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Is there really such a thing as national debt?

In a recent article by Warwick Smith in The Guardian, a group of economists refuted three of the government’s claims, namely that there was a budget emergency, that there was a debt crisis and that the carbon tax was an economic wrecking ball.

Knowing how difficult it is to get economists to agree on anything, this seemed like quite a coup and reading it only served to remind me of some of the government’s ‘over the top’, exaggerated and often inaccurate outbursts from various ministers in their feverish attempts to scare us into thinking we have a problem with the economy.

Leaving the matter of the carbon tax to another time, the issue of debt and deficit is quite another matter and should be pursued vigorously.

If there is one way to prove or disprove the existence of a national debt, it is to ask the question: to whom is the debt owed? Government debt (so-called) occurs when the government places a tender on the open market. This is done through The Australian Office of Financial Management. They are the ones who place tenders for the sale of Treasury Bonds.

The most recent tender was for $1.5 billion on 18th July 2014 (Tender 705) at 2.75%. This tender attracted 92 bidders who sought to invest a total of $3.881 billion. The tender, therefore, was oversubscribed and in the end, 39 bidders were successful, 27 of whom received their requested allocation and 12 received a partial allocation. So, bad luck for the 53 bidders who missed out.

marketThe thing is, these bidders were actually competing to buy these bonds. No one was twisting their arm to provide the money. They were, in fact, competing to invest in Australia’s future. That doesn’t sound like the government incurring a debt to me. It sounds much more like people or companies investing in shares on the stock market. I did something similar many years ago when Telstra was put up for sale. The same thing happened then. The offer was oversubscribed and I didn’t get as much as I asked for.

But, just like the stock market, the buyers of these bonds can sell them, if they wish, on the bond market. So, if any of those 53 bidders who missed out on the initial offer, or anyone else, wanted to get in on Tender 705, they still could. So that suggested to me that the government didn’t have to repay that bond, it could simply be traded for the life of the country on the bond market. Except that it does have a use-by date and in the case of Tender 705, that date is 21st October 2019.

But back to the issue at hand.

So, in this case, the government has just raised $1.5 billion repayable on 21st October 2019. The question to be asked here is: what did the government want to do with this money? It looks very similar to a company wanting to raise capital for an acquisition program by announcing a new share issue.

aofmWhen I put this question to the nice man I spoke with at The Australian Office of Financial Management (AOFM), he said the money goes into consolidated revenue to cover periodic shortfalls in the difference between revenues and outgoings. All of which sounds similar to me borrowing twenty dollars from my brother to buy petrol while waiting for next week’s pension deposit to arrive in my bank account. His answer was what I expected but it was the wrong answer. The bonds are issued to soak up the overflow of cash in the banking system, but he was not going to admit that. It is possible he did not know that.

Every six months the AOFM then issues coupons to the investors (mostly banks), to the value of the interest rate promised. Then, in 2019, the government will repay the principal together with the value of the interest for the final six months.

At the end of each financial year, the treasury accountants add the tax revenues received plus borrowings derived from the bond sales and treasury note issues and that amount should equal the total expenditure for the year. All of which means the books are balanced.

That still leaves unresolved the matter of the money borrowed and the interest payable on these bonds. That is essentially what we call the Deficit. It has to be repaid, doesn’t it? Where does that come from? My friend at the AOFM told me that interest and principal is paid out of general revenue. He pointed out that of the 2014 budget expenditure of $401 billion, $14 billion represented interest payments. Another wrong answer. The interest payment is created out of thin air (ex nihilo).

So then I put the question to him: why not just create the money out of thin air (ex nihilo) to pay both the interest and the money borrowed? He was aghast. Not a good idea, he said. That causes inflation, he said. I suggested that the inflationary element could be controlled by limiting the amount of money in circulation through taxation. Yes, he said, that’s possible. I further suggested that by creating the money we would effectively reduce the value of our dollar on world markets. Isn’t that what we all want for our export industries and local manufacturers?

At this point my friend suggested I call the Treasurer; he said that what I was proposing was a policy matter for government not one for the AOFM to answer. Very true. But his answer betrayed an undeniable truth. It revealed all too clearly that debt can be extinguished out of thin air if a government wanted it so, and that such a policy could be beneficial to Australian export business and local manufacturing.

That then raises the houseobvious question: why does a government that can create money ex nihilo (from thin air), feel that it needs to borrow?

This, to me, makes a mockery of Joe Hockey and every other government minister’s claims of a debt crisis, and pretty much everything else they say. The government wants us to think, as I once did, that running a nation’s economy is the same as running household debt.

It isn’t and all it takes to explain this is the will to do it.



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  1. bighead1883

    Thanks John Kelly and I was screaming exactly the same thing back in October 2008 on the ABC`s the Drum.
    I discussed with Alan Kohler the very same topic and had many a talk with Satyajit Das who all answered the same,government policy but nothing about pressuring the government to do it.
    Wall Street say`s NO

  2. billy moir

    the rabbott is wrong even at his household level. I wrote to the abc show chaser before the 2010 pointing out the rabbott had a mortgage of $300000 on his north shore house and a gdp of $150000 that was a debt of 200% ten times labor’s debt. The team confronted him with the facts and he gaves his pathetic hahaha. Labor missed the boat then and now with the rabbott borrowing billions and increasing the debt with no consequence because labor’s silence gives taxit approval to blame gillard and still using the analogy they are missing it again. Why? If it works for the rabbott why not little billy????

