56 comments

1. KorstrawFebruary 17, 2014 at 7:48 am

   John you’re right about simplistically comparing the household economy with the national one. This article from Tony Webber who was Qantas Group general manager microeconomics and then chief economist between 2004 and April 2011, I think is closer to the mark: http://www.theage.com.au/business/nationalise-qantas-international-20111014-1lo1o.html. He wrote this when Joyce shut the company down. However, as he says in the article, it was pie in the sky then and even more so now with this bunch of incompetent lunatics we currently have. But his suggestion seems to me a better one for Australia, rather than the ideological bullshit, drivel we’re fed about the ‘evils’ of govt owned businesses. Many of us will know that, admittedly in a different world, Qantas established its reputation as a Govt owned business. What changed?

2. John KellyFebruary 17, 2014 at 8:14 am

   Korstraw, thanks for the link. Qantas was, of course, government owned and solely international many years ago and it was the pride of the country. Merging with Australian Airlines (formerly TAA) and going domestic marked the beginning of the end of its allure.

3. mikestasseFebruary 17, 2014 at 8:29 am

   Just imagine how much shit QANTAS will be in when Australia has to import 100% 0f its oil at, oh, I dunno, $150 a barrel? Or $200? Or can’t get any at all even………

   Still on target……..

4. Miriam EnglishFebruary 17, 2014 at 8:42 am

   Sorry John, but I must emphatically disagree.

   I’m always alarmed when people compare a country’s internal economy to a household’s economics. The two could not be more different. When a government spends money inside its borders it isn’t losing the money, it is moving it around. It is more like someone taking a few dollar notes out of their pants pocket and moving them to their shirt pocket. They are not poorer. Even this metaphor isn’t quite right, because when a government spends money inside the country it becomes richer. Richer? you wonder. How can that be?

   Every time money moves from customer to producer, from producer to employee, from employee to grocer, from grocer to farmer, and so on, the government gets a cut as tax. The faster the money moves, the more money the government gets. By spending money and stimulating this movement the government helps money move around in society and makes more money. If there was always the same amount of money this wouldn’t amount to much, but when people borrow from banks they cause banks to create more money, quite literally out of thin air. Most people only borrow money when they are confident about their ability to pay it back, so this requires a “healthy” economy with lots of money moving around. By spending money, government helps to make people feel confident about their future and to spend and borrow more. This applies more strongly to the support systems, like pensions, medicare, and other social services, but also things like big industries like car manufacturers, fruit canneries, and airlines. (Even though the day of the oil-burning car and airplane is nearing its end, wrapping food in mined metal is a crazily wasteful process at a time when metal mining is nearing or passed its peak.)

   I’m not saying everything would benefit from being socialised; there is great value in using the decentralised nature of an open market to avoid the slow responses and blinkered mindsets of a centralised planner. But the government has a genuine role to play in helping the economy when it can and cushioning us all from the worst excesses of a fully private economy crashing and burning multiple times as it veers madly around.

   The best way to ensure a government (and its people) go broke is to cut back drastically on spending. That is, bring on “austerity measures”. People hang on to what they have and avoid spending too, slowing all movement of money inside the country. Everybody gets poorer because nobody is being paid anymore because everybody is worried where the next dollar is coming from. And the government which institutes such austerity finds itself up sh!t creek because they can’t get any taxes anymore, while their external costs owed to other countries remain as they ever were or even worsen. It ends up like poor Greece, by listening to the inept right-wing market ideologues who harp on about the household economy — a concept that is as inapplicable to a country’s internal economy as bicycles for fish.

   I know you are certainly not right-wing John. I’m not saying that. I’m saying we need to get rid of that comparison. It is utterly wrong and plays right into the hands of those aggressive true believers of some of the worst economic fantasies in history.

5. mikestasseFebruary 17, 2014 at 9:00 am

   Miriam English……… “The best way to ensure a government (and its people) go broke is to cut back drastically on spending. That is, bring on “austerity measures”.”

   It is also the best way to reduce greenhouse emissions.

   If you don’t cut back, and live within your means, (I live within my means, and I may be poor, but I’m not broke!) then you have to borrow money (read create money out of thin air as DEBT) which immediately means more economic growth, because without growth it’s impossible to repay the debts plus interest.

   Growth WILL end, no ifs no buts. It’s only a matter of time. The longer we wait to put an end to it willingly, the worse the eventual crash will be……. There’s no better time than RIGHT NOW…..

   We have to do it to save us from catastrophic Climate Change for starters. If it’s not too late that is….

6. John KellyFebruary 17, 2014 at 9:33 am

   We may have to agree to disagree, Miriam. Internal spending (moving money around) is fine in the context of communal affluence. But it is not real growth unless the receivers use it to introduce something new. I can give my son pocket money but unless he does something positive with it, it is wasted. The tax element here is minimal because one taxable benefit is offset by another’s deduction. In any event, I’m not talking about taxation, I’m talking about risk versus benefit management. What is the benefit in guaranteeing Qantas debt? Does Qantas’ international arm represent a value adding component to our economy? If yes, what is it and could it not be provided in ways that do not require debt guarantee?

7. Miriam EnglishFebruary 17, 2014 at 9:48 am

   It is also the best way to reduce greenhouse emissions.

   Heheheh 🙂 You won’t get an argument from me there. I totally agree. There was some small hint of that in my parenthetical remarks that “the day of the oil-burning car and airplane is nearing its end, wrapping food in mined metal is a crazily wasteful process at a time when metal mining is nearing or passed its peak”.

   I’m poor too, but live within my means (and living far better than people who have many times my income, I have to say). I’m in full agreement that conventional growth will definitely end, though some unconventional forms will continue ad-infinitum — growth in the knowledge-based economy, for instance, growth in artforms, etc — if they use less resources instead of more, which computing has enormous (largely unrealised) potential for.

