We are Governed by Idiots.
After several interest rate reductions over the past two years, a tool used by the Reserve Bank to stimulate activity, not much has happened. Business has not been prompted to invest and consumer spending is flat. So one might well ask, what’s going on behind the scenes?
One would think that with interest rates so low, both businesses and consumers would take advantage of the moment and expand. But a couple of other factors not broadly explained, give us a clue as to why this isn’t happening.
One is private debt, the other is the fear that when interest rates start to climb again, as they surely will, the ability to service those debt levels will become a major problem for consumers and companies.
Currently private debt, comprising business borrowings, home mortgages, other loans and credit cards accounts for $2.5 trillion (AUD), or 156% ratio to GDP.
Of that, $1.5 trillion is home mortgage debt, or 93% of GDP. Add $48 billion of credit card debt to that and it’s not hard to see that with flat wages growth as currently exists, in personal terms, Australian households are maxed out of any wiggle room to borrow or spend more.
By contrast, our public debt of $400 billion is barely 25% of GDP.
The other part of the private sector, the business community, is in a similar position with current debt at $822 billion. This debt is not like the debt carried by a currency issuer like the Commonwealth Government who, despite what politicians tell you, can always meet its debt obligations.
Private sector debt, if not repaid, can bring a nation to its knees, causing widespread unemployment, hardship and serious health issues across all sectors, even food shortages. And here we are, a nation with a small and easily managed public debt ignoring the precarious position private debt now threatens to place us.
In the face of this, Treasurer Scott Morrison wants to increase the GST to 15% on everything, including food. This is important to understand. The Treasurer wants to further tax the most vulnerable and indebted, not just by a further 5% but, in the case of food, a full 15%.
He thinks that as a nation, we only have a spending problem, so he wants to take more money out of circulation at one end by increasing taxes, and even more at the other end by cutting spending, something that will make it even harder for the private sector to function.
Reading between the lines of the latest Essential poll released this week, one wonders if it is the seasonal factor, or if something more substantial has happened within the electorate’s psyche.
The two party preferred result shows the Coalition at 51% and Labor at 49% and one might ask, has Malcolm Turnbull’s “I’m not Tony Abbott” attraction begun to fade or has all this talk of an increase in the GST begun to resonate.
Australia largely sat on the sidelines after 2008 when most of the western world went into an economic tailspin. Problems associated with the way the banks conducted their affairs caused people to take on debt that could not be repaid.
The reason we avoided that disaster was the quick response by the Rudd government to put money into the bank accounts of all taxpayers, the majority of whom spent that money and in the process, kept business afloat avoiding mass unemployment.
That may seem a somewhat simplistic explanation but it’s an accurate one. The 51/49% result suggests the difference between the two major parties is closer than most people think.
But even if it is out by one or two percent, say 53/47%, what it tells us is that more than half of Australian voters do not understand what their government is doing and where it is leading us. And you can safely bet that those who support the government are the ones most heavily mortgaged and maxed out on their credit cards.
Doesn’t it seem logical that if the government understood the position the private sector now finds itself, it would want to alleviate that financial stress by taking up some of the slack? That is, by spending more, not less and by taxing less not more?
This can only lead to the conclusion that we are being governed by idiots who have no idea where they are leading us.
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JohnB
Return to home pageThank you so much John for writing this. It is what I keep saying but you say it so much better.
You could have just left the title there, and you would have general agreement. But good article.
The average Aussie is nothing more than a whipping post for these fascists and the source of money so they can pay their rich financial backers more public money.
Consider if the poll results were 2 points out the other way, 49/51! lib/lab……..
Just goes to show the level of stupidity in Australians, allowing this stupid, lying, deceitful pox ridden government to hand fists full of taxpayer dollars to their rich greedy mates, already burdened with millions in assets. A bloody disgrace!!!
Wake up Australia!!
Change the word ‘idiots’ to ‘criminals’. People might start to do something with a tiny alteration in their perception.
@Tara Simmons… yes indeedy…
Australians need someone to wake them up. If the LNP can still get around 50% approval while selling the public this lemon that a 15% GST on everything and tax cuts and subsidies for the wealthy are good for them then I despair that we have become a nation of ignorant fools.
What I find so contradictory on propaganda in Australia was on ABC TV 22nd January, where a financial advisor said how for months individual investors have been concerned with their stocks and shares, what to do now or what to do with their investments in the future. He said they needed guidance from their financial advisors and were told to hang on with the result of incurring big losses over the past year and the present forecast is a bleak future for investors. The financial expert added that it was up to the investor to make their own mind up for investment. Surely the public must find these statements confusing in as much as they are expected to pay for financial advice and to also be told they should decide for themselves? I believe the individual can no longer trust government nor can you trust any authority to give you advice which is not only misleading but in many cases dishonest. The authorities should regard as fraud obtaining money from people who having worked hard for their money having got their money from a honest days work. One can only say we are being taken for a ride and one has to be aware of propaganda coming from what we once assumed was a trusted source.
