When Leigh Sales asked Bill Shorten on Thursday night how he was going to pay for the promises he made in his budget reply speech, Bill dodged the question. Well, why shouldn’t he? Politicians do that. But the answer he should have given was: The same way governments pay for anything. They credit our bank accounts with money the Reserve Bank creates out of thin air.
If the broader Australian community understood the principle of the three sectoral balances, they would be immune to the lamentable language used by politicians, journalists, business commentators and television anchor men and women who demonstrate daily how little they know about money.
People would also be immune to the pathetic lies politicians spew out on a daily basis. They would see through the thinly veiled deceptions economists of all political persuasions practice when they write or speak about the state of the Australian economy.
The language used by the above mentioned people in respect of the health of national economy is so distorted, it renders any attempt by those who try to explain the true position to failure, which, thus far, has resulted in a state of collective national ignorance.
Constant references to ‘repairing the budget’, ‘fixing the budget’, ‘the deterioration of the budget’ are meaningless in terms of fiscal balance. But the very worst of the worst of them is the mantra ‘balancing the books’.
For those who don’t get it, the books are ALWAYS balanced.
So how does one start to correct these corruptions? The least complicated way would be to explain, as simply as possible, the principle of the three sectoral balances.
The economy is divided into three sectors: government spending, private spending and external spending (imports/exports). At the end of any given cycle, these three sectors are always balanced, i.e. their combined value always equals zero.
For the private sector to be in surplus, at least one other sector must be in deficit. Our current account (our export/import account) is usually in deficit because we generally import more than we export). If the government sector deficit is greater than the external deficit then the private sector (you and I and the businesses we work for) must, of mathematical necessity, be in surplus. That means we are either saving more money than we are investing, or paying down personal debt. The equation can be expressed thus: (I-S) + (G-T) + (X-M) = 0.
If an economy can boast full employment it doesn’t matter which of those three sectors is in deficit. They will still balance out to zero, but more importantly, welfare payments from the government will be minimised allowing it to concentrate on providing essential services such as schools, universities, hospitals and public transport, the very things it is elected to do.
That leaves the private sector to trade secure in the knowledge that a growing robust economy will ensure they will expand and be more profitable. Full employment also guarantees adequate tax revenues to maintain a balanced economy ensuring delivery of essential services. All of which translates to constant growth and improved living standards.
So where are the sectoral balances at the moment? Our government is in deficit and the external trade account is in deficit, which means the private sector is in surplus. That means you and I and the companies we work for have money to spend. So why aren’t we spending?
The answer lies in our fear and uncertainty. The government is sending us false messages about the state of the economy. It is obsessed with limiting its own spending to produce a surplus, and does not understand the negative impact that a surplus has on the broader community.
If the government returns to surplus and the external account remains in deficit or balanced, the private sector must absorb the difference; you and I and the companies we work for, must go into debt.
During the Howard/Costello years when government surpluses were being brought down almost every year, the external account was either balanced or in deficit and the difference was being absorbed by you and me maxing out on our credit cards, mortgages and personal loans. Private debt skyrocketed during that period.
Today, 7 years later, that debt has not come down. Private debt is higher today than ever before. So what will happen if the government returns to surplus? It is a mathematical certainty there will be more private debt, mortgages will be higher, people will seek out more personal loans and credit card debt will continue to rise.
The Australia economy does not have a debt problem. It has an employment problem. The only way to correct this is to increase employment; to make unemployment redundant. For that to happen, government must embark on deficit spending way beyond the puny measures outlined in this year’s budget.
What about the escalating debt I hear you ask? It doesn’t exist. The debt our politicians, journalists and mainstream economists talk about are treasury bonds issued by the government to manage the bank overnight lending rate and to soak up excess reserves in the system.
They are not debt. They are like shares purchased on the stock market. They can be bought and sold on the bond market. Or, the Reserve Bank can simply buy back the bonds.
They attract an interest rate payable by the Reserve Bank twice a year which the bank creates out of thin air. It costs nothing. This is the great deception successive governments practice on an unsuspecting public.
When the bonds mature, usually after 10, 15 or 30 years, the Reserve Bank repays the bond holders by issuing more bonds or by simply crediting the accounts of the bond holders. This is not a new practice; it has been happening for the past 40 years since we dropped the gold standard and adopted a fiat currency.
It is a process completely separate from deficits and surpluses. Government deficits are good most of the time just as debt free savings are good for the individual most of the time.
If politicians and journalists deny the veracity of this practice then one of two things is true. Either they are the ignorant ones, or they are concealing the reality of how money works.
If you doubt any of this, then listen to the former head of the US Federal Reserve, Ben Bernanke. When asked by US 60 Minutes reporter, Scott Pelley: Is that tax money that the Fed is spending?
Bernanke answered: It’s not tax money. The banks have accounts with the Fed, much the same way that you have an account with a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.
This is how it happens here in Australia as well. When the government pays its bills it simple makes an electronic entry on a computer. Taxes have nothing to do with it.