   I have an intense dislike for the monetary system with its reliance on money created from debt and the devaluing of everything to a pecuniary value and concentration of power into fewer and fewer hands. I avoid it as much as possible and don’t ever borrow. I was simply making the point that when talking about economics, people often refer to a government’s internal finances being like a household’s finances. That is completely wrong. It is a comparison that right-wing market fundamentalists are extremely fond of, and one of the main reasons their thinking is so badly out of kilter. It is why conservative governments tend to drive nations into debt and socially conscious governments tend to repair economies — completely the reverse of the standard propaganda.

8. John KellyFebruary 17, 2014 at 10:06 am

   Reblogged this on THE VIEW FROM MY GARDEN and commented:

   Warren Buffett never invests in airline companies. He learned his lesson the hard way. He is, however, a big fan of Solar Power.

9. Miriam EnglishFebruary 17, 2014 at 10:11 am

   John, you are still getting hamstrung by “conventional” right-wing views of money and profit and loss.

   I didn’t really get involved in the argument about whether QANTAS should be nationalised or not because I haven’t given it enough thought, though my gut feeling is that it should be nationalised in order to bring tourist dollars in so as to benefit the country as a whole, in ways that a private company is unable to do. A nationalised QANTAS could have its running costs paid for by the increased wealth of the community. A private company just sees costs with little return because of its much narrower scope. At the same time I’m somewhat unsympathetic to an industry that gobbles up large quantities of petroleum and which, unless it moves to alternative technologies, is destined for the dustbin of history.

10. mark delmegeFebruary 17, 2014 at 10:36 am

    here is a thought John – how about we save a few hundred billion over the next decade and just ask China to look after our national security? Afterall our military only serves the interests now of a failing empire.

11. john921fraserFebruary 17, 2014 at 11:19 am

    <

    The Kiwis understand the need for a national carrier.

    The first thing Australia should do is give Joyce (the Irish gnome) a one way ticket anywhere.

12. DissenterFebruary 17, 2014 at 12:10 pm

    Somehow ALONG the way the AUSTRALIAN people have BEEN MADE CONFUSED.GOVERNMENT has BEEN TURNED INTO THE ECONOMY.
    Well it is simply not true. The economy and how it is managed IS A SMALL BUT IMPORTANT part of government.
    THE DEBT which currently EXISTS IS NOT SPIRALLING OUT OF CONTROL. IT is a SMALL part of GDP in fact and one of the smallest percentage parts of GDP in the world.
    SO WHY THEN is it BEING EXAGGERATED AND RAMMED AND EXAGGERATED AND RAMMED to the people?
    Because the government has MADE decisions which IMPACT adversely on the majority of people WHICH ARE DISCRETIONARY and NOT FORCED decisions. It is their INTENTION to CURB and SLOW the increasing wealth of the working class and middle class.
    THIS IS A VERY STUPID DECISION because they are the majority of all Australians and they BUY things with their discretionary SPENDING. DOING so will SLOW the economy.
    HOWEVER IT IS BEING DONE FOR OTHER REASONS>
    THE economy is fed by taxes and other revenue. THE GOVERNMENT does NOT WANT TO tax the wealthy as they see them as the DRIVERS of the economy and THEIR MATES.
    HERE LIES THE FALLACY.
    THE WEALTHY ARE NOT THE DRIVERS of the economy. IF THEIR MONEY is secreted in TAX havens IT IS WORKING FOR no-one and if they LIVE IN SINGAPORE to avoid paying taxes then they are not AUSTRALIANS anyway.
    THE DRIVERS of the economy are the EVERYDAY PEOPLE. EMPLOYMENT IS ALSO CREATED by the middle class.
    NOW HOW DOES THIS IMPACT on Qantas. WHy is this important for Australia? Qantas is a national airline. WITHOUT Qantas WE have NO NATIONAL airline. IN TIMES OF DEFENSE NEED we MUST HAVE A NATIONAL AIRLINE. THe Airforce does not have the CAPACITY to do both things.THE airforce might need urgent and immediate planes in numbers.
    Planes are ordered and nOT ALWAYS immediately available. Qantas is NEEDED to FILL THAT gap.
    ANYONE who argues that QANTAS could be internationally Co-OWNED is a FOOL.

    Last week CHina DEMONSTRATED its new naval capacity not in a SHOWY way but in a low key way by sending 3 warships into the INDIAN OCEAN having come through INDONESIAN straits to get there. THese were on training missions.

    THIS IS NOT ALARMIST. Sometime in the hopefully far distant FUTURE we may need SOME GREATER defensive CAPABILITY and an Australian owned civil airline will be GREATLY needed to SUpplement that.

    What does Warren BUFFET have to do with it? He has accumulated great wealth. He FED OFF the GFC. He became more wealthy but HE IS THE ENEMY. He is an individual who has AMASSED enormous wealth and these are the people who are EYEING Australia as the next place to FEED.

13. Miriam EnglishFebruary 17, 2014 at 12:43 pm

    Dissenter, I’d seriously reconsider peppering your text with so many uppercase words if I was you. It makes it surprisingly hard to read and extract meaning from. That said, I must say most of what you say above is dead right.

    Historically, the wealthy are not job creators or poverty relievers. The economy isn’t helped by them but tends to be damaged by them. There are exceptions, of course. Some wealthy people are great philanthropists and do genuinely help with poverty relief. Some wealthy people do build whole new industries and create new jobs, but these are the outliers. The general rule is, as you say, the middle class more than any other thing creates jobs. They spend the money to enable industries to grow and employ people. And they are, by and large, the people who invent whole new industries. Without a middle class society consists of the very wealthy, who tend not to spend locally, and the poor who don’t have much to spend. That becomes a stagnating society.

    The current government’s adherence to an obsolete and disproved financial model puts the country at risk. Unfortunately we just have to oppose them as best we can until they can be voted out and we have another (perhaps less inept) government muddling through.

