This week, Moody’s ratings agency warned that Australia’s AAA credit rating was at risk. The report said without measures to raise revenue “limited spending cuts are unlikely to meaningfully advance the government’s aim of balanced finances by the fiscal year ending June 2021”.
It went on to say, “Although Australia had a favourable budget position relative to other countries with AAA credit ratings, Moody’s noted Australia’s government debt had risen to 35.1% of GDP in 2015 from 11.6% of GDP 10 years earlier.”
“We expect government debt to increase further to around 38% of GDP in 2018,” it said. “Climbing government debt is “a credit negative for Australia”, raising the prospect of a credit downgrade in future.”
What a load of tosh!
Moody’s, you might remember was one of the agencies that admitted to the US Congress (at the height of the GFC) that they took money from firms in return for their AAA corporate rating. In other words, their lack of due diligence helped fuel the GFC.
So how much value should we put on a Credit rating agency’s assessment of a currency issuing government? The short answer is, zero.
Moody’s defines a rating as “an independent opinion on the future ability and legal obligation of an issuer of debt to make timely payments of principal and interest on a specific fixed-income security”.
In doing so, they are suggesting that a sovereign currency issuing government could default on payments that are due in the very currency which itself produces. Is it so hard to see how illogical that is?
The risk of default on Australian sovereign debt is zero, given that the $A is issued by the Australian government in unlimited quantities, if it chooses.
As explained by Professor Bill Mitchell, “Once we understand how a sovereign government operates with respect to the monetary system this point become obvious.
First, when a particular government bond matures (that is, becomes due for repayment) the Australian Government simply credits the bank account of the holder with the principle and interest and cancels the accounting record of that debt instrument. Simple as that. The banking reserves would rise by that amount and the wealth of the private investor would change in mix from bond to bank deposit.
One account number rises and another falls by the same amount!
Second, the fiscal deficits run by the Australian government just work in the same way – adding reserves on a daily basis to the banking system (as people spend the $As and deposit them back into bank accounts etc).
The bond issues are designed to give the private sector an interest-bearing financial asset to replace the non-interest earning bank reserves.
Professor Mitchell says, “Australian economy is in decline at present as the most recent Labour market data shows. The mining boom is well and truly over and non-mining investment is falling.
Households are carrying record-levels of personal debt and labour underutilisation is around 15 per cent (the combination of elevated levels of unemployment and underemployment and depressed participation rates).
So when the Treasurer (Scott ‘ScoMo’ Morrison) claims we have to impose fiscal austerity to help the economy you know one thing for sure – he hasn’t a clue about macroeconomics.”
And neither do the ratings agencies. So, when you hear them threaten that unless a sovereign currency issuing nation cuts back on net spending (deficits), they might have to downgrade their rating, you can be sure that they, like Scott Morrison, have no idea what they are talking about
THE 10 HIGHEST TAXING AUSTRALIAN GOVERNMENTS
2004-05 24.3% Liberal
2000-01 24.2% Liberal
2005-06 24.2% Liberal
2002-03 24.0% Liberal
2003-04 24.0% Liberal
2006-07 23.7% Liberal
2007-08 23.7% Liberal
1986-87 23.3% Labor
1987-88 23.2% Labor
2001-02 23.2% Liberal
[Stephen Koukolas, 16 April 2016]
THE 10 LOWEST TAXING AUSTRALIAN GOVERNMENTS
1992-93 20.0% Labor
1993-94 20.0% Labor
2010-11 20.0% Labor
2009-10 20.2% Labor
1991-92 20.7% Labor
2011-12 20.9% Labor
1983-84 21.0% Labor
1994-95 21.2% Labor
2012-13 21.5% Labor
2013-14 21.5% Labor
And the source for these numbers are the MYEFO released by Treasurer Morrison and Finance Minister Cormann in December 2015: http://www.budget.gov.au/2015-16/content/myefo/html/index.htm [Stephen Koukolas, 16 April 2016]
At the risk of appearing cold, sceptical, and potentially a conspiracy theorist, may I comment upon the possible (?) correlation between the pending budget and Moody’s ” Findings ” … is it just possible that the Budget could be already pitched at what Moody’s for Hire is revealing on cue?
