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A Healthy Australian Economy

By Peter Martin

A High Dollar, a Healthy Economy, Low Deficits: Pick Any Two from Three!

We all might like to have: 1) A high Australian dollar 2) Close to full employment with a healthy growing economy 3) Low government and trade deficits or even surpluses. A high dollar helps us afford to buy that Korean made TV or Chinese smart phone or to go on a foreign holiday which is often much cheaper than an Australian holiday. We all would like the economy to be in good shape so that we or our family members can find well paid employment. We’d probably like low government and trade deficits (more correctly the current account deficit in the balance of payments) too. We’re told often enough how we shouldn’t be living beyond our means. So this must be a good thing. Or must it? Are all three even possible simultaneously?

If we have to choose just two which one should we leave out? There is no simple answer but if we better understand the way our economy works we will at least know what the options are from all political perspectives. Including the second option, of a healthy economy, should be a “no-brainer” for politicians across the entire political spectrum. Businesses need a buoyant economy to make profits just as workers need a buoyant economy to find decent and well paid jobs. But is it? The recent news is that Australian unemployment has just risen to 6%. Some economists clearly don’t think the Government knows what it is doing with its attention focused solely on the budget deficit. The quest for a balanced government budget seems as distant a goal as ever, but the connection to that other largely forgotten deficit, in trade, is rarely made. Previous generations did not share our relaxed attitude to the imbalances we see in international trade. The monthly trade figures were a regular and prominent feature of our business news, at one time, but we have to look much harder to find those same figures now.

They well understood, what we seem to have forgotten, that if any particular country, as a whole, has a net deficit trading position with the rest of the world then either the government of that country, or the inhabitants of that country, has to fund that deficit by borrowing. In other words, the internal deficits run by governments, and the extent of the private sector debts which can accumulate in the economy, are directly related to the external deficits caused by a trade imbalance. We can see that countries such as Germany, Switzerland, and Singapore which run large trading surpluses do not have any of the public or private sector debt problems which we see in the UK or USA which run large trading deficits. Unfortunately, though, the solution to world debt problems cannot be for everyone to run a trading surplus! If we do wish to ensure the third option, of low deficits, is included in our choice we need to understand that both government and trade deficits have to be kept low.

Transferring the burden of debt, as seems to be the wish of ALP neoliberal economists too, necessary to sustain the current Australian trading imbalance, from government to the private sector is going to do less than nothing to solve the economic problems of the country. If government wishes to reduce its deficit, without crashing the economy by imposing an unrealistic debt burden on everyone else, and at the same time creating unsustainable asset price bubbles, it has to acknowledge that this can only be done by reducing the trade deficit. It has to start to tackle the problem from both ends by nudging down the value of the dollar a little more. Including the low deficit option means we have to then choose between having a high dollar and a healthy economy. We can see for ourselves what happens when a country like Greece is stuck with a currency which is too high to suit its economic capabilities and yet it is forced to attempt to balance its books. The economy crashes! We have seen the dollar fall recently but has it fallen enough? Or, we can choose a high dollar, a healthy economy and have a more relaxed attitude to the twin deficits.

There are many economists, who I personally would agree with, who present a good case for selling as much debt (government bonds) as is possible and recycling the proceeds back into the economy with increased deficit spending. Some debt can also be sold to the central bank (RBA) in what has come to be known as People’s Quantitative Easing. Providing inflation is kept under reasonable control there should be little or no problem. We can also have a more relaxed attitude to the build up of private debt (if we know what we are doing!), but we should appreciate the difference between the two types.

