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.