How can lowering interest rates to stimulate economy work when this government continue austerity policies. Cutting on all fronts. Even outsourcing ATO jobs, among others, to Singapore
Note the don’t know/undecided in the polls. Well into 30% on most questions. Maybe public not as stupid as some thinks. Something is stopping PM going to election. Especially so, when it is hard to see things being better for PM by waiting.
A bit off topic but I came across this the other day. http://data.worldbank.org/indicator/BN.CAB.XOKA.CD
Ahh… So the LNP believe that the general public are the Magic Pudding!!! We simply need to give more, and take less.
Mark, those figures in $US show Australia has a $40 billion trade deficit which converts to $57AUD. That is a further $57 billion sucked out of circulation. So it’s not really off topic at all and reinforces the need for stimulus spending.
One slight adjustment to the end of the article:
– they need to tax less at the bottom & middle, but tax more at the top … we have multibillion dollar corporations paying nothing or very close to it, and we have inherited wealth being entrenched, while others suffer intergenerational poverty.
John, You can’t spend your way out of debt.
@donwreford
Good for you that now you don’t have to believe because now you know. Which is to say don’t trust experts without first doing your due diligence. Even the ones you might seek out especially in finance are working in their best interests, not yours and any actions taken on their advice, win or lose for you, they still get a commission. The people they parade in the media should always be looked at sideways and check you still have your wallet once they’re done talking. They’re all selling something, mostly bullshit and everyone should know this by now, Hermes help you if you don’t.
No voters are idiots.
In 2007 debt = zero
In 2007 unemployment = 4.3%
In 2007 kids in detention = zero
In 2007 asylum seekers in detention = 6
In 2007 = economy booming
And you lot voted against that
PJP, you and I can’t spend our way out of debt. A sovereign currency issuing government, however, can and does.
Not idiots, not just criminals, but lying, thieving , self-serving TRAITORS . can they be impeached? No jail term too long for those in high places behaving like this.
They say one has to spend money to make money. Some truth in this I believe. Shutting down a business leads nowhere. (Speaking in general).
I suspect if I spent on my rusty guttering ASAP, I will save money down the track. Yes, the damage caused by not replacing the guttering will be great.
It depends on what and how money is spent.
Lowering taxes on higher income earners in GFC will do little. Putting same amount in hands of lower income earners will.
Even if the spend it on alcohol and pokies. Will keep people employed, keep money churning.
The wealthy will just leave it in the bank.
Spending/investment can grow economy, lead to less debt.
John, I’m happy to be shown otherwise but as I understand it, if Australia was a truly sovereign nation it could issue currency without going into debt o the RBA. Or to put it another way how does a sovereign nation go into debt to itself? What am I missing? Why not just issue a currency like colonial scrip the way they did successfully in the US until the British f*&cked it up?
PJP, please give us your understanding of Australian government ‘debt’.
Did anyone see what happened in the Goulburn valley after Abbott refused a bail out fund for the canning industry? The State government came to the party, and the industry used that money to modernise, and is now looking forward to a bright future. Abbot’s neocons just don’t get it.
PJP, “if Australia was a truly sovereign nation” ? what do you think we are?
Its simple maths , if you are taxing more than you are spending you are removing money from the economy , as the gov can issue as much money as it needs via the RBA it can never “run out” of funds . The line that “tax pays for gov spending ” is a load of bunkum.
David Gordon Hill; “the line that “tax pays for gov spending ” is a load of bunkum”.Yep. Ergo sum, the little self-serving meme that “our taxes are paying fer that bitch ter have kids”, is just a (mostly Liberal) myth.
As usual spot on John. We are not only being ruled by idiots we are surrounded by fellow citizens who completely lack any sense of logical consequential thinking. What a sad state of affairs.
There is no strong countervailing voice and I blame both Labor and the Unions for abnegating their responsibility to the nation by communicating the simple facts you outlined. I think Labor are scared to hell of the debt boggy and have not the wit to challenge the most obviously rationally defensible position for government spending and reduced taxation there is. To anyone with a modicum of sense it is a real winner capturing the middle class. working poor, elderly etc. however without thee confident drive for change we can expect nothing of consequence.
It is simple. You relentlessly attack with the facts or you waffle and compromise leaving voters bemused and uninspired. The job of politicians is to inspire yet all I feel at the moment is the mush of a stack of deflated wet blankets.
Evin if Labor were to win by default of L-NP failure they have no vision for the type of change necessary to save us from another economic collapse and never ending cyclical economic disaster.
The point is the logic of neo-conservative capitalism is demonstrably wrong and can be proven with millenia of boom bust, transference of wealth to the elites and reduction in standards for the middle class and poor. Now the poor excuse is we have to compete with impoverished workers rather than maintain our standards and bring the less fortunate countries along by setting and example.
I get flabbergasted at he hide of these greed mongers convincing working people black is white while ripping them of for everything they can.
Debt servitude is the new slavery and if you cannot sustain a high level of debt then to the poor house with you.
Further on private debt: An informative article here.
