So, inflation has gone down further to 1.3% for the year to September 2016 from 1.7% in the first quarter of 2016. This is against the RBA’s target rate of 2-3% and all the economic boffins are turning their eyes toward the Reserve Bank guessing as to whether Governor Philip Lowe will reduce interest rates further to 1.25% on Cup Day.
Why do they bother? None of the past half dozen or so rate reductions have stimulated spending. Neither will another rate cut. RBA governor, Philip Lowe has already suggested that reducing rates has run its course and some form of fiscal stimulus is necessary.
What rate reductions have done is inflate housing prices. That is not what they were intended to do. So, now we have the usual suspects (the wealthy) being the beneficiaries of a housing boom while those who most need to buy a house lose out, or place themselves at financial risk by borrowing beyond their capacity to repay.
So, why is inflation so low? The short answer is people are not spending enough to generate increased sales growth that will convince businesses to invest and thus stimulate employment. Sales are the lifeblood of an economy. The 3% GDP growth experienced over the past year has come, not from increased sales, but on the back of government spending.
So who is responsible for scaring people enough to stop them spending? Firstly, it was Joe Hockey and Tony Abbott. Now it is Scott Morrison and Malcolm Turnbull.
People will not spend when they are convinced, as they have been by this government, that the economy is tanking, that we must live within our means, that we have a spending problem, that we must reduce the debt or go broke. That false debt-scare has frightened everyone to such a degree that they have resorted to paying down debt and/or saving.
But here’s the thing about our national debt. We know the government recovers an equivalent amount of currency in circulation (a pre-existing government liability) in exchange for the issuance of Commonwealth Government Securities, i.e. security ‘paper’ – but the transaction is recorded on national fiscal balance sheets as an increase in government liabilities.
When that same transaction is recorded on the private investor’s balance sheet with the RBA, the purchase of that ‘security’ is recorded as:
1) A reduction in available ‘Current assets’ equal to the amount of money withdrawn to pay the purchase cost of the purchased bonds;
2) An increased in the value of long term ‘Investments’ held – of an equal amount to the reduction recorded in ‘current assets’.
In other words, the transaction, at the time of purchase, represents a transfer of money from a readily convertible ‘liquid’ form (cash) to an (interest earning) not so readily convertible investment form (security contract).
At that instant in time, there has been no increase in the net wealth of the investor, though ‘interest’ dividends will be received per agreed investment terms. The interest paid on the bonds is a Reserve Bank transaction, not a fiscal one. That interest should not be a budgetary consideration.
This is what we call our national debt. Yet this government won office in 2013 on the back of a giant scare tactic, saying that our economy was going down the toilet; that we had to balance the budget and pay down debt. In fact they are still doing it.
So now, through their own ignorance, they are reaping what they have sown. They have frightened the community so well that any growth recorded is the product of the very thing they are trying to reduce….their own spending. In soccer parlance, I think that’s called an ‘own goal’.
If you doubt that our national debt is a myth, that all government spending is new money, that taxes withdraw money from circulation AFTER it has been spent into existence by the government, consider the contradiction of the fiscal balance sheet liability when juxtaposed upon the RBA transactions that simply swap one account across to another and credit interest as agreed.
When one views the transaction this way, it is easier to see how our national debt (so-called) is a myth; one can see that bond sales do not fund government spending. The money received in exchange for the bonds remains in an account at the RBA on behalf of the investor.
The commercial accounting condition that every asset has a corresponding liability is not being applied to federal government accounts. One can see that the entry of the bond sale revenue onto the fiscal balance sheet as a liability only, is false accounting.
This has been written in collaboration with John Bloomfield.
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