  3. ian

    They’re forgetting one important thing: government can print money, households can’t.

  4. sam

    “Not a good idea, he said. That causes inflation, he said. I suggested that the inflationary element could be controlled by limiting the amount of money in circulation through taxation.”

    Almost funny isnt it.

    Would have been handy to have a laptop + spreadsheet + a few data seta of NAIRU predicted inflation to show how the methods for predicting ‘inflation’ are rubbish.
    Neo-liberal economists might as well use white noise to predict inflation thats about the understanding they have of this.

    The dreaded NAIRU is still about!

    Its a joke you can follow everywhere in the world. Look at IMF, ECB’s infaltion predictions. F**king joke. One might say they have no idea 😉 *Using their models japan should be hyperinflating by now.

    John you probably already saw Steve Keens videos on this:

    *which nations actually run external sector surplus: norway, lybia, UAE, saudi arabia, finland, algeria.

  5. Rob031

    Economic and money matters can be tricky.

    Three people go to a restaurant and incur a $30 bill between them. The head waiter takes the $30 to the person in charge who says that they have been overcharged by $5. The waiter thinks: “They don’t know by how much” and goes back to the customers and gives each a refund of one dollar while pocketing the other two dollars.

    The three customers wound up only paying $27 between them. The waiter has $2 in his pocket. That adds up to a total of $29 out of the $30 that was initially paid.

    The question is this: “where did the extra dollar go?”

  6. donwreford

    Adding to the debt would be the acquisition of fighter jets, from America, they do not work as yet, Abbott, our Saviour.

  7. silkworm

    Rob031, that is an old puzzle. The answer is: you do not add the $2 to the $27 they paid. You subtract the $2 from the $27, to give $25, which is what they owed.

  8. darrel nay

    Thanks John,

    The disciples of every economic theory claim that their model is the ‘greatest’. The success of any economic strategy is built on the confidence of the market players. I respectfully suggest that if Modern Monetary Theory is to be implemented then it will only work when it has overwhelming market support – if it were used in the near future, the markets would react viciously and the economy, and Australians in general, will suffer. Most Australians don’t want more taxes – leave individuals to decide how to allocate their cash.


  9. sam

    Dear darrel

    It would be the exact opposite to what you suggested.

    A lot of the mechanics of MMT are simply observations of how the market (fiat money system) really works.

    *tax revenue != spending (RBA/treasury knows this).
    *obsolete mechanics like money multiplier dont exist (bank of england put this to rest).
    *attempts to say there is some natural form of unemployment eg: NAIRU are so stupidly mathematically incoherent that if you showed it to an engineer they would break out in laughter as its no differnt to white noise.
    *Government bond markets are as strong as ever. (obviously the stock market knows government will always ‘follow through’ on their bonds there is no doubt that a government can always ‘pay’).
    *If anything the last 5+ years have repeatedly proven that this is not a ‘government debt’ crisis. Its a crisis in the private sector. Nobody has confidence to spend/consume/invest and the riccardian agent concept suggesting that people would literally ‘jump for joy and spend’ when they see government getting smaller and anticipate less future taxes is bulls**t. The opposite happened/repeatedly happens. It reduces confidence and increases prices because whatwas once a ‘service’ is not a ‘for profit business’ in the hands of the private sector.
    *look at stuff like DSGE modelling. Nobody in even the finance industry uses it because it doesnt work. Neo-liberal economics has produced incorrect predictions one after the other and did not even forsee the GFC because most of the models ignore things like banking system, money, debt and convergence.

    If some MMT concepts were implemented even in a bad way it would turn around a lot of things that have been rotten in the economy for decades. It would quite literally be the opposite of what you suggested because you would have a system that can handle shocks and all the dynamics that happen in a real economic reality. Or would we rather an economy of massive inequality, instability and artificial restraints placed as a top priority over all real world constraints.

    Or are we supposed to have cyclic crashes as bad as the great depression? Neo-liberals would be happy to model ‘Equilibrium’
    of a car as it crashes into a wall at hight speed and tell you nothing useful about it.

    With neo-liberalism: markets ARE reactING viciously NOW and the REAL economy IS IN TROUBLE, and Australians in general, ARE SUFFERING.

  10. kerrilmail

    Excellent article John. I came to the same conclusion a week or so ago after reading your articles explaining the economy. Having witnessed the extraordinary devaluation of the Zimbabwean Dollar many years ago I too thought the concept of printing more money to be a ridiculous path. But havingseen my husbands business “fail to thrive” due to the Australian dollars decline, I was equally fearful of the money making notion. But as you say and I quietly thought to myself, if our dollar is too high? If our debt is too high? If we could wind up (almost certainly under this lot) in a recession? Then why not print more money??? Am I being too simplistic? Is there some pivotal financial pont that this suburban housewife is missing??