“History indicates there are two major causes for increases in public debt: World Wars (1914-1918 and 1939-1945) and responses to economic recessions and depressions caused by private debt-financed speculation: the 1890s, 1930s, mid-1970s, early 1980s, early 1990s and the GFC in 2008. Therefore, the key to preventing onerous levels of public debt is to thwart the state from committing to wars, and to eliminate parasitic rentier capitalists from the private sector….
……The case against public debt and deficits are based upon pseudo-scientific economic theory which has not progressed since the 19th century, political point-scoring and rank opportunism. Australia certainly does not have a ‘budget emergency’, is not ‘running out of money’, and is not headed towards ‘peak debt’ or ‘bankruptcy’. In conclusion, “Australia does have, however, a surplus of government hypocrisy and a deficit in truthfulness and competence….”
PJP, we could simply issue currency without going into debt. It is a political choice to issue bond debt. Treasury is not “in debt” to the RBA. It’s just numbers in a computer; the same as you transferring money from one account to another.
governed by idiots in a nation of slow learners!! Even though the financial record speaks for itself, as does the attitude (and legislation) of labour, this nation of idiots voted into power a party which has poor economic credentials. It squandered a windfall in the first mining boom and now through an amazing lack of foresight the are surpised by a downturn in China’s economy!! The way out of this is to crush the economy of australia with higher taxes for the people who own the economy. The effect will be to drive micro and small business into the ground and give australians an excellent chance to experience an economic depression!!! Go liberal! the morons of australia need you…to give them a lesson they will not forget!
Snotty Morrisscum is stupid, badly advised and nasty. I could suggest he needs to be exorcised but I might be accused of being ‘overwrought’ again. (Secretly, I still think he needs to be exorcised. He doesn’t look normal to me.)
But to be fair, the LNP’s consideration of increasing the GST by 15% on everyday food items is unconscionable especially when ignoring the glaring fact that corporate tax avoidance is allowed to continue and superannuation concessions to the well-off stay in place.
As others have said above, money circulating in the economy is beneficial for all. Yes, I agree with giving people on welfare more benefits so they can spend on what they need and within reason, want.
Better still, give them the means to provide their own employment. Fund their micro-businesses and start-ups by government direct grants and loans WITHOUT unreasonable and inaccessible eligibility obstacles, so they can provide themselves with self-employment. This would take pressure off extra welfare funding and provide more revenue in the economy. The other bonus is that in time, they could also provide further employment opportunities for other unemployed or under-employed Aussies too.
A nation of sheep, ruled by wolves, owned by pigs….
They and their backers know where they are going and even poor australians know they personally are better off than the media poor. When labor was in power the rabbott and his media expunged/derided/shouted down any positive overseas comparison or expert opinion, even from nobel laureates.
This morning the son of a small car was using ‘comparatively’ and bragging about the 300000 new jobs with the autocuists, starved for political favour, nodding like a backwindow dog. I expected the tongue to protrude with salavation. Wish someone from labor could put some effort into ‘economocking’ these idiots and their loony borrowers.
Any talk about increasing the GST by 50 % should always be accompanied with the reminder that 579 large companies operate in Australia without paying any tax.
Here’s a few mantras.
We will decide who does business in Australia and the circumstances under which they operate.
Tax the leaners first!
No tax. No welcome!
@Matters Not… that’s a very good approach. It should spark the interest of Howard’s “battlers” and rattle their hip pocket.
That said, I have a feeling that the TPP will make new laws to tax the “leaners” quite difficult.
@ Glenn K
What do you mean by ‘we’?…no such thing.
@John
I agree. The govt. shouldn’t have to fund its spending through debt if it does in fact have the right to create debt free money as a sovereign nation. As you rightly say, it conjures it out of thin air where it appears as digits in a computer – no tangible assets anywhere except for when it comes to paying back the debt, wherein lies the problem. My transferring funds from one account to another is entirely different because (and not that you don’t know this already but just for others, maybe) first I had to earn the currency by creating value for someone else in exchange for my productive time by performing work.
This is the difference. The govt creates money as debt out of thin air to fund itself but it’s the ‘dumb masses’, the tax cattle who are ransomed to pay it back via an unwritten guarantee (call it a social contract!) of future work it will perform on the tax farm (ours is called Australia Glenn K).
So if a sovereign govt. has the right to issue currency free of debt and interest (as Australia currently does but chooses not to because we’re run by a nation of spineless jellyfish, then (rhetorically) who do the tax cattle pay the debt back to now if not a private interest who issues the currency?
Yes mars08, the more I read about the TTP, the more I come to understand that it’s not about ‘nations’ and ‘citizens’ but about ‘corporations’ and their ‘interests’. The World Bank’s evaluation shows Vietnam, Malaysia and the like having some gains re growth in GDP while Australia lags well behind. (Not that I am saying GDP is a measure of much that counts.)
