Total, total bullshit”?

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Oh dear. When Nas­sim Khadim from The Age asked me to com­ment yes­ter­dy on the elec­toral asser­tion being made by the Lib­er­al Party–that ris­ing State debt was putting upward pres­sure on inter­est rates–I respond­ed that the asser­tion was:

Total, total bull­shit. It’s like say­ing that some­body dropped a peb­ble into the ocean and that caused a tsuna­mi. And you can quote me on that.”

Well, I expect­ed just to see the “peb­ble and tsuna­mi” anal­o­gy turn up in the report. Instead, I saw the first two sen­tences of the above–and learnt the hard way that edi­to­r­i­al stan­dards at Aus­trali­a’s major dailies are no longer as reserved as I took for grant­ed:

States ‘not respon­si­ble’ for infla­tion: The Age, August 7 2007

I am sure I’ll wear more stick for the “bull­shit” than I do for the anal­o­gy; but all I can blame for that is truth in report­ing. So I had bet­ter back up my com­ments.

What was miss­ing from the article–and clear­ly for rea­sons of space–were the rea­sons I gave for the com­ment.

They were that, as far as I can ascer­tain, the $70 bil­lion in State debt that the Lib­er­al Par­ty adver­tis­ing refers to are in fact for­ward debt com­mit­ments, large­ly for infra­struc­tur­al spend­ing, between now and 2011. There are many rea­sons why it is, yes, “total, total bull­shit” to blame those debt com­mit­ments for infla­tion­ary pres­sures, and hence upward pres­sure on offi­cial inter­est rates.

First­ly, and most impor­tant­ly, that $70 bil­lion over 5 years pales into insignif­i­cance beside the $204 bil­lion by which pri­vate debt expand­ed in the last twelve months. It is even less than the $97 bil­lion by which mort­gage debt alone expand­ed in the last year. On an annu­al basis, it is no more than per­son­al debt–largely cred­it card debt–grew in the last year. That’s why I gave the peb­ble and tsuna­mi anal­o­gy. If any form of debt is adding to infla­tion­ary pres­sures now, it is pri­vate debt–and specif­i­cal­ly, house­hold debt.

Sec­ond­ly, most of that State  spend­ing is ear­marked for infra­struc­ture, at a time when some of the com­mon­est rea­sons giv­en for infla­tion­ary pres­sures are bot­tle­necks on sup­ply caused by inad­e­quate infra­struc­ture. There are good rea­sons to expect that, in the cur­rent eco­nom­ic cli­mate, these planned debt-financed projects will reduce future infla­tion­ary pres­sures, not add to them.

Third­ly, most of these hypo­thet­i­cal debt do not yet exist. These are for­ward commitments–out to 2011, which is more than one Fed­er­al elec­tion away. They can’t be a fac­tor in the cur­rent move­ments in eco­nom­ic vari­ables of any description–and until the Lib­er­al Par­ty adver­tis­ing cam­paign on this fur­phy began, I doubt that they would even have fig­ured in the con­ver­sa­tions at this morn­ing’s RBA meet­ing, which will decide whether rates do or do not rise tomor­row.

Final­ly, and of great impor­tance to whichev­er Par­ty wins the next elec­tion, there are good rea­sons to expect that Fed­er­al debt will blowout in the future, and not to fund infra­struc­ture, but to cope with an eco­nom­ic down­turn caused by exces­sive pri­vate debt. Just as the “keep­ing inter­est rates low” elec­toral cam­paign of 2004 back­fired very bad­ly on the Lib­er­al Par­ty in this elec­tion, so could any claim to keep­ing gov­ern­ment debt low in this elec­tion.

If a reces­sion occurs dur­ing the next Fed­er­al term–and giv­en what is hap­pen­ing in the USA right now, there are good odds on this “if”–then whichev­er par­ty is in pow­er will find its tax rev­enues dimin­ish, and its expen­di­ture on social secu­ri­ty rise. It will go into deficit, and in the cir­cum­stances, this will be an entire­ly jus­ti­fi­able devel­op­ment: in a pri­vate-debt-dri­ven down­turn, gov­ern­ment deficits enable the pri­vate sec­tor to refi­nance. To try to main­tain a sur­plus in such an envi­ron­ment would be eco­nom­i­cal­ly irre­spon­si­ble.

So though my com­ments may be inter­pret­ed in a par­ti­san or Par­ty-polit­i­cal way, they were not. I have been scrupu­lous to keep my per­son­al polit­i­cal pref­er­ences out of my com­men­tary, and I am avail­able to dis­cuss eco­nom­ic pol­i­cy on the issue of pri­vate debt with any reg­is­tered polit­i­cal par­ty.

My inter­ests are also in the much longer term than the sim­ple issue of which Par­ty will win the next election–and in that spir­it, I would advise the Lib­er­al Par­ty that it would be unwise to con­tin­ue with this cam­paign of blam­ing the States for the prob­a­ble rise in offi­cial inter­est rates tomor­row. If one looks beyond this year’s elec­tion, then if the Lib­er­al Par­ty wins, and there is a reces­sion, and the Fed­er­al Bud­get nec­es­sar­i­ly goes into deficit, then:

  • It would be eco­nom­i­cal­ly irre­spon­si­ble to respond to that bud­get shift by fur­ther bud­get cut­backs, which would only exac­er­bate the down­turn; and
  • At the elec­tion after that, the ALP would have a per­fect weapon to beat the Lib­er­al Par­ty over the head with–two failed promis­es in a row, one on inter­est rates 2004–2007, the oth­er on deficits 2007–2010–and the Lib­er­al Par­ty would prob­a­bly lose the 2010 elec­tion in the biggest elec­toral land­slide in Aus­trali­a’s polit­i­cal his­to­ry.

So for the sake of Aus­trali­a’s eco­nom­ic future, and yes, for the sake of the con­tin­ued via­bil­i­ty of the Lib­er­al Par­ty after the 2007 elec­tion should the Par­ty actu­al­ly win, I respect­ful­ly sub­mit that this par­tic­u­lar elec­toral cam­paign should be dropped. It is, truth­ful­ly, “total, total bull­shit”.

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About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.