all ‘users’ of the eu, a ‘foreign’ currency.

You continue to make comments about MMT without it seems having actually read any of the literature…here’s a good place to start:

“If you think you know what ‘debt’ is, read on”

Troy PrideauxJuly 11, 2016 at 9:09 am

“Only in economies with fixed exchange rates, pegged currencies, or, as in the case of the EU countries, foreign currencies, does the national debt have to paid back”

John or someone else, can you possibly explain the reason for this in layman’s terms? I’ve often heard it mentioned and I’m getting the impression it’s quite fundamental to MMT?

JohnBJuly 11, 2016 at 8:05 pm

Troy,
I offer this (simplistic) explanation – (John Armour pls excuse me butting in).
A National currency issuer that maintains a fixed exchange rate, or an exchange rate pegged to some other foreign currency, or a currency directly convertible to some other real commodity (such as gold etc) is essentially in itself a commodity .

The currency issuer needs to obtain a quantity of that commodity to equal the value of new issue of currency before the issue of new spending.
e.g. If the currency converts to gold, they need to procure gold, if the currency converts to USD, they need to procure USD – that is where the problem lies for that debtor nation.
If that nation’s economy is weak (unproductive) they cannot afford (are unable) to buy the necessary quantities of the commodity from external (foreign) sources; therefore they cannot at will issue new spending.
Simply, if the debt is denominated in a foreign currency, then supplies of that foreign currency must be obtained to pay that debt.

“Only in economies with fixed exchange rates,…..does the national debt have to paid back”(in real terms).
The creditor demands payment in the denominated currency of the debt.
Again, the fixed/pegged/exchange rate…etc. makes that currency a ‘commodity equivalent’ currency, supplies of that external commodity must be obtained to pay that debt.
The terms of the debt dictate that it must be paid as due – the nation has little choice; it must pay up or be in default.

The issuer of a ‘fixed’ currency is shares the problem faced by us ‘common users’ of the currency – they must acquire the requisite amount of that valued commodity before they can spend (issue) an equivalent amount of their own currency into its national economy. Currency users (like Australian or EU States) must acquire (earn) the currency before spending.

A fiat currency however floats on the forex market – it is ‘worth’ whatever its current international exchange rate deems it to be worth – it relies on confidence in the stability and future ‘exchangeability’ of that currency.
A fiat currency is primarily a ‘currency of exchange’ – it has no fixed value relationship to any particular commodity or other foreign currency. It can be issued at will by a sovereign issuer – debts written in that currency can be settled in that currency – not requiring the acquisition of some external commodity or foreign currency.
It can be ‘issued before collecting’ i.e. spent into the active economy before being collected as tax; whereas with a ‘fixed’ currency, some quantity of valued ‘commodity’ must be collected by the issuer prior to spending currency into the active economy – which potentially invokes National solvency issues.

I recommend this video for discussion on the relevant matters (particularly around the 20 to 30+ min mark):
MMT vs. Austrian School Debate

Most neolibs follow the Austrian school of economic thinking – a way of thinking rooted in the past, that has not shifted from ‘gold standard’/fixed currency days.

Re the EU:
Australian States (through federation/constitutional arrangements) receive a mixture of (non re-payable) commonwealth sourced finance in the form of grants, industry/infractructure/defence related subsidies, GST proceeds (ratios dependent on needs) etc. Those grants are generally not repayable
The EU states however essentially get no grants from the central bank, only repayable loans with interest rates attached – and no inter-state/CB (Central Bank) debt forgiveness provisions exist.
All users of the EU are effectively users of a foreign issued currency.

The more assistance an EU ‘state’ needs, the poorer more depressed their economy, the higher is the interest rate levied by the wealthier ‘states’ – who are the source (and recipients of the interest) of the funds the CB lends out.
That is why the spiral downward continues for weaker states like Greece, Portugal, Italy etc.
To settle their ‘state’ debt to the CB, EU states must acquire ownership of quantities of a foreign currency – the Euro.

Hence recessed EU ‘nation states’, already inflicted with C.B. enforced austerity, are confronted with the problem of ‘national’ insolvency – there is no way out of poverty for them.
The inflexible dysfunctional architecture of EU federated finance arrangements do not allow for grants or ‘hand outs’ /debt forgiveness to needy states – an essential requirement for a sustainable federation.

Troy PrideauxJuly 12, 2016 at 8:29 am

Thank you very much JohnB! Excellent description. Exactly what I was after. I’ll take a look at that video this evening.

John ArmourJuly 18, 2016 at 10:13 am

Hey JohnB…butt in all you like…that was a terrific explanation!