    I don’t think Warren Buffett is “the enemy”. I think of him more as a symptom of how this screwy system is organised and that he is neither good nor bad; he is merely wealthy. To his credit he is also a philanthropist and survives on very little money personally. He supports increasing taxes upon the wealthy and I’m sure I’ve read that he is a supporter of labour unions, but I can’t find the reference just now. The Koch brothers, and Murdoch on the other hand, are definitely malevolent. They have very clearly made themselves the enemy and conduct open warfare upon the poor and democracy.

14. John KellyFebruary 17, 2014 at 1:15 pm

    Okay Miriam, we’re on the same page for the international arm of Qantas. That could be separated and nationalised and losses offset with the value of tourist dollars. The domestic arm, however, is profitable and should remain a public company and not look for any handouts. We didn’t “save” Ansett, nor should we have. When it went down another airline moved in to fill the space.

15. DissenterFebruary 17, 2014 at 3:04 pm

    A very IMPORTANT truth has surfaced today. The biggest HIT on the budget deficit was the $882 million that the ATO had to pay to Murdoch for supposed LOSSES incurred since 1989.
    NOW THAT is an example of the malevolence of the MSM. At the same time as this he Murdoch was making public statements about public servants and welfare leeches. Secondly this was WHY LABOR was so vigorously attacked because they were GOING to appeal the case.
    SO WHY did HOCKEY not make this PUBLIC FACT in his MYEFO? WHy was this NOT widely reported?
    THIs is the important question.
    THIS is why INDEPENDENT MEDIA is So very important. Many THanks to the owners and journalists who write on this site.
    What I want to KNOW is where the READERS are?

16. Stephen TardrewFebruary 17, 2014 at 4:46 pm

    Dissenter I agree about the caps. I find what you write interesting but my eyes go all wobbly jumping from plain text to upper case. My mind knows what to emphasize and you don’t need to put it in a perpetual spin.

17. DeganFebruary 17, 2014 at 5:34 pm

    SO…out of all this, what I get is, that PRIVATISATION of national assets is a BIG NO-NO. It’s like drilling a hole in your own boat, letting money leak out of our economy and now we are try to stop the boat sinking by drilling more holes? A little bit of debt is all right. We can consider this ballast. But saying we need to be in surplus is a joke. The boat sits too high in the water and becomes useless, unable to steer and the people in the boat benefit little from the service the boat is suppose to provide. We can also look at foreign investment like a bilge pump, but that pump still has to be carried on the boat. It’s no good trying to say we need a pump from a ocean going vessel in a row boat. It just wont float. Well Abbott did promise to stop the boat(s) didn’t he? :p

18. John ArmourFebruary 17, 2014 at 5:42 pm

    I’m not overly concerned which way the dice fall for Qantas, John, but I probably lean towards Mr Buffett’s view. My only concern is for the employees, which oddly, doesn’t extend to Mr Joyce, if indeed he is counted as one.

    Like Miriam however I do worry about your employing the classic fallacy of composition, “the household analogy”, and applying it to the macro economy: “It works most of the time although some aspects of a national economy go beyond simple household finances”.

    No shit John ? 🙂

    “Even so, there is much in common”

    That’s worrying. The reality is that it’s mostly the exact opposite.

    The “household analogy” is the weapon-of-choice that the neo-liberals use to deliver their “debt myth”. It’s a powerful metaphor that resonates with 99% of the electorate because it fits with their personal experiences of household budgeting, and debt. But it’s also dead wrong.

    Unfortunately for Australia, “fiscal sustainability” is embedded in the economics policies of not just the LNP, but also Labor and the Greens. In application, it just means “austerity”.

    Internal spending (moving money around) is fine in the context of communal affluence

    What’s wrong with “communal affluence” ? I actually like the sound of that. Surely that’s the object of the exercise. Money moves into the economy and out again. On its way through it leaves a trail of “good” or “goods”.

    But it is not real growth unless the receivers use it to introduce something new

    70-odd percent of the economy is “services”. I just got my local garage to patch a hole in my car’s radiator. Nothing new was created, but that transaction will find its way into the national accounts and add to GDP.

    I can give my son pocket money but unless he does something positive with it, it is wasted.

    It will only be wasted if he flings it into the drink. Even having a fling and a drink will not waste it in a macro sense, although the kitchen economist might disagree. Saving it would have a temporary depressing effect on demand, but eventually it will find its way into the spending stream and get taxed away, in the limit, to zero, and doing lots of good on its way.

    Waste is a bit like beauty: all in the eye of the beholder. To the LNP, everything the last Labor government spent was wasted.

    In another context (The Great Depression), Keynes once said that it would be useful for the Treasury to put 5 Pound notes in bottles and bury them in disused mine-shafts, then tender out the rights to dig them up.

    Keynes, who “invented” macroeconomics, knew that the “conventional wisdom” was not often very “wise”.

19. DissenterFebruary 17, 2014 at 6:26 pm

    To Stephen and others. I apologise about the caps. I use them to allow readers to scan what I write in a second or two. Useful when there is high volume to read otherwise a pain. I agree.

20. Buff McMenisFebruary 17, 2014 at 7:56 pm

    Much as I love QANTAS, and I have been travelling on this airline and except for one disloyal trip to Singapore about 25 years ago I have /only/ travelled on this airline, this gets a tick from me. Now, don’t get me wrong .. I don’t want it to go down the gurgler, I don’t really want it bought out by Emirates or Air New Zealand or Japan Air or whatever .. but I do want rid of Alan Joyce!!! No question! I want that little leprechaun gone .. poufff … (nasty comment intended) .. away with him, as QANTAS has gone down, down, down since he was put in charge! Either he is incompetent or the staff is incompetent or the Board is incompetent or all three but he is the supposed head of this company and he has driven it into the ground. I shall weep if my beloved flying kangaroo (already without its wings, removed some years ago by someone who thought it looked more streamlined without them!) disappears, I shall really weep if the airline goes totally down, but I shall NOT weep if Alan Joyce evaporates and returns to his native land. He is one that Minister Morrison should declare “illegal”!

