May21
Excellent presentation on Scribd on Australian housing
on May 21st, 2010 at 6:07 pmPosted In: Debtwatch
This presentation was noted by a blog member today. Take particular note of slides 21-20 which compare the balance sheets of US and UK banks to that of one Australian bank, the Commonwealth.
How to Profit From the Coming Aussie Property Crash (and Banking Crisis)
Also a quick note that the site’s server crashed this morning and had to be restored from backups. Several blog comments were lost, including some from new members. These records of these new members might also have been lost, so if that applies to you, please rejoin and resend your comment.
Steve, don’t listen to those naysayers. They’ve conveniently used the “sensationalist” and “emotional” weasel words to put down something they don’t like.
FYI, veteran banking analyst Brain Johnson said that Australian banks are much **MORE** highly leveraged than the UK and US banks. This is a fact. I rather listen to him then listen to those clueless naysayers. It is also a fact that there’s a $13 trillion “off balance sheet” liabilities in the banking system. I have no clue what hell of a risk is inside these liabilities, and I doubt even the RBA or APRA have a clue either. These are large numbers. But just because they are large doesn’t mean it is “sensationalist” or “emotional”.
I concur with sj, that the author of this presentation is asking a very simple question. What if an accident happen to Australia’s banking system? I shudder to think of the consequences.
P.S. “hysteria” “emotional” “sensationalist”
I think these words are made with the intent to grossly exaggerate.
Mr Keen
This be my last comment for a very long time you say this is not up to your usual high standards.
Like to go on record and say if the banks do get into major trouble this will be your best post ever, take on the naive herd bloggers takes courage Mr Keen.
Your high standards will drop Mr Keen if you allow the naive herd to take control.
Mr Keen not surprise by you wanting to change track,you are worry about flame wars.
Now I know not to short the banks yet, the naive herd come first.
Good luck.
Agree, sj.
Steve, do not let the naysayers dictate to you what you should write. Don’t let them decide what ‘quality’ posts should look like.
If those who go into cash and miss out on the rally blame Steve shows that they don’t know what self responsibility is. I miss out much on the rally too. But do I blame Steve? No! I take personal responsibility for my decision.
Steve,
It’s interesting that people should believe or think that because you post a blog for discussion that it should degenerate any work that you have previously presented, even if you have said “hey look at this “comic strip” type of presentation by some one a bit crude (in the true sense of the word) however the extremity highlights the vulnerbility that Prof Ross Garnaut wrote in his book “The Great Crash of 2008″ Prof Garnaut states the the Banks in Aust were up the creek without a paddle at the time of the Great Crash. Sure, we weren’t into parcelled deritatives but were well onto the way of copying the USA into it at the time. He also states that we were lucky that USA fell first when it did for Aust was only 4 years behind them but well on the same path.
I recall in 2003 the then Govenor of the RBA McFarlane Burnett, publicly stated that the housing market in AUS was overheated. Buying stopped immediately and did so until the GFC when it went down for a short period of time until the Govt first home vendors Stimulus ignited it again.
Meanwhile in the USA no such caution was issued quite the contrary the great moderation was to continue forever.
It doesn’t matter how sophisticated the message is, by text book such as Garnaut, (in my opinion a great read)or by comic strip the message is the same -beware we are in danger -sort it out for yourself.
Steve, nobody can predict the next move however we can all accept that Debt personal or otherwise is the major problem and debt swap from private to public (Govt)just transfers and compounds the problem for the Govt debt has to be repaid from the private sector (taxes- mining super tax etc)
There are no immediate answers in my opinion for each is contrary and has a different problem however because (different to the past depressions) we are now Globally both dependent and interdepent on each other there is no escape, just a matter of time before we (as a nation and individually) find our own level.
Sure as hell though ,you have been right, too much credit, and too much private debt in Australia at least has caused to too little productivity and no matter how it is expressed it ends up the same.
Individual intelligence needs to take responsibilty for how one reacts to “blogging” and other peoples thoughts.
We should be very mindful that openess and sharing different perspectives is what we need, not image, to shape thought stimulus.
Thanks Steve..looking forward to the next post. I’ve had a hard week too, hence the somewhat emotional posts!
I guess the main point I was trying to make is with the presentatin (apart from your slides at the front), these slides lack any context. Yours for example generally offer a historical context so you can see what happened in the past may happen again in the future.