Troy PrideauxJuly 19, 2016 at 9:46 am

Question: prior to floating the $AU in late 83, would the Australian exchange rate be classified as “fixed” per John’s description above as it wasn’t actually fixed to any commodity or gold standard from my understanding but to this “Trade Weighted Index” (no idea what that is)?.

http://www.abc.net.au/news/2013-11-27/jericho-floating-the-dollar-was-worth-the-pain/5118028

Thanks,

Troy

Troy PrideauxJuly 20, 2016 at 12:33 pm

I finally found the time to watch the debate link that John provided re: Austrian Economics School vs MMT. Pretty clumsy analogies and arguments put forward by the Austrian Professor in my opinion – he appeared to be justifying or explaining his religious beliefs in the doctrine more than objectively explaining their relevance or usefulness in managing an economy.
On the other hand Warren Mosler appeared to argue his case strongly with relatable analogies that appeared to make sense. However, there was one significant concern I came away with particularly after he answered the question (towards the end) about his prediction of the GFC.
His answer was that (a) he didn’t see it coming (like the rest of us), but more importantly, he appeared to address this issue as a failure of the necessary actions taken to mitigate the system collapse ie. With the right (MMT) levers in play, the prediction of a GFC would be a moot point as there would be enough fiscal and/or monetary control available to avoid crisis thereby rendering the prediction one of policy initiative and implementation than one of a potential crisis.
The concern I have with this is that if there was enough control available to governments or central banks to avoid a crisis like the GFC, then what assurances do we have that the fundamental systemic issues that caused the crisis would also be addressed? Further, do we actually need a crisis of that magnitude to highlight the deep systemic and structural problems that caused it, what’s more, to provide enough of a political mandate for political leaders to take the necessary actions to deal with the causes and prevent the issue festering into an even greater future crisis?

JohnBJuly 21, 2016 at 12:43 am

Troy, @July 19, 2016 at 9:46 am
Since floating the currency the TWI is now only an indicator as to how our currency is faring compared to that of our major trading partners.
The RBA says it better than I can:
“The TWI is not a price in terms of a single foreign currency, but a price in terms of a weighted average of a basket of currencies. The TWI will therefore give a measure of whether the Australian dollar is rising or falling on average against the currencies of Australia’s trading partners. ….

On fixed vs floating $ pre 1983:
…Exchange rate policy in Australia shifted through several regimes before the Australian dollar was eventually floated in 1983 (Graph 3). From 1931, Australia’s currency was pegged to the UK pound, before it was changed to a peg against the US dollar in 1971. For much of this period – from 1944 to the early 1970s – Australia’s exchange rate peg operated as part of a global system of pegged exchange rates, known as the Bretton Woods system. When the Bretton Woods system broke down in the early 1970s, the major advanced economies floated their exchange rates. However, Australia did not follow suit, in part reflecting the fact that at that time, Australia’s financial sector was relatively underdeveloped.
The Australian dollar did, however, become progressively more flexible from around the mid 1970s. In 1974, a decision was made to peg the Australian dollar against the TWI and in 1976 this peg was changed from a ‘hard’ peg to a crawling peg. The crawling peg involved regular adjustments to the level of the exchange rate, in contrast to the occasional discrete revaluations and devaluations that had occurred under the previous regimes……
……However, under the fixed and crawling peg arrangements, the Reserve Bank was required to meet all requests to exchange foreign currency for Australian dollars, or vice versa, at the prevailing exchange rate….”

Whether it be termed ‘pegged’ or ‘fixed’ it meant that Australia’s currency still had a fixed ‘commodity’ value – Australia had to defend that pegged (set)value of the currency against international currency speculators who manipulated/gambled the money market to force through volume of trade (profitable for them) currency revaluations.

Response on your July 20, 2016 12:33 pm post later.

Troy PrideauxJuly 21, 2016 at 8:13 am

Thanks once again for an excellent informative response John.

JasonJuly 21, 2016 at 10:48 pm

Troy, Exactly what John B said. If it’s linked to anything other than the free floating market in its own currency only it’s not a floating currency.

As far the Austrian video you need a well regulated financial sector of you get issues like the GFC with bad loans that can’t be paid like NINJA (no income no job no assets) type loans. Criminal yet no one went to jail that’s a political issue.

In pure economics I understand only 5% of home loans were bad loans, much lower than Italy has right now BTW but that’s a whole other story.

The point is the collapse of the GFC could have been prevented with the right amount of fiscal spending lie Australia did almost perfectly. The stimulus was about 3x less than it should have been in the USA and it’s only in politicians minds that they ignore fiscal spending because they think like a household etc.

I highly recommend this short 6 min video by economist Paul Krugman explaining how you solve depressions it’s the most concise video I love to watch and share: http://edition.cnn.com/videos/business/2013/01/29/idesk-intv-krugman-on-economy.cnn

Krugman is not an MMTer but he understands Keynesian stimulus which politicians seem to ignore despite the proof of history.

Click on my name too and join up to the political party if you believe in its policies. It is possible with enough people’s understanding.

JohnBJuly 23, 2016 at 10:38 am

A concise expose on the myth of intergenerational debt by L Randal Wray (Sep 2012).

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