21. Buff McMenisFebruary 17, 2014 at 7:59 pm

    Oh, and reference to the above, my first trip with QANTAS was in 1954 when I was 8 years old, on a Super Constellation to Port Moresby and a DC3 across the Owen Stanley Ranges to Lae and then on to Madang for 4 years. My last trip was an unexpected one on a beautiful A380 from Sydney to Perth. I love QANTAS! :'(

22. mark delmegeFebruary 17, 2014 at 8:03 pm

    ?? Debt is not a simple matter but looking at the figures from what I can gather (please correct me) under Labor about 300 billion was added in about 70 months. Worse still they spent money from the ill considered Mining tax before it was even raised …. and it wasn’t – It might be good to have a discussion about the quality of debt or the percentage of debt or even how it contributes to the creation of wealth and circuit of money but debt can be a problem. Take a look at the US’s 18 trillion or the mess in Greece, Italy Spain etc and tell me debt isn’t a problem. That said in bad times debt rises and it is. That’s not to say I didn’t want those social programs initiated by Labor – most seemed like a good idea at the time but how many could we afford?

23. revolutionarycitizenFebruary 17, 2014 at 8:58 pm

    “The first thing Australia should do is give Joyce (the Irish gnome) a one way ticket anywhere.”

    Something me and John can agree on…

    The crux of QANTAS’ problem is its main competitor has access to significant government funds through its part owners. That and truly terrible management.

    QANTAS is sitting on about $3B in cash, so I would certainly hope any agreement between the government and QANTAS involves some draw-down of that cash and a management restructure.

24. DeganFebruary 17, 2014 at 10:31 pm

    For those who wish to raise to subject of Commonwealth National debt, please all consider what happened under the Howard administration. National PERSONAL debt when through the roof to a record high, while the government sat there with grins on their faces, glorifying themselves about a surplus….I still don’t/won’t get a credit card

25. John ArmourFebruary 17, 2014 at 10:38 pm

    Mark,

    Your opening observation about Labor adding 300 billion in about 70 months suggests that you may be approaching this issue from a partisan-political viewpoint, possibly confirmed by your subsequent remark beginning with “worse still”.

    I am not, therefore, surprised that you have got this totally arse-about. If you want to get an understanding of “debt” you need to leave your tribal loyalties at home, regardless of whether they’re Left or Right.

    Firstly, conflating US public debt with that of Greece is a classic “no-no”. The so-called US debt is in their own currency, the USD. This means they can create all the dollars they need to meet any obligations with a few keystrokes on the US Treasury’s computer. You can google recent testimonies to Congress by Greenspan and Bernanke saying the same thing.

    If you get your economics from newspapers however you wouldn’t know that.

    What’s more, the “debt” is mainly “owed” to US citizens. A former Chair of the US Fed said that in testimony in 1938. It’s not exactly a new idea.

    A recent book by a former Deputy Secretary of the US Treasury has whole a chapter devoted to demolishing the debt myth. The book is called “Six Myths That Hold Back America”.

    He was also a former CEO of Bankers Trust, so not your usual “lefty”.

    Greek debt however is written in euros, meaning that Greece has to flog assets or export stuff to earn the euros (a “foreign” currency for Greece) to pay off their debts.

    Greece has a problem. The US doesn’t.

    Australia is like the US. We also have a floating fiat currency. Therefore, we don’t have a debt problem either.

    This gets a bit technical, but the reason Treasury issues bonds to match deficit spending is not to borrow the money to fund the spend (Treasury could after all just “create” it out of thin air…I hope that’s not controversial) it’s to mop up the excess reserves in the banking system that bugger up the RBA’s management of the overnight cash rate that the deficit spend creates.

    You won’t find that in your newspaper either. But if you want to come on to a blog and comment on debt, it’s a good idea to do your homework first. Things are not always what they seem.

    Finally, to answer your question about what we can afford, understand this: the government can afford to buy any product or service that’s available in the market place simply by creating the money to pay for it. And before you scream Weimar or Zimbabwe, the only restraint on the government is that its spending doesn’t strain the economy’s physical resources and create inflation, and the best measure of that is the level of unemployment.

    At 6% unemployment the economy is not exactly “living beyond its means” as Joe keeps telling us.

26. revolutionarycitizenFebruary 17, 2014 at 11:00 pm

    Debt gets even more complicated when you factor in growth, population and GDP, inflation and interest rates.

    Greece’s economy is in the toilet, making every Euro it borrows that much harder to repay, mainly due to reduced revenues to government and higher interest rates on its debts.

    The US of A has an enormous economy that only has to achieve marginal growth added to its population growth profile to keep its debt repayments under control.

    Also, if the US Federal Reserve simply decided to restructure the US Government’s foreign held debt by simply printing the money, the result would be a decline in USD value, followed by an increase in US Economic activity as its products become much more competitive in the Global Market. (That and the US Government has much greater scope to raise taxes than many Euro-States)

    Australia isn’t in the US of a realms of being able to largely ignore its debts, and is far more likely to get its borrowings under control to avoid what is happening to the UK. We’ll go through a lean government spending period along with some asset turn-over and possibly shelve a large portion of the debt to the bond markets for as long as interest rates remain low. (And pay it off whenever if ever)

27. mark delmegeFebruary 18, 2014 at 1:42 am

    John Armour did labor create any debt in about 70 months? Was the figure somewhere near 300 billion? (ie spending 300 b more than it received)You seem to be saying debt has no meaning whatsoever…really? Please explain …

28. mark delmegeFebruary 18, 2014 at 2:54 am

    An Interview With Michael Hudson on Economic Violence

29. mikestasseFebruary 18, 2014 at 5:23 am

    Debt IS a problem inasmuch as it needs economic growth to repay it with interest……… and economic growth is is as good as finished. Furthermore, economic growth is killing the planet with resource depletion, pollution and climate change.

