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”.

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.
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  • SteveZ

    Hi Steve,

    I thought you might find this inter­est­ing. Jim Cramer from the U.S. com­ments on the nature of the sub prime mort­gage cri­sis. He does rant on but the com­ments are inter­est­ing. The link can be found here.


    It appears the con­ta­gion is spread­ing.

  • Wow! And I thought I could lose it on occa­sions…

    I am still attempt­ing to main­tain a some­what reserved stance on this issue–I do not want to be labelled a crank as a result of an intem­per­ate remark, even if the remark is in fact accu­rate. What con­cerns me is that peo­ple who are nor­mally part of the cheer squad for finance mar­kets are in fact mak­ing the “Armaged­don” remarks.

    On which note, I’m work­ing on a quick report from the House of Reps Eco­nom­ics Com­mit­tee Round­table on hous­ing loans. Back shortly.

  • I have been try­ing to find how to reg­is­ter and be able to con­tribute com­ment to Steve’s won­der­ful site.

    If this gets through it would seem I have finally got through the process.