In Australia, Morrison et al developed a policy entitled Sovereign Borders and the punters cheered and clapped because we apparently were in charge of what happened here and we could keep out ‘undesirables’ broadly defined. Now we find that our Sovereign Borders will be easily breeched by any non-taxpaying corporation that chooses to so do.
It really is a laugh. But the laugh is on us.
Yes Matters Not,
the laugh is on us but not the LNP who engineered the TPP…
…unless they are brought to account.
If Robb retires before condemnation in government, he must front a Fed ICAC anyway for why he sold out Aussies and AUS’ interests.
PJP, who do we pay it back to? Good question. Most bond sales are purchased by banks. That’s the real reason they are issued; to control interest rates. The banks buy them to get interest on their reserve account with the RBA. So, the RBA simply debits the account it holds for the bank. At anytime the bank can sell the bond back to the RBA. It’s a swap. Again, numbers in a computer. Other bond holders could be super funds, insurance companies and a few overseas investors looking to park some excess cash. But as the bonds are always sold in $A, it really doesn’t matter.
” [The above] can only lead to the conclusion that we are being governed by idiots who have no idea where they are leading us.”
while agreeing with the above would simplify everything, it’s probably too dangerous to a game to play. thinking that the incompetence and stupidity of the LNP or the IPA-ALP-LNP Coalescence is the problem could allow us to not consider or to forget less palatable possibilities :
the Broad Church (religious fanatics in politics) is potentially a Death Cult which is obsessed with killing the Biosphere and 99% of the global human population if not with bringing about complete annihilation;
the LNP Broad Church and other Political Caste World Haters are engaged with the above mission without even considering the consequences;
the religious obsessionals that are infecting the politics of this country are Programed Zombies whose only drive is Destruction …
reductionism is never very exciting …
Φ
Might I suggest you do a simple flow chart and simple explanation of how these tiered, vested interests inter-relate. Then, I/we will have a visual understanding of how it works.
Don’t think so. Understanding the whole ‘common sense’ of the TPP goes way beyond the LNP.
Really? So many ‘assumptions’ of the unlikely variety. Way above my level of speculation.
But I’ll ‘book’ it for future reference.
remember the chicago $chool of economic$ and milton bloody friedman – he helped $et in motion a dragon but It$ now almost a dead dragon and it has burnt through the $ocial and economic fabric of modern $ociety.
” The way out of this is to crush the economywith higher taxes for the people who own the economy.”
Who owns the economy?
Do you mean labour or Labor?
Wealth is created by labour and capital working together.
Part of that wealth is given to government to create infrastructure to create civil productive society.
Capital doesn’t own the economy or the government.
“that “our taxes are paying fer that bitch ter have kids”, is just a (mostly Liberal) myth.”
Even that bitch contributes to creating wealth. She is rearing the workers for next generation.
SPC has proven one can spend to get out of debt. In fact if the money wasn’t spent by state government against wishes of Abbott, the debt would be high in that area now. Instead we have new up to date factory that is ready to process 100’s acres tomatoes alone. First time in many years.
They are now able to compete with tomatoes being dumped by Italy. Lower dollar has helped.
Hello John Kelly,
Perhaps you could assist in clarifying the accounting practices applied in recording ‘debt’ level in Federal fiscal statements.
A very basic query:
Say the govt spends new money amount of $X into the private sector; that amount is duly recorded as ‘expenditure’.
Assuming the govt. receives $X in tax ‘revenue’ the ‘budget’ expenditure of $X is then neutralised.
As a result of spending $X into the private economy, for interest rate stabilisation purposes the reserve bank offer $Y worth of bonds private banks to mop up excess private bank reserves that resulted from the injection of the extra $X into circulation.
The issuance of $Y bonds is recorded as an increase in govt. debt.
However, in exchange for the issuance of those bonds, the reserve bank receives $Y of private bank cash reserve funds.
How/where are those received cash funds accounted in the balance sheet; since it is a one for one liability swap for the govt., why don’t the received funds ‘balance out’ (or neutralise) the ‘debt’ represented by the bonds. (I am ignoring the interest liability associated with the bonds).
JohnK,
A correction to my query above: JohnB January 23, 2016 at 12:22 am
Please ignore the sentence –
“Assuming the govt. receives $X in tax ‘revenue’ the ‘budget’ expenditure of $X is then neutralised.”
as I realised upon a second read that if the deficit impact of new spending is zero there would be no need for bond issuance action to stabilise interbank interest rates.
Regardless, the query as contained in the last para stands.
The entitled politicians are doing their bit by spending the public purse.
Bronnie, Barnaby, Tony et al weren’t ripping us of with their profligate spending, they were stimulating the economy.
Just not spending for the benefit of the society they are supposed to be representing.
JohnB, firstly, the monies received for the bond issue are recorded as debt, yes, but they just remain as a credit in the accounts of the buyers at the RBA. They don’t get “spent”. As you say, all government spending is new money. Therefore, imagine 3 columns: column 1 has expenditures, column 2 has revenues and column 3 has “borrowings”. Add them all up and the bottom line will read $zero. There is no one for one swap. All three columns remain seperate from each other. Don’t allow what politicians say to confuse you. The accounting is all quite clear.