The old ‘egg’ & ‘chicken’ in play ?? …. murky marketing front and centre !! ….. market / establish the “need” (quoting the Authority) and then ….. ta – da – Solution !! … Sco-Mo the Magician centre stage, smoke > Top Hat & Cloak . ( Mandrake groans – turns in grave ) !!…;-) …..
Douglas
as they say ‘follow the money’ and I think you just maybe be right.
The sad fact is that so few people really want to know yet Bill Mitchell’s approach to economics could provide the greatest positive change agent to your lives.
how can the man live with himself?
last week asic is better equipped than any royal commission
this week he says asic will be better off when the banks give them up to $100 million more operational funds than the cost of a royal commission
this action will save money because the banks will not charge the user anything??? Why can’t labor make him the joke he is?????
sorry for being dumb but if the coalition inherited a shithouse debt ridden economy how were they able to double the debt? who lent the cash?
John Kelly: I’m glad you brought this up, because elsewhere people are pointing out what Moody’s has said. Oh dear!
You could also point out how ridiculous these “ratings” are. A simple example from the last few years is the following:
Govt. debt at 10.6% of GDP in 2006. Interest rates were:________( guess?)
Govt debt in 2015 at 35.1% of GDP and rising: interest rates are:_________(guess)
I invite people to fill in the blanks, because these agencies claim that when their ratings go down, the interest rates go up, and rising govt debt is always a reason for ratings to go down and interest rates to go up. But as you can see, this does not happen. You can understand why this is so by reading the link below.
I also invite everyone to to check out how the ratings agencies and the neo-liberal economists who sing from the same song-book have been saying that the Japanese govt. debt will result in a collapse of their economy, for the last two decades or so. That hasn’t happened either. But , in the face of all this evidence, there are still people who go by the “ratings” for a sovereign govt. that issues its own fiat currency that is freely convertible.
A summary here :
http://bilbo.economicoutlook.net/blog/?p=33365
and lots more if you are interested.
wam: “sorry for being dumb but if the coalition inherited a shithouse debt ridden economy how were they able to double the debt? who lent the cash?”
A very good question, and you are not dumb!
First up, all corporations borrow to invest. Are they all shithouse debt-ridden? In fact, ask anyone who knows accounting and they will tell you that a corporation that does not have debt on its balance-sheet is “running a lazy balance sheet”. So having debt is not a crime as they would have you believe. Just ask them: when was the last time that BHP Billiton paid off all its debt?
Second point: Please find out how govt. “borrows” to spend. It “sells” treasury bonds. Now ask yourself, what are these bonds secured against? I leave it to you to figure that out. However, as you may have noticed, all this talk of “debt and deficit” disaster has ceased. Why?
Because they can sell these bonds without limit (more or less depending on the stability of the govt etc.). Japanese govt . debt is around 200% of GDP and the sky has not fallen in.
What is the lesson to be learned? All this talk of “we cannot afford this” is just bulldust. The truth is much more complex than that, but they would rather you didn’t know.
“And neither do the ratings agencies. So, when you hear them threaten that unless a sovereign currency issuing nation cuts back on net spending (deficits), they might have to downgrade their rating, you can be sure that they, like Scott Morrison, have no idea what they are talking about.”