Government debt, unless it is in some foreign currency, doesn’t have to be repaid in the same way as private sector debt. The accumulation of too much private debt can lead to economic busts to follow the initial boom created by the increase in bank lending. The former Liberal Treasurer Peter Costello likes to boast of his economic prowess by having ‘delivered’ a budget surplus in the pre GFC period. Simply created by allowing too much private sector borrowing, unfortunately! Many economists, such as Steve Keen, point out that the mainstream of the economics profession seems quite oblivious to the problems of stop-start bank lending. The acceleration produces the boom. The sudden deceleration, when we later have the inevitable ‘credit crunch’ produces the slump. We know from our own experience that Steve is absolutely right about this, so why can’t the mainstream change their models to reflect reality?

Most of this posting, so far, is entirely apolitical in nature. The same economic constraints apply whatever the political complexion of the society or economy involved. It is natural we might have different ideas and opinions over the ideal size of government. It is fair enough to argue for a more socialist approach to the distribution of available wealth and income or a more conservative approach. What is not fair enough, though, is for the political right or neoliberals (who are unfortunately not confined to the Australian Liberal and National Parties) to wreck public services and our economy, for some nefarious purpose, or in some misguided attempt to reduce the government’s deficit, by cutting government spending and raising taxation without taking into account everything else that changes when they do that. All they’ll do is crash the economy!

Judging by the economic storm that is brewing, the powers-that-be haven’t learned from past mistakes and it looks very likely we are seeing the start of yet another very severe financial crisis. Thanks to the boom in the Chinese economy, Australia was very fortunate to escape relatively lightly after the 2008 GFC. Will our luck hold out for the next time?

Peter Martin blogs on his own site; Modern Monetary Theory: Real Economics



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  1. Jennifer Meyer-Smith

    “A High Dollar, a Healthy Economy, Low Deficits: Pick Any Two from Three!”

    I choose a healthy economy and as I must choose a second, I choose … um, um… I think it is low deficits???

    As I am being influenced by MMT, I would have thought a high dollar doesn’t matter as our currency is sovereign and we can make our own money so comparisons with other currencies don’t matter (so much) …

    Low deficits should not matter either coz the idea is to keep a robust economy chugging along with full employment thus equitable access to reward for participation and ensuing revenue growth and money becomes available for public programs.

  2. charybds

    I would chose the high dollar and healthy economy, .. we like our toys and holidays.
    Deficits? .. frequently just a scary word for the neolibs to frighten us with.
    The first two properly managed should take care of the other ..
    … surely having a “healthy economy” is the clue .. (healthy).

  3. Jexpat


    The high dollar bit may have been an oblique reference to what’s more generally known as limits on seignorage.

    Cutting to the chase, it means that, no matter what sleight of hand might be used, there are limits to a currency’s value (or upper range of value).

    Depreciation, especially relative to other cther currencies in the 21st Century- but also domestically, will occur at some point when we “print money” without backing it up with corresponding revenues, or expectations of them or without substantial enough fiscal multipliers from investments (which can be in people: “human capital” or infrastructure: “physical capital” or scoietal benefits for all: “social capital”).

    Fancy words for: there’s no free lunch. Not for animals, not in our broader ecology- nor for economics. We all live and prosper or die off by the same sets of principles.

  4. Jennifer Meyer-Smith

    Thanks Jexpat,

    for having a go at enlightening me. Would you please give me direction on your two choices and then I might want to follow your example. I know it sounds simple minded but sometimes that’s how intelligent people learn too.

  5. Jexpat


    There are more than two choices.

    The nub of the matter boils down to why we have taxes in the first place.

    And since we do, how might we rationally, equitably, and with an eye toward future gains for our nation put the revenue to work in a manner consistent with our values?

  6. Mercurial

    No, no, no! ScoMo explains it in much simpler terms: if the government can just stop spending money on the riff raff, then the rich will save enough money to be able to afford all those delightful imported goods. There – trade imbalanced fixed!!

    Isn’t that how it works? Don’t you trust ScoMo?

  7. totaram

    Petermartin: “Thanks to the boom in the Chinese economy, Australia was very fortunate to escape relatively lightly after the 2008 GFC.”