“We are Governed by Idiots.”
Well who bloody well voted for them? IDIOTS!
John K,
If your three columns of revenue, expenditure and borrowings balance to zero then that would indicate that currently we ARE funding spending by taxation (and other revenue) and bond issuance.
We could easily avoid that by, instead of your column called ‘borrowings’, having an entry called something like capital introduced or quantitative easing or e-seignorage…..but we don’t.
JohnK,
A further query to your explanation if you don’t mind.
“..the monies received for the bond issue are recorded as debt..”
From the govt. POV, all money in circulation is already debt – all money issued in excess of money withdrawn from circulation via taxes etc accumulates as standing govt. debt.
It would make better accounting sense if the bonds issued were recorded as the ‘debt’, and the currency received (withdrawn from circulation) deemed ‘destroyed’ (as are all tax ‘revenues’).
“…but they just remain as a credit in the accounts of the buyers at the RBA..”
That does not seem credible – a credit in the reserve account of the buyer remains a liability to the govt.
So, to my mind, the govt. now has a double liability – the bond on issue plus the credit held in the buyer’s RBA account.
…and it raises further questions:
– is that to say that over time, all money’s received from bond sales to private banks are held in credit to the buyer’s reserve account? How long does the credit last?
– when those bonds are surrendered is the payout of the bond deducted from the the ‘credit in the reserve account’? If so, why is there any concern in ‘affording’ future relinquishment of debt, when funds are already held in credit against the bond issuance?
What am I missing here?
I have no trouble comprehending your 3 column accounting method, but it still leaves the question of where did the funds for the borrowing amount (bank bond purchase funds) come from – it’s apparent the funds were withdrawn from active circulation, even though they were stored as ‘backup’ in a private banks RBA held reserve account. If funds are withdrawn from circulation the govts. liability for that currency must reduce.
Reserve account funds held by private banks cannot be both ‘in circulation’ and ‘not in circulation’ at the same time.
An observation –
On the broader question of ‘the normalcy’ of govt. deficits; there would be no money/wealth in circulation at all, let alone facility for growth in private wealth if the govt. did not consistently and predominantly run ‘deficit’ fiscal balances – and theoretically, if every deficit balance since federation was matched by bond issuance, the value of bonds issued would be equal to the total value of all private wealth,
Without fiscal deficits, the economy cannot grow.
Can’t growth be achieved by productivity improvements?
not if it means less people are employed.
Productivity can be improved through better education, health, transport etc. This does not equate to less employment.
Neil, once again what debt are you talking about. Government debt that means little or non government dect, which can b ing economies down, which I recall was at record levels.
my point is though if by productivity improvements less people are employed – where is the ‘growth’ ? Growth should mean more people are better employed – not less. Growth should mean (surely) more people are usefully employed in better work conditions and the society (govt) should benefit by having a larger tax base. Offshoring for example might make a company more profitable – but will result in less local employment and a reduced govt tax base… if you get my drift – and this is one important reason why the US economy is now a pig.
@Kaye Lee January 23, 2016 at 1:37 pm
I was considering a (closed) economy in monetary terms only – even though improved productivity may bring greater output and improved efficiency for those improvements translate into more goods/wealth available to be shared; the way we share the wealth is via the expansion of available money.
If the amount of money in circulation was held static, the only way to enable equitable distribution that wealth would be by redistribution of pre-existing money.
e.g. The money for new entities/new workers who wish to save and buy goods/services would have to come from the fixed pool – and that in itself would cause deflationary instability.
I think I am right in saying that to maintain a stable currency value, the amount of (demand) money must be expanded to match the supply of available goods/services.
Just like most voters – Idiots.
i’ll second that!
the Libs have not done one thing this term I know of that has had a positive measurable impact.
People do not understand debt. The Commonwealth Govt. is NOT like a household. The Govt does NOT borrow money to cover its spending.
When the Govt deficit spends more cash is winds up in the banking system, if there is too much cash then the RBA loses control of interest it sets. To avoid this it issues bonds to soak up the excess cash. So the banks have swapped cash for bonds. When the bonds mature they simply swap back and debt is reduced. No big deal, no debt and deficit disaster, no big con job that the public got sold.
The govt could easily just pay interest on bank balances that they hold each night and not issue bonds (debt).
The only reason why the LNP are cutting all services and conditions is it has to do with their agenda … its our services and conditions being reduced not theirs.
If we had a responsible govt. they would be spending to address the reason why the deficit grows and that is output gap. The gap between what we can produce and what is actually being produced.
Kaye Lee, yes, that is how they account for it. But that’s a political choice. We could call it capital introduced, because that’s what it is. But that doesn’t change anything. All spending is new money.
I will never understand why you persist with this money destruction idea because the reality is the tax I pay is credited to a government account. It doesn’t disappear. I think this is an unnecessary distraction from the ideas you are promoting with which I agree.