  11. Abe

    I’m guessing the if investors are rational they will only fall for this trick once, so you’d best have a plan that ensures you don’t need to borrow ever again. And what happens to the real economy (that’s running a current account deficit) while all this hyperinflation and currency debauchery is going on?

  12. bighead1883

    Rob031July 25, 2014 at 5:54 pm
    We were taught a similar mathematical trick by our primary school teacher in the early 60`s.
    You count your fingers [both hands] from 1-10.
    You then count them backward [on one hand] from 10-6
    You then count forward again [same hand] 6-11
    You are now Eleventy Joe and our Nations Treasurer.

  13. John Kelly

    Kerrilmail, no you haven’t missed anything. The USA has been engaged in Quantitative Easing for the past 6 years. There is very little difference between QE and printing money. Their dollar has devalued gradually in the process to their benefit. If we were to gradually extinguish a paltry $300 billion over the next five years the value of our dollar would fall to around 80-85 US cents, which is precisely where we want it to be. Zimbabwe is a completely different story. They had no assets to back what they did. We do. The important thing for a suburban housewife to remember is that you can’t print money but a sovereign nation can.

  14. Pingback: Is there really such a thing as national debt? | THE VIEW FROM MY GARDEN

  15. John Kelly

    @bighead1883, Great artwork too. Recommended on Facebook.

  16. totaram

    @Sam: Can you please reply to Abe? I was starting to do so but encountered a severe pain in the brain. Just old age. I do apologise.

  17. Möbius Ecko

    It takes an interview by the Kiwis for Hockey to come clean, so why isn’t our media all over this revelation and the fact Hockey has disclosed he’s blatantly lied until now.

  18. John Armour

    Can you please reply to Abe?

    I thought about it, but it’s hard to make this stuff that simple.

  19. Carol Taylor

    Gosh Mobius, don’t tell me that Joe has been telling porkies..again. I should imagine that NZ being a land far far away that Hockey believes that our msm won’t bother reporting on this small revelation..

  20. abefrellmanAbe

    I’m okay with the complication version, John. Please enlighten me.

  21. Möbius Ecko

    Methinks it’s more selfish than that. His budget went over like a lead balloon when he probably thought he would be hailed the greatest Treasurer, and images of him puffing cigars along with stories of him dancing in his office after dumping on the less well off and giving to the rich trashed his image, after all he has a massive ego. His book in a lame attempt tried to make him out to be benevolent as he actually wanted to be harsher but wasn’t, and it also went over like lead balloon. Abbott come out looking better as he supposedly tempered Hockey.

    Then we have the recent speculation of his leadership aspirations, also harshly rebuked by Abbott’s masters, the ones Hockey is doing everything for.

    So for me he’s setting up to save his skin.

    The other theory could be he’s setting up to backtrack a lot on this budget and then take a much slower path to implementing the ideological measures he wants, which has been mentioned by some right wing media commentators as the way he should have gone.

  22. sam


    Ill try and make this brief i dont think it needs answering as most of it deosnt make sense or is already answered:

    Firstly look at IMF’s predicted inflation for quantative easing in Europe. It was wrong. Didnt happen.
    Secondly step back to Australia 2008 when we were told a meager stimulus would cause an acceleration in inflation. It didnt happen.
    Regress to Japan over the last 20 years. Inflation didnt happen.
    *by conventional economic models japan should have been hyperinflating for years. Looks like putting money into pension funds is not inflationary.

    Could it be that inflation is not understood very well?
    All these models used to predict inflation are wrong.
    *demand > capacity (eg: supply shocks like OPEC crisis)

    Now juxtapose this to MMT approach which uses a ‘job guarantee’ as an automatic stabiliser. Jobs are created simultaneously to money issued. The extra money circulated is not inflationary ‘capacity’ is raised simultaneously.

    Say this goes on for X years:
    Assume a situation where full employment style economy approaches capacity (an asymptote to a maximum capacity). That is why you have a taxation system or issue bonds to take excess money out of a system.

    Modern monetary theory and inflation – Part 1

    As for investors being rational/irrational.
    Firstly neo-liberal economics has a terrible time getting this right in the first place.You’d be surprised who doesnt use it 😉

    And secondly what is a ‘trick’? Was it a ‘trick’ when the sub prime ponzi scheme folded and the banks for all intents and purposed failed even though they were ‘bailed out’. *looking at share price they certainly failed for investors. So the whole statement doesnt even make sense.

    There is a difference in investing between calculated risk and falling for a blatant lie as the scope of the disaster showed.

    Where was ‘rational behaviour’ in those models for such a structural shock? It wasnt there. These models fail to model uncertainty, money, banks, debt and certainly not even in the same room for rationality.

    As i said its the exact opposite. Who wants a system that cyclically deleverages in the private sector and increases private sector debt at the end of it? Nobody especially not investors. First and foremost the wont have capital to reinvest (every day this is continually proved look at eurozone!) and their previous investments were duds.

    If you want insight into what goes on in a DSGE:

  23. Abe

    Looks like those bonds will have matured before I get my explanation, complicated or not.

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