    The biggest debt problem in Australia is not government debt…. it is private debt, which is five times as big as public debt… and unlike the government, WE cannot print our own money to get rid of our credit cards, mortgages, car loans, etc etc etc…

    Capitalism (like QANTAS) is in deep shit because high debt means growth is harder to achieve as people spend more and more money on it instead of purchasing consumer goods or services. They also spend more on fuel and energy (thanks to preak fossil fuels) and in the end growth is shattered, which can only lead to a future of debt default and/or deflation.

30. John ArmourFebruary 18, 2014 at 8:10 am

    Revolutionarycitizen,

    The only thing you got right was Greece.

    “Also, if the US Federal Reserve simply decided to restructure the US Government’s foreign held debt by simply printing the money,”

    How do you think the US redeems and services its debt now, regardless of who holds it ?

    The US has been been meeting its debt obligations since 1791 by issuing fresh bonds, which you could call “printing money”. On very few occasions over the last 200 years has the US cleared its public debt.

    If you keep thinking of debt in the way you do (something akin to personal or household debt) you will never “get it”.

    It’s a bit like that famous perceptual illusion: I keep seeing an attractive young girl but all you can see is an old woman. I keep telling you there’s an image of a young woman on the postcard, but you insist otherwise.

    Professor Bill Mitchell has written dozens of essays on the myths that swirl around public debt. Here’s just one that you should read if you have an interest in this stuff.

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

    “Australia isn’t in the US of a realms of being able to largely ignore its debts, and is far more likely to get its borrowings under control to avoid what is happening to the UK”.

    Australia is in exactlythe same situation as the US. Size has nothing to do with it, nor has the fact that the USD is the so-called “reserve” currency. The critical issue is that the US and Australia issue debt in their own currencies.

    Using terms such as “getting its debt repayments under control” has no application or meaning in countries like the US, UK, Australia etc where the government is the monopoly issuer of the currency.

    I don’t know what “to avoid what is happening to the UK” means. I know their economy is stuffed but it’s got nothing to do with “getting borrowings under control”.

    If anything, it’s the other way around. The UK government needs to expand their deficits to reflate their economy seeing as the private sector is sitting on its hands, just watching, and they continue to run deficits on the external account. Sound familiar ?

31. John ArmourFebruary 18, 2014 at 8:30 am

    Mark Delmege,

    John Armour did labor create any debt in about 70 months? Was the figure somewhere near 300 billion? (ie spending 300 b more than it received)You seem to be saying debt has no meaning whatsoever…really? Please explain …

    I’m not dodging the question Mark but I thinks it’s rhetorical. Google it yourself.

    It’s actually irrelevant what the actual figure was, unless you believe in the debt myth and want to keep frightening yourself.

    In your haste to make a cheap political point you’re totally missing what’s really important here: under the guidance of Ken Henry, the Treasury Secretary, the Labor government in 2008/09 went massively into deficit and dodged the GFC bullet, saving 100,000’s of jobs.

    The Treasury then issued bonds of equal value to the deficit for reasons that I explained.

    The private sector (like my superannuation fund) happily bought those bonds with money the government had spent into the economy in previous periods.

    You should read the Bill Mitchell link I put into my reply to ‘revolutionarycitizen’ above.

32. bjkelly1958February 18, 2014 at 10:28 am

    It may make you happy to know, John Kelly, that you have a economic characteristic which you share with Joe Hockey; you both like trying to rationalise the Nation’s macroeconomic stance with household economics. You and Joe are both wrong.
    We do need a national domestic carrier. Most troop movements to and from Viet-Nam were effected by QANTAS from ’63 to ’72. Our Air Force didn’t have enough carrier planes to do the job.
    As for QANTAS itself, the old adage about fish rotting from the head down applies. The Gnome, the Broad and certain senior management should go.
    The truth is that Australia carried a modest national debt when the LNP stole office with lies. The question of greatest import is what was the debt being used for. The introduction of Gonski, the creation of the NDIS, reform and improvement in childcare and so on.
    If you are desperate to pursue your household analogy, think of it like this. You know that if you add a granny flat and a pool the value of your home will increase, and do so a greater rate than next door who has none of these desirable extras. So you take out an extension on your mortgage, you increase your level of debit to ensure an improved situation in the future.
    The present scheme of financial management under the LNP co-alition is to destroy those things that Labor went into debt for in education, facilitating climate improvement, care for the disabled, care for young children and the medical care of Australians generally. It is intended to place as much public infrastructure into the hands of the private sector as it can. Australia’s future growth is, therefore, dependent on the activity, vigorous activity at that, of the “Captains of Industry” in the private sector. It is quiet out there, too quiet.

33. John ArmourFebruary 18, 2014 at 10:53 am

    “Most troop movements to and from Viet-Nam were effected by QANTAS from ’63 to ’72. Our Air Force didn’t have enough carrier planes to do the job.”

    I could think of better reasons than that, bj.

    : (

34. mark delmegeFebruary 18, 2014 at 11:03 am

    Thanks

    John Armour ‘In your haste to make a cheap political point ‘ that wasn’t my intention. I’m happy to learn.

    And I am beginning to understand…Just so long as institutions will buy those AUD$ government issued bonds you say there is no problem. OK I can wear that. What then would limit the ability of those or any institutions from buying those bonds?

35. revolutionarycitizenFebruary 18, 2014 at 11:08 am

    “The US has been been meeting its debt obligations since 1791 by issuing fresh bonds, which you could call “printing money”. On very few occasions over the last 200 years has the US cleared its public debt.”

    The USD can not escape volumetric devaluation caused by the issuing of debt. Your argument is that the US Federal Reserve can print money to repay and cover those debts without penalty, that isn’t entirely accurate. Legally the US Government can borrow whatever money Congress agrees to, that is not to say it isn’t without consequence, the Federal Reserve can print an infinite amount of money to ensure that Congress could do so, that doesn’t make it a good idea.