I fully agree that government spending is not constrained by revenue. I believe that bonds are an unnecessary construct. Manipulating the money supply could be achieved by offering interest on reserve accounts as Mark mentioned.
You suggest it is a political decision to accumulate debt. Seems a very odd decision to me.
I really do think people would understand better if you dropped the ‘taxes are destroyed and all spending is new money’ way of putting things. It may be true in an esoteric way but not any accounting way. It’s not necessary to accept that for your important points to be explained.
I guess what I am saying is deficit spending could be funded by a single entry. Why all the palaver?
Mark; “….when the bonds mature, they simply swap back and debt is reduced. No big deal, no debt and deficit disaster, no big con job that the public got sold.”
And amen to that. The ‘con job’ and allied ‘intergenerational debt’ beat-up, was probably the most blatant piece of bare-faced lying and fearmongering that Abbott and co. ever concocted. The ongoing tragedy is that judging by his comments– and bullying bluster when pressed–it is clear Scott Morrison’s grasp of economics is little better. Meanwhile, keep posting! You nailed the issue nicely.
Kaye Lee, “…. “because the reality is the tax I pay is credited to a government account. It doesn’t disappear. .
Might a recent ‘Damascene convert’ offer a suggestion? I came to an understanding of the ‘destroyed taxes’ issue by accepting that the figure that you yourself describe as being ‘credited to a govt account’ is just that–a figure, nothing more. It doesn’t represent monies that are in any way expendable, it merely records the total of monies that were not permitted to ENTER the economy, for whatever reason.( To offset govt. money creation/ control inflation etc) That’s how I grasped it–taxes represent money not allowed into circulation. The problem is that the dated and misleading phrase ‘tax collection’ persists. So, to cite an extreme example admittedly, we still tend to think of PHYSICAL collection–the King’s tax agents going out into the countryside, collecting sheaves of wheat, measures of oil, two chickens etc. Not only has physical collection long since lapsed, but even the figure ‘credited to a govt account’ is merely nominal, like a footy score. Hope this helps? Cheers, RA.
Royce I have no problem with the idea that it is just numbers transferred around electronically and not collection of anything physical. Nevertheless, it is tallied up, as is expenditure. We are usually left with a deficit. At the moment, that deficit is funded by the issuance of bonds (and even sometimes surpluses are augmented by bond issuance).
Taxation withdraws money from circulation but spending puts it back into circulation. You can call this destruction and creation of money if you want but in an accounting sense that makes no sense to me.
JohnB, “what am I missing here?” When the bonds mature, the RBA makes an appropriate entry to the account of the bond holder (debit/credit), whatever reverses the original entry. No different from what happens when you or I have a term deposit account that has come to the end of its term. If the bank has excess reserves at the time it may well reinvest them in another bond issue or negotiate with another bank on the overnight rate. There’s nothing complicated about that. There is no double liability. The money is never spent. It may be accounted for as a debt on the Treasury books but that’s just a book entry and doesn’t change anything at the RBA. The difficulty in grasping the mechanics lies with Treasury conducting a household/corporate accounting method/style, while the RBA has a different methodology. As for “affording future relinquishment of debt” that is just political doublespeak by politicians who don’t know or who lie.
Kaye, I don’t know why you persist with your view, either. I don’t consider myself that clever, therefore if I “get it” anyone should. Yes, tax received is recorded but it is never spent. So saying it is destroyed is quite reasonable. If you “get” the rest of it, why not this?
Kaye, re your comment to Royce, “Taxation withdraws money from circulation but spending puts it back into circulation.”
It isn’t spent. All spending is new money. It shouldn’t be all that hard to understand.
Kaye, re your comment, “I really do think people would understand better if you dropped the ‘taxes are destroyed and all spending is new money’ way of putting things.” The whole purpose of referring to it that way is to get people to understand what really happens so that they will reject the absurdities of comments by politicians, particularly Morrison and Cormann who clearly have no idea what sovereign currency central banks do.
I am reminded of when the midwife was yelling at me to push saying she had three children and if she could do it anyone could. As it turns out, my son was being strangled and I was rushed off for an emergency caeserian eventually. I am also reminded of how, when Coronius said “hence” in my Level 1 maths text, I often got lost.
I still don’t think it helps to say money is destroyed when people can look at government fiscal statements and see exactly what you said before – that revenue, expenditure and borrowing add to zero – which really muddies the waters for what you are trying to get across. I also personally feel it is irrelevant and causes more grief than it is worth.
What do you think about getting rid of bonds and paying interest on reserve deposits instead?
That sentiment is to be applauded. Ignorance ought to be displaced.
Yes, I get that as well. Politicians excel in ‘spin’. But here’s the crunch.
Presumably, those who work for ‘central banks’, particularly at the higher levels, have a deep and meaningful understanding of ‘what they do’ (effectively). Is there a ‘link’ that shows they have such an ‘idea’; have provided those ‘insights’ (re Australia) in publically available publications; and if not, then why not?
Or is it just a ‘plot’ that involves so many people (with inside information) at so many levels, and none of those involved have the courage to speak out?