Slide 21 merely shows that Australain banks have more housing loans than other banks. On it’s own it looks scary. If compared historically it may actually be proven that banks with greater percentage of home loans, have higher lending standards and are able to survive housing downturns then those with low percentages. This is certiainly backed up by the way RAMS etc disappeared, whislt the big banks hardly missed a beat.
It is this type of aspect that I believe you generally cover quite well in your normal posts.
Hi Jack Spax and thank you for your observations…MMT is one thing. I’m sure the theory properly applied works as well as any other in an ideal world (like most economic theories!)As I have stated often enough I have no real argument with the basic idea. I am fascinated as to why anyone thinks it is anything new or original. Further I have been unable to get a decent thoughtful comment anywhere to Bob Parentau’s paper which illustrated the problem of trying to print money to solve the problem. Not one proponent of MMT would comment on the paper by one of its own apostles. Why not? My observation would be that it was a clear illustration, and probably the best I’ve seen in the last few years, in MMT terms that you CANNOT just start printing money to solve the problems.
MMT is NOT the problem. It is the application of printed money to the current structure without real deep change in both the economy and structure of our society. As it stands by printing you just create more debt. I note the later Bilbo proviso that if the printed money results in the manufacture of real things in an economy that is operating below capacity then it is OK. Who could possibly argue with that???? Somehow in a society without the education, equity or structure to recreate an industrial base within the next, AT LEAST, 25 years, the application of printed money is going to result in the production of ‘real things’.
The reality is however it never does result in the production of real things. Government is much more short sighted than business being only interested in winning the next election conducted under the influence a stupid corrupt MSM. Money let loose at less than an appropriate positive after tax interest will always result in the misallocation of resources. This is obvious in a myriad of ways throughout the totality of our economy and the resulting inefficiencies are choking real enterprise and real businesses producing real goods.
The problem of trying to ensure that the money is spent on REAL things in the Aus economy at the moment is insurmountable. The road back from where we are is a very long one and I, for one, cannot see how it can be achieved within society as it is structured. We have already sold off most of what little manufacturing base is left to foreign companies just to maintain our consumption levels. The food chain, between the farm gate and the supermarket, is totally foreign owned. Our mines are mostly sold in exchange for 4WD’s and flat Screen TV’s. Hence we have the currrent desperate moves to try to claw back some higher income stream from the mining sector. As a society we could have saved over the last 50 years and owned them ourselves. We elected not to in favour of indulging ourselves. We have no savings as a result of real after tax negative interest rates. Our education systems are out of whack with reality. Our dollar is way overvalued because of equity sales, borrowings, and speculative hot money. We all think we deserve a lifestyle in excess of what would be realistically available to us. I’m not trying to allocate blame. Discussion of the failure of our underlying philosophy would occupy a multitude of volumes.
I am merely stating that under current conditions, if you print money in the these circumstances, it will, over time, mostly end up creating higher foreign debt and a sell-off of what little equity we have left in our own country. We’ll get some more shopping centres, more coffee shops, and more Public Servants doing nothing other than to create more regulation setting up REAL businesses for failure. We will get no REAL goods produced. We will simply import more. The long term outcome, set against how the rest of the world is developing, will be a total disaster. It will be much worse than any hardship now envisaged that will be caused by any serious effort to start to correct the imbalances.
Chartalism itself is a symptom of what is wrong…Rather than really think deeply about what is wrong and how the hell we can actually fix it, all you have to do is start printing money and we are all off to the races again!!! All our ills are cured and our hardships taken away. It isn’t going to happen.
Saying the same simplistic stuff over and over does not make it correct.
AK you have the wonderful characteristic of being absolutely 100% right, on the widest range of subjects about which you often know little, with certainty, to the extent you are able to advocate the confiscation of private property, and the hard earned savings of ordinary prudent people, to fulfil your notions, economic and social, of how the world will be organised.
Such notions have been applied to society before and are downright dangerous.
Adios folks. Enough!
Flawse aka The Outback Oracle
P.S. Jack…I know Steve is an advocate of the debt Jubilee as is Hudson. While I personally do not have the answers to all our ills, arguably perhaps none, and I am loathe to contradict someone of Steve’s proficiency and intellect, I do not believe the Debt Jubilee would prove the relatively painless process that Steve and Hudson believe. I have been a reasonably close observer of things economic, social and natural over a lifetime and my youthful predictions, of 40 years ago, about where the economy and society would go, are pretty close. So I venture my opinion.