    Just because you issue debt in your own currency doesn’t make it any different, someone has to buy the debt, and then someone has to repay the debt. Just because you’re the issuer of the currency the debt is held in doesn’t alter the fact that the debt has to be reconciled, or risk your currency being worthless. In Australia the RBA does not print money to hold government bonds, over 60% is held by external institutions with the rest largely held by banks, insurers and superannuation funds and all of whom want their money back with interest.

    The UK Government has effectively reached its issuing limit, there is so much UK Government debt on issue that it runs the risk of attracting no buyers, it can’t just go and borrow more money. It is at (if not beyond) its realistic capacity of repayment, and even as it stands it has no plan to stop running permanent deficits. It’s only goal so far is to get its deficits down to an agreed % of GDP. The risk for Australia in that comparison is for us to do the same thing, ignore the structural deficit issue (in the UK it’s incredible unsustainable welfare spending) and accept high levels of permanent debt and deficits predicated on the idea that the debt fairies will one day repay it. The only difference between the UK and Greece is wishful thinking.

36. John ArmourFebruary 18, 2014 at 12:10 pm

    John Armour ‘In your haste to make a cheap political point ‘ that wasn’t my intention. I’m happy to learn.

    My apologies Mark.

    What then would limit the ability of those or any institutions from buying those bonds?

    Your question assumes that the government needs those institutions to be willing to buy its bonds. The boot is actually on the other foot.

    The issuing of bonds is actually a big favour to the bond market. The government has in the past actually issued bonds even when it was running surpluses (under Costello) just to keep the bond market happy. Bond traders send their kids to private schools and drive BMWs so their needs are important.

    Once again, I suggest you read Bill Mitchell on the subject

    Who is in charge ?

    Skip down to this explanation first to get a feel for the issue, then go back to the beginning for a bit more of the technical background:

    Two things that then arise from this:

    Can the bond markets dictate the cost of public borrowing?
    Can the bond markets close down a sovereign government?

    Remember that the issuance of bonds is not to raise finance per se but to neutralise the effect of excess reserves in the banking system. These reserves are like hot potatoes in the inter-bank market and banks try to get rid of them by lending them to other banks. This can drive down the overnight cash rate and create problems for the central bank’s monetary policy.

    I would also add that the issuance of debt was rendered “optional” when the Western economies abandoned the gold standard in 1971. Australia kept some of the features of the gold standard right up to the Hawke-Keating government in 1983 (or thereabouts).

    Most economists seem to think we still live in a gold standard era with all its silly constraints. That’s where the “debt myth” comes from.

37. petermartin2001February 18, 2014 at 12:13 pm

    PS Just to relate the above comments to the Qantas discussion I should say that any decision by the Australian government to either support Qantas or let it be taken over is entirely political. The Australian government can afford it. There’s no limit on the number of Aussie dollars it creates! Having said that it would consume resources that could possibly be better used elsewhere, and that’s a value judgement to be made.

38. revolutionarycitizenFebruary 18, 2014 at 12:21 pm

    “”The USD can not escape volumetric devaluation caused by the issuing of debt.” That’s not really true.”

    Actually it is, much of the added value of the AUD was due to the devaluation of the USD caused by them printing money to service debts. No currency can escape volumetric devaluation caused by issuing debt or printing money. The same happened to the Pound over the same period and for the exact same reason.

    Currency and Trade is another issue.

39. petermartin2001February 18, 2014 at 12:46 pm

    @Revolutionary Citizen

    I just noticed that you’d written

    The only difference between the UK and Greece is wishful thinking.

    There are lots more differences! The weather is nicer in Greece! But to be serious, the two big differences are called the Pound and the Euro. The UK Government issues the pound. It can never default on payments which are denominated in £. It can issue as many as it like to cover any payment. It can never default. Ultimately it won’t come to that but the bond vigilantes know they can’t bully the UK in the way they bully Greece with the Euro.

    Greece is like you and I is a user and doesn’t have control over its own currency. It has to borrow Euros just like anyone else. Big mistake joining the Euro IMO !

    Incidentally the Euro works reasonably well for net exporters. But its a disaster for net importers like France. That’s where the next Euro crisis is brewing. Italy too is on the brink.

40. petermartin2001February 18, 2014 at 12:56 pm

    @Revolutionary Citizen

    Think of a the economy as a bath tub. The currency level is the water level. If its too high you have inflation. Too low you get recession.

    The government turns on the tap. That’s inflationary. But then someone lets some water out of the plughole by buying a foreign car. That’s deflationary. Someone saves some currency by filling up a plastic container with water. That’s deflationary. So the government turns on the tap to refill to the right level.

    Or Governments can recapture water that gone out of the plug hole by buying securities and add it to the bath tub.

    That’s basically how it works. Its not the total amount of money that determines prices. Its the amount of active money. Its the level of water in the bathtub. Its not too difficult really!

41. petermartin2001February 18, 2014 at 11:59 am

    @John Kelly,

    Its almost never correct to compare an issuer of a currency, like a Government, with a user of a currency like a household. An issuer has to issue more than it receives back in taxes otherwise there isn’t any currency out there to pay the taxes. Does that sound logical?

    Having said that they have to issue just enough to keep the economy going but not too much that it causes high inflation. The amount that’s issued may or may not at some time equal the amount received back in taxation. But it doesn’t have to.

    @ Revolutionary citizen

    “The USD can not escape volumetric devaluation caused by the issuing of debt.” That’s not really true.

    The US runs a current account deficit on trade. Therefore it loses dollars from its economy. It gets those dollars back by selling Treasury securities and then recycles them into the economy by running a budget deficit. Which are then respent on imports! So, in general the countries which have a trade deficit also have a budget deficit, Like the US, UK and Australia. The ones with a trade surplus like Germany, Singapore, Switzerland, China also have a budget surplus. The government needs to tax those inflationary exports receipts away so they are a mixed blessing for the economy.