(BTW, I want to believe it, but there’s some real nagging doubts).
Thanks John Kelly for your replies.
The fact that fiscal statements list tax receipts under ‘Revenue’ sets up the readily reinforced misunderstanding that tax funds government spending.
The ‘revenue’ definition being a carry over from the ‘gold standard’ currency days, when it was in fact the only money available for the govt. to spend if it was to maintain gold convertibility.
Clearly not so in today’s fiat currency world.
Re ‘destroyed’ withdrawn currency:
The monetary face value effectively expires on crossing the divide to the issuers side of the monetary system.
On being entered into the tax receipts/withdrawn register coins/notes revert to ‘token’ status (near worthless ‘stock’ items),
Only validated entries on a spreadsheet record the currency’s withdrawal.
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Kaye, Things would be so much easier to understand if Central banks paid interest on reserves. Some countries do that now. But I fear it will be a cold day in Hell before those that make squillions on the bond market would let that happen.
Kaye, don’t quite get the significance of your comment, “We are usually left with a deficit.” A deficit of what?
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Royce,
A deficit results when our expenditure exceeds our revenue. I am sure you already know that so I am not sure what you are asking. It seems to me the question is how we account for our deficit spending. Currently we issue bonds to cover the difference. I do not believe we have to do this, but that is what our fiscal statements show that we do.
If we, instead of issuing bonds, just had an entry showing the capital introduced, and then controlled the money supply through interest paid on reserve deposits, that interest would largely remain in the domestic economy rather than going to foreign investors.
Perhaps I am missing something crucial?
Kaye, that’s right. You haven’t missed anything. The interest paid to foreign investors isn’t much anyway. It’s paid in $A and they probable reinvest.
Yes, I didn’t think that significant…just another small aspect.
The interest paid to foreign investors isn’t much anyway
Did you make that up? My understanding is that 70% of our bonds are in foreign hands which means 70% of our interest bill goes overseas.
Kaye, “… I am sure you already know that…” Yes, apologies. See it now. Disappearing up my own fundament somewhat….!
Nei,l “…means 70% of our interest bill goes overseas”. Concerning, if true. But not much different to mining profits winging their way to the Caymans, Bahamas, etc. And your attitude to that particular situation is……
Concerning, if true.
It is true. We are different to other Western nations. The majority of our debt is foreign (70%). It is the other way around for the USA (30%), Europeans etc. When their govts borrow they have lots of multinationals and huge numbers of wealthy people to lend their govts money. Furthermore they have huge assets like Ford, Toyota to cover their overseas debt.
Non-resident holdings are about 64% at the moment. Interest is (very roughly) about $1 billion per month so I guess that is more significant than I thought if $650 million a month is going to non residents.
http://aofm.gov.au/statistics/non-resident-holdings/
That is extra frightening to think that not only are Aussies being short-changed by super-rich pigs but these super-rich pigs don’t even reside in Australia so in their own mean little, tight ways, they’re not spending their extra benefits from interest inside Australia.
$650 million a month is going to non residents.
And that is money on Federal govt debt going overseas. I guess you can add to that interest on State govt debt. Queensland has a huge debt and i guess it is mainly foreign as well.
According to the last budget, the Government’s total interest payments in 2015‑16 are estimated to be $15.0 billion – that’s almost $10 billion going to non-resident investors.
http://www.budget.gov.au/2015-16/content/bp1/html/bp1_bs6-01.htm Table 9
Martin Bryce January 24, 2016 at 10:45 am
How do you come up with this rubbish ?
That stereotype of a typical australian bears absolutely no basis in fact ,
just as the myth of the so called “Howard battlers” was a figment of some bored journalists vivid imagination.
Howards Battlers myth was shot down in 2004 by research by Adelaide Uni, but still gets trotted out just like your assertions as to the aussie image
Am I to assume half of those posting here on the AIMN fit the stereotype you paint ?
the 2004 study stated
The conclusion is that ‘Howard’s Battlers’ has no basis in electoral fact.
There is no
currently Coalition-voting seat in the nation – in or outside a city – that can in any way be described as ‘low income’and former Labor territory. In fact, the current government’s voter base resembles that of its
predecessors: the combination of a reliable ‘heartland’ plus the election-deciders’ – relatively affluent ‘mortgage belt’ seats in the outer suburbs of the capital cities, and the so-called ‘regions’ — non-urban electorates with large enough town populations to make them marginal.
Usually this kind of tripe gets trotted out by those who couldn’t quite make it, and want to feel better about themselves
https://www.adelaide.edu.au/apsa/docs_papers/Aust%20Pol/Brent.pdf
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The issue of foreign owned bonds and securities needs to be presented in proper perspective.
As far as regulation of the Australian economy is concerned the nationality of the owners, or recipients of bond interest payments is irrelevant – and largely uncertain.
As all transactions occur in $AU, so as a currency issuing govt. there is no likelihood of Aust. ever being unable service/payout the debt.