I have begun to suspect that they know. The evidence is there for everyone to see. They just hope to carry on as usual and suck in the gullible blokes who haven’t been paying enough attention. After all, there is a lot of money to be made from all this. These people are part of the financial services industry and are paid shit-loads of money to produce this garbage. And don’t tell me I don’t know what I’m talking about: my son was an investment banker for some years.
many thanks totaram – i tried to get to gillard/swan to point out that the rabbott had a $600000 debt and an income of 150k that was 400% debt and ask if our debt was disastrous at 35% what was his debt????? but was laughed at for being off track and too personal despite the fact that he was touting the debt situation was like household debt in billions and was constantly full of overthetop personal attacks???
the info in asic is not easy but so far it is like shares and we bought a few hundred shares, forgot to sell them in the poseidon boom and lost (how about anchorage and dick smith?)at least with bonds the money is safe unless the country goes???
John, thank you for mentioning two things which barely rate a phasing phrase in the msm – record household debt and a huge underutilisation of the workforce. Neither of which seem to be any sort of combination which puts us in good stead to be a ‘transitional’ economy. Record household debt is one reason I believe why the Liberal government is frightened to do anything whatsoever about the housing situation. The whole economy is on a knife edge based to a large extent on property churning..it’s the numbers and a so-called perception of ‘wealth’. And as for underutilisation of the workforce, what on earth are the Libs thinking of trying to limit penalty rates thereby making it cheaper for organisations such as Coles and Woolies to maintain a limited workforce while maintaining their profits. If the Libs truly believe that organisations will hire ‘more people’ just because those people come a little cheaper, they’re wrong and imo quite delusional. Come to think of it, the Libs would have gone down the austerity path during the GFC, so it’s not surprising that they somehow believe that austerity will ‘create jobs’.
Carol Taylor
“The whole economy is on a knife edge based to a large extent on property churning.. it’s the numbers and a so-called perception of ‘wealth’.”
You raise some very valid points and the points you make about housing seem to be overlooked/misunderstood by many. If house prices fall the consequences for households with large debts could put them out on the street and for those with little or no debt the value of their home is irrelevant unless they rent or move into a caravan or similar. Most people sell a home to buy another so no profit is realised.
@Carol Taylor… a great comment. My only feedback would be that underutilisation of the workforce actually puts the economy in a good position to transition to any new industry/s. It just needs a government willing to take advantage of that spare capacity and invest it in the right place eg. renewable energy.
That won’t be a coalition government though because they like a steady level of unemployed/underemployed – it helps keep downward pressure on wages.
As John has written about before, for a currency issuing government like Australia, our ability to pay for things is more limited by unused capacity in the economy than anything to do with debt or deficit. If there is productive capacity unused in the workforce then the government should be stepping in to use it for nation building projects. Full employment should always be the goal and if the private sector doesn’t provide then our government should.
Utilising spare capacity in this way won’t put any excessive pressure on inflation as the neocons would have us believe.
Carol Taylor at 11:33 pm
Good old Joe Hockey, who in mid 2007 was saying there was not going to be a collapse in the world’s financial markets whilst at the same time through connections of his banker wife he warned a mate of an impending collapse.
Hockey, whose GFC plan was as you said supposedly austerity, but how can having a plan that was only around two billion less than the government’s successful stimulus be called austerity? And that plan involved deliberately sacrificing thousands of SME’s and hundreds of thousands of jobs whilst giving huge amounts of money to the financial sector. In hindsight everyone now knows how well that went in other countries that did it.
Wally! Enough will your scare campaign RE You raise some very valid points and the points you make about housing seem to be overlooked/misunderstood by many. Wally! its YOU who don’t get it. Housing is overpriced,Simple as that. had enough of your self serving simplistic post’s.
Jaiden
“had enough of your self serving simplistic post’s”
I own my home so cost of housing makes no difference to me.
If the cost of housing drops what do the people who paid top dollar and borrowed 95% of the purchase price do? They lose their homes because no good paying off something that is worth less than they owe. Same as what caused the GFC, assets not worth as much as the debt.
You say housing is under-priced, where I say wages are too low. Increasing wages helps existing home owners and those looking to buy, reducing house prices would hurt many existing home owners.