    I didn’t expect this nonsense from you. Are you suggesting that the Keynesian stimulus of the Rudd govt. had nothing to do with it? I am no supporter of Kevin Rudd or anyone else, but you are strengthening the Coalition argument that the entire stimulus spending was a “waste”, and completely unnecessary, and all it did was put us back into debt after the wonderful Costello years. Seriously!

  8. petermartin2001


    Of course Rudd’s Keynesian stimulus was useful. But it was a panic measure. He must have been sh*t scared at the time to do that! Handing out checks and paying dodgy insulation installers wasn’t exactly the best use of money and the available resources at the time in any case.

    Of course, Australia could have managed perfectly well without the Chinese boom had the right policies been consistently followed. The question, though, is would the Rudd or Gillard govt have held their nerve and not drifted back into neoliberalism?

    I doubt it. It would have been just the same. They’d have been back on their “we can have a bigger surplus than you” track once the scare was over.

  9. nurses1968

    People seem to have short memories in just how Kevin Rudd saved us
    “Most countries would envy Australia’s economy. During the global recession, Kevin Rudd’s government implemented one of the strongest Keynesian stimulus packages in the world. That package was delivered early, with cash grants that could be spent quickly followed by longer-term investments that buoyed confidence and activity over time. In many other countries, stimulus was too small and arrived too late, after jobs and confidence were already lost.
    In Australia the stimulus helped avoid a recession and saved up to 200,000 jobs. And new research shows that stimulus may have also actually reduced government debt over time.”
    September 2, 2013
    “Joseph Stiglitz is a professor of economics at Columbia University and a recipient of the Nobel Prize in economics.

  10. petermartin2001

    @nurses1968 @totaram Although I’d always have to vote for someone like Kevin Rudd if the alternative was even worse, we shouldn’t for one moment get too carried away with his Rudd’s economic understanding. Bill Mitchell gave him quite poor marks in 2009 for example.

    Our PM’s second essay – 1/10 (being generous)

  11. totaram

    “Of course Rudd’s Keynesian stimulus was useful. But it was a panic measure. He must have been sh*t scared at the time to do that! Handing out checks and paying dodgy insulations installers wasn’t exactly the best use of money and the available resources at the time in any case.”

    Really? What would you have done? It doesn’t matter if he was shit scared or not. It doesn’t matter if it was a panic measure. We are not discussing personalities. We are discussing whether the measures helped to avoid a recession. They may not be the best measures according to you or anyone else, but they were as recommended by treasury at the time and of course Rudd knew no better.
    The point is that the coalition said it was all a waste and by talking of “dodgy insulation installers”, you’re simply reinforcing the coalition narrative. The insulation installers were not personally chosen by Rudd or anyone else in the federal govt. They were actually under the regulations of Queensland state govt, which had been watered down to reduce “red-tape”.

    I don’t care if Bill Mitchell has given him poor marks. The point is that he did better than what the coalition wanted, and you need to recognise that, or we will be reinforcing the nonsense about how “Keynesian stimulus always fails” etc.

    If the stimulus was useful, you should say so instead of glossing over the issue and putting it all down to China’s booming economy. That again buys into the neo-liberal narrative of how the stimulus was unnecessary and a “waste”.

  12. petermartin2001

    @ totaram,

    If you’re asking what I would have done it would have started with a temporary reduction in GST, a temporary extra subsidy on all public transport and possibly a temporary income tax reduction too. That can be done quickly and would encourage extra private spending until some more sensible govt spending could be implemented and which always takes some time. The cheque idea wasn’t too bad but that should have been left until later. There’s always going to be a big problem when government makes it clear it wants to spend money in hurry on projects like insulation schemes or school renovations, or whatever. It simply gets ripped off by the cowboys, it costs untrained workers their lives and the whole concept of stimulus spending is brought into disrepute.

    Of course I’ve no problem, per se, with government spending on insulation schemes and school renovations. But it has to get it right and it has to be sensible and consistent spending over a longer time period.

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