Foreign security ownership estimates are very imprecise – the holders of bonds/securities generally is via ownership obscuring entities/banks/financiers etc. who refuse to provide commercial-in confidence information to govt.
Only 14.5% of AU securities are definitely identified as foreign, 18.8% as Australian, the rest (66.3%) are deemed foreign as they are transacted through opaque domestic custodian and nominee companies.
“..The AOFM has no means by which to compel the provision of information by the beneficial owners of securities or by persons holding securities on their behalf….The figures in the tables represent opinions formed by the AOFM based on limited information…”
In the US similar ownership obscurity applies the quoted figure of 48% foreign ownership [Table1] should be also be viewed as likely too low.
From US treasury document: “Distinguishing official from private holders in the surveys is difficult for the same reasons that obtaining accurate information on the country of foreign owners of U.S. securities is difficult: in both cases chains of financial intermediaries can obscure the true foreign holders. Thus, some holdings attributed to private intermediaries, especially in major custodial centers, may actually reflect holdings of foreign official institutions.”
While on the surface at least it may be considered ‘concerning’ that interest payments are leaving the country we should view it in the context of the external trade picture.
Australia runs a trade deficit of around $2 billion per month (~$20 billion pa) – that means we annually export $20 billion AU to foreign suppliers – those suppliers/nations then must decide what to do with those AU dollars.
They have only numbers on a spreadsheet account that are useless until spent; they can either buy Australian imports, sell $AU via Forex for a preferred currency, or re-invest in interest bearing Australian bonds/securities.
Not all $20 billion can be used to buy Australian exports as Australia is a net importer.
I suggest that many will choose to invest in AU bonds, at least for the period until their funds are needed elsewhere – our debt is their savings.
From Aust. pov investment in AU bonds is preferable – it strengthens, stabilises our currency, whereas selling the $AU on the Forex would tend to weaken our currency.
We must also bear in mind that foreign investment is 2 way traffic, while foreigners invest in Australia, Australia invests in foreign countries too; [select Australia on map] Australia presently possesses half the value of foreign assets that we have in value of foreign liabilities.[Graph1]
The currency inflow from Australia’s foreign investments presently provides approx a net 33% reduction in currency flow outbound [Table1].
If we wish to continue to enjoy the real social benefit of imports, then we will continue to be an exporter of $AU.
Those exported dollars can either work for us as re-investment, or against us as a weakening influence on our currency value.
As a final point, the purposeful obscurity afforded by the current global financial system (that facilitates so many contrived interwoven entities) ensures there is no effective way to guarantee AU securities/stocks/bonds investors have Australian resident/beneficial ownership.
Our private banks are owned by transnationals – no one outside the banks inner circle know or disclose the destination/source of their funds.
(currently all bonds/securities transacted via AU banks are presently deemed by AOFM ‘Australian’).
That is another thing I do not understand – suggesting that you have to have Australian dollars to purchase something in Australia. It seems to me that is only true if you are paying cash. I can purchase things from anywhere overseas with my Aussie e-dollars – they just use the currency conversion rate to work out the price. Likewise people overseas can buy from me. As this is all just keystrokes I don’t see how it makes any difference. Surely interest paid into someone’s account would go through a similar process? You are due say AU$1000 so US$700 is credited to your account?
I have the same question when you say, as taxation must be paid in AU$ it creates a demand for the currency. If I had a billion US$ and owed a tax bill in Australia, wouldn’t I just transfer money in the same way? I don’t understand.
Hello Kaye,
I am not familiar with ‘e-dollars’, however I sometimes use Paypal (a similar facility?) to conduct trans-currency payments – so I will outline my understanding of its operation.
Such facilities are just currency user interfaces – specifically designed/operated to enable conduct of hassle free personal inter-currency transactions.
They are not a currency per se, but a ‘for profit’ payment handling service (with built in [some say ripoff] commissions on top of inter-bank forex exchange rates) that protects and insulates casual ‘citizen’ currency users from the complexities and almost insurmountable difficulties in accessing the foreign exchange ‘mechanism’ – especially where minor transactions are involved.
At either end of the transaction there is local currency involved – a bank or finance institution receives a credit/debit to a users account, then processes the transaction in the local currency.
Paypal have setup transition bulk ‘holding’ accounts that access/trade the Forex ‘currency pair’ buy/sell interchange system for all major world currencies.
Minor transactions draw from Paypal’s reserve bulk accounts in each major currency (as do most private banks).
‘Money transfers’ are generally just electronic data instructions transferring minor amounts from one local bulk Forex settlement account to another.
From Paypal:
“..PayPal has launched Multiple Currencies to facilitate payments among our diverse base of international members….The most readily available information on currency exchange rates is based on “interbank exchange rates”. Interbank exchange rates are established in the course of currency trading among a global network of over 1,000 banks, and are not available through consumer or retail channels…”
So, no matter how currency users interchange between currencies, that currency changeover is facilitated through the Forex buy/sell auction system.
Hope that helps explain – please advise of any errors in my understanding of the exchange procedures.