    Any attempt to run a government budget surplus and a simultaneous trade deficit sucks money out of the economy at both ends, impoverishing the private sector. The end result is an economic slump.

    The USA can keep running its trade and budget deficit for as long as overseas investors wish to buy US Treasury bonds. When they no longer wish to do so the US dollar will fall and their trade with the Rest of the World will naturally equalise.

    For more discussion: see Google {petermartin2001 burden children grandchildren}

42. revolutionarycitizenFebruary 18, 2014 at 1:02 pm

    But Britain has defaulted, it defaulted on debts linked to German WW I reparations during the Depression. And around the same time they instituted adjustments to pre-agreed interest rates on WW I bonds, which although the bonds were paid, just at a lower rate of return than initially agreed, a soft default if you will.

    And the US issues its own currency and it has defaulted

    https://mises.org/daily/5463/A-Short-History-of-US-Credit-Defaults

    There is always a calculation that has to be made, the cost of issuing the debt, both material and potential versus the cost of default.

    Even though they can issue whatever volume of currency it desires, the fundamental consequence is always the same, volumetric devaluation.

    Greece may have better weather but its economy is in the toilet for the same reason the UK’s is, its a make nothing country reliant on welfare spending to artificially keep the whole enterprise from falling over. Greece just reached the end of its rope before the UK, France and Italy has. That isn’t to say those three won’t follow suit in the not to distant future.

    Money counting economies (service sector) rely on someone else to actually make the money to pay for the service, and when that stops happening, it’s all down hill.

43. petermartin2001February 18, 2014 at 1:10 pm

    When countries were on a Gold Standard then, yes, they could default because their currency was defined in terms of gold. Similarly with the recent Russian and Argentinian defaults. Their debts weren’t in their own currencies. They were in US $ and only the US government has control of the US$. If Australia borrows US$ it can involuntarily default. If it borrows in A$ it cannot involuntarily default.

44. revolutionarycitizenFebruary 18, 2014 at 1:11 pm

    And the bath-tub analogy isn’t exactly accurate either, other-wise places like Switzerland which hold enormous capital inflows would endure hyper-inflation as the bath-tub is near full. Same as Australia, Australia is a net importer of capital (cash) and that has had no devastating inflation out-comes as the bath-tub over-flows with water. (And the peak capital inflows to Australia occurred at the same time the government had turned the taps on)

    I think you over-simplified that to the point it no-longer works in actual practice.

    Perhaps you forgot to compensate for currency value and interest rates as a means of inflationary/deflationary controls.

    The US Federal Reserve has not only kept the taps on, it has gone out-side and routed the garden hose into the bath-tub, and inflation has remained stable there also, albeit because interest rates are in real terms at or below zero.

45. John ArmourFebruary 18, 2014 at 2:10 pm

    Your argument is that the US Federal Reserve can print money to repay and cover those debts without penalty, that isn’t entirely accurate.

    “Printing money” is your term. It’s more accurately “bond issuance”.

    Just because you issue debt in your own currency doesn’t make it any different, someone has to buy the debt, and then someone has to repay the debt.

    It makes a helluva difference if you have to fire-sale your assets to pay your debts, like Greece.

    The only difference between the UK and Greece is wishful thinking.

    Mario Draghi and Christine Lagarde would be pleased to hear that. The euro crisis would be over. I don’t know what George Osborne would make of it but.

    Let me know when the bid-to-cover on UK debt drops below 1 and I’ll rush over there and fill up my boots with Gilts.

    It (UK) is at (if not beyond) its realistic capacity of repayment

    The UK can service its debt until hell freezes over, so long as there’s a clerk in Treasury who knows how to debit a reserve account and credit a securities account, using no more than keystrokes on a computer.

    You seem to have given zero weight to what I’ve had to say so let me quote former Deputy Secretary of the US Treasury, Frank N Newman:

    “The US has gone over 200 years without ever fully paying down Treasuries held by the public. There is no need to worry about paying it down in the next generation or the next. There is no plan for the government to raise taxes to pay down Treasuries outstanding, and there is no reason to develop such a plan.

    It is really not helpful to use the term “debt” when referring to Treasuries , since Treasuries issued by the government have very different characteristics from debt of households”

    Or Marriner Eccles, Chairman of the Federal Reserve, in 1938:

    Isn’t it about time that we learned this simple truth? Is it so hard to understand that when an individual owes money he generally owes it to another individual, but when a nation owes money it owes it to itself? When an individual pays a debt, he pays it to someone else. When a nation pays a debt, it pays it to its own people.

46. revolutionarycitizenFebruary 18, 2014 at 2:49 pm

    You can not escape volumetric devaluation.

    And as explained above, the UK has defaulted on its debt previous. And since bonds are issued to the market they have to be purchased for the value to be realised, and then interest paid. The idea that printing money ad infinitum is actually a possible real world monetary policy is absolute nonsense, the fact that you’re still advocating it after the real world effect of volumetric devaluation has been shown to be in effect in the very two markets you’re basing your theory on is madness.

    In Australia, a nation with a sovereign currency has 60+% of its government bonds on issue held by non-resident entities, which means, when a government pays its debts it doesn’t repay its people, it pays whoever purchased the debt. The UK is lucky, only around a third of government bonds on issue are held by external investors, but that equates to a third of the British Government’s interest bill being banked off-shore, still better than our 60+% being banked off-shore, but it is still a loss.

    In Britain’s case that’s a third of its current $52B current interest bill being off-shored, and I am sure there are things in the UK that could use the attention of that money. And that is a real issue with debt, repayment drag on government revenues transferring to repayment drag on GDP growth as a result. Australia’s interest payable drag on our economy will be worse, since more than half of the interest our government pays on its debts will be off-shored.

47. petermartin2001February 18, 2014 at 3:22 pm

    @revolutionary citizen

    Are you making any distinction between active and no-active money in your thinking? Money in Swiss bank accounts and bank vaults is inactive and has no effect on the economy just by existing. Its only when money is spent that that happens.

    You’ve probably heard of a trillion dollar coin. Well you could have a $100 trillion dollar banknote. The Australian government could print one if it wished. Would it have any effect on the economy? If it was spent, yes it would. Otherwise it has no effect whatsoever.

    That’s the quantity theory of money disproved by a single thought experiment!

48. revolutionarycitizenFebruary 18, 2014 at 3:38 pm

    Actually the inflows of capital into Switzerland do effect is economy, quite substantially, but that is a different matter.

    Yes, the US Mint could create a Trillion Dollar Coin, and the US Federal Reserve would have to print a trillion dollars to actually purchase the coin in order to deposit its value. Of-course would lead to volumetric devaluation, which the USD has suffered as a result of printing money at the Federal Reserve…

49. petermartin2001February 18, 2014 at 3:41 pm

    @ John Kelly,

    Trying to understand a nation’s economy is not easy. There is so much to absorb. Whenever I feel unable to get my head around any particular matter ……

    It does take a bit of thought but I’d say that any reasonably average intelligent person should be able to absorb the basics. Try to put aside all political notions of how you think government ought to act and just consider scientifically how they do act. Forget everything you think you know about economics and start with a clean sheet.

    Than take a free lesson from Professors Wray and Mitchell. This is the first of a series of 10 short lectures which are very very good.

    Then this is worth a watch too.
    

50. Miriam EnglishFebruary 18, 2014 at 5:42 pm

    It never ceases to amaze me that people with right-wing sympathies will blame the poorest people for a country’s woes. Greece’s problems aren’t because of welfare. Some of the healthiest economies in the world spend far more on welfare (for example some of the Nordic countries). It is my understanding that Greece’s problems come from massive corruption. The von Mises “Institute” won’t have much to say about that though. They are all about pushing an ideology detached from reality. Be very careful reading stuff from their site. It will warp your brain without you even realising it.

51. revolutionarycitizenFebruary 18, 2014 at 5:51 pm

    “It never ceases to amaze me that people with right-wing sympathies will blame the poorest people for a country’s woes. Greece’s problems aren’t because of welfare. Some of the healthiest economies in the world spend far more on welfare (for example some of the Nordic countries). It is my understanding that Greece’s problems come from massive corruption. The von Mises “Institute” won’t have much to say about that though. They are all about pushing an ideology detached from reality. Be very careful reading stuff from their site. It will warp your brain without you even realising it.”

    I didn’t blame the poor, I blamed the governments that gave it to them when they knew they couldn’t afford it.

    And the Nordic countries you speak of have unimaginable tax scales and government debts that they’ve incurred trying to do the impossible. Also, the Nords to their credit paid their taxes, tax-evasion in Greece was the national sport, that and collecting government stipend. If you care to take a look through Greece’s financial history you’ll understand that Greece is the last nation anyone should have been lending money to.

    UK, France and Italy are in deep financial trouble due to their welfare spending, in the UK direct welfare payments are now greater than all income taxes received by government, leaving things like the NHS and everything else the government does on the Business Taxes side of the ledger, and it just hasn’t worked.

    The best thing you can do for poor people is make them wealthy and that will never happen with welfare. In-fact welfare doesn’t do much for the poor except keep them poor, Australia has spent over $1,000,000,000,000 in the past 10 years on direct welfare payments, and we now have more poor people than when we started.

52. petermartin2001February 18, 2014 at 6:51 pm

    @revolutionarycitizen

    So let me get this straight. You think that if the RBA printed a trillion dollars and stashed the notes down a coal mine, they would still lead to “volumetric devaluation” ? ie Extra Inflation?

53. John ArmourFebruary 18, 2014 at 7:12 pm

    Actually the inflows of capital into Switzerland do effect is economy, quite substantially, but that is a different matter.

    Actually, they don’t. They are sequestered in reserve accounts. The only way their presence affects the Swiss economy is via the account keeping fees they generate. Those fees could be “substantial” but somehow I don’t think that’s what you meant ?

    If however you are referring to the Swiss trading surplus then that’s another thing.

    In the sectoral balances that underpin the Swiss national accounts you’ll find that the government balance (G – T) is in surplus also. This means that the private sector balance (I – S) has to be negative, which it is, because of the high level of private saving.

    That just means that Peter’s bath-tub analogy is correct.

54. John ArmourFebruary 18, 2014 at 7:35 pm

    From your earlier comment, rev c.

    And as explained above, the UK has defaulted on its debt previous

    And as Peter also explained, that can only happen when a country is running under a gold standard, or borrowing in a foreign currency. Didn’t you understand what he said ? You could so easily Google this.

    There’s another remote possibility, where a political party arbitrarily threatens to force default in childish brinkmanship games, but that’s a political issue, not financial.

    In Australia, a nation with a sovereign currency has 60+% of its government bonds on issue held by non-resident entities, which means, when a government pays its debts it doesn’t repay its people, it pays whoever purchased the debt.

    Your belief that foreign bondholders somehow take money out of the country and reduce the capacity of the government to undertake works for the public benefit is also deeply flawed because Australian dollars never leave our shores. Same for US dollars and UK Pounds. That $52B you quoted is still floating around inside the UK’s sovereign borders.

    Overseas bondholders just finish up with $A assets in the Australian banking system which they can spend or reinvest here but not repatriate.

    They can convert them into another currency but the new owners of the dollars face the same choices as the original bondholders. The money stays right here.

55. Dan RowdenFebruary 19, 2014 at 4:53 pm

    Definition of Conspiracy:

    Two economists in the same room agreeing on something.

56. John ArmourFebruary 21, 2014 at 8:59 am

    Two economists in the same room agreeing on something.

    The irony Dan is that there are literally thousands of them who believe, as an article of faith, in an economic paradigm that is deeply flawed.

    They might quibble over the direction or size of interest rate movements, but on the really important stuff, the overwhelming majority are rock-solid, and wrong.