I believe the Jubilee would simply result in more debt. Steve has qualifications which he believes would obviate my concerns however this debt thing will never be solved while no one has to pay the price of their debt.
Further, as you are aware, much of our debt is owed to Foreign interests. I can tell you certainly that the average Chinese worker will not take kindly to having his hard earned savings confiscated so that people in the Western World, who they are fully aware are a profligate lot, can continue to live to an unrealistic standard of living.
Flawse, an excellent and considered critique of some of the shortcomings of MMT.
One other point that advocates of MMT don’t often want to acknowledge is that something very similar to MMT it has already been tried and failed.
There was a period in the 1970s in Australia when the Australian government would cover funding shorfalls partly by borrowing from the Reserve Bank (ie printing money). This was of course a time of simultaneous high inflation and unemployment.
Our current monetary arrangements, which include the voluntary government budget constraint which stipulates that the govt must borrow from the markets (and not the RBA – money printing) to cover deficits, is a direct result of trying to fix the problems associated with previous system.
Some of this is summarised here:
http://www.rba.gov.au/publications/bulletin/1993/nov/pdf/bu-1193-1.pdf
To be fair, when I made this point on Bill Mitchell’s blog, he did respond with a very long-winded (but interesting) post.
http://bilbo.economicoutlook.net/blog/?p=7958
However I found it to be quite unconvincing, as the crux of his argument was really just that is was all a conspriracy which “neo-liberalism has promoted since its morphed out of the slime as Monetarism”.
Hmmmm, play the ball not the man Modern Monetary Theorists…..
TOO, Gamma,
The first result of any hint of “money printing” will be a dramatic escape of the speculative capital and whacking of the exchange rate. This will be initially painful but the pain will be applied mostly to the consumers – exactly where it should be applied. Bill doesn’t like to talk much about this issue. But wouldn’t it be good?
This will happen anyway, sooner or later as running trade deficits forever is simply impossible. But there are no other levers left (except for inflation) to make this unpopular change happen now.
I am not a blind advocate of socialist policies and “big state”. If I read rants like this:
“‘What would you prefer?” Senator Conroy asked. ”A corporate giant who is answerable to no one and motivated solely by profit making the rules on the internet, or a democratically elected government with all the checks and balances in place?””
http://www.smh.com.au/technology/technology-news/minister-slams-facebook-breaches-20100524-w89g.html?autostart=1
I can promise only one thing – I will vote for the Greens and Liberals so that Senator Conroy’s party is removed from power for at lest the next 12 years – deflation or no deflation, mining tax or no mining tax, at any level of government and at any cost.
This is no longer about politics. Freedom of speech is meta-politics. The cost of removing the British Labour from power will also be high but so what? They deserved that because they have poisoned British democracy.
The only reason I believe inflation is inevitable is because there is an exponential growth in total debt not matched by the exponential growth in income. This is algebra not socialism.
People who only read news from Australian media have no idea how serious the GFC Mk 2 is in Europe. People like Kevin Rudd or Stephen Conroy would probably like us to not know.
Please read this:
“Andrew Roberts, credit strategist at RBS, said last week that the world could be heading for Great Depression II. Albert Edwards of Societe Generale expects some years of deflation, followed by hyperinflation as countries monetise their deficits. ”
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/7760827/MPCs-Adam-Posen-warns-Britain-at-risk-of-Japan-style-deflation.html
and this:
“The tragedy of the interwar years in Germany was that the Social Democrats – then the world’s foremost socialist party – became fatally tainted by acquiescing in Bruning’s deflation torture from 1930 to 1932. They did so, of course, because they dared not confront the orthodoxies of the Gold Standard.
By then the fixed-exchange mechanism had gone horribly wrong – in much the same way that EMU has gone horribly wrong – because the surplus countries were not recycling demand to maintain equilibrium. It had become a job-destruction machine. The result in Germany was the Reichstag election of July 1932 when the Communists and Nazis won over the half the seats. ”
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7756879/Europes-deflation-torture-is-a-gift-to-the-Far-Left.html
Oh I wouldn’t expect the debt moratorium process to be painless Flawse,
There’s no painless way to get out of the misguidance of the Australian (and most OECD) economies for the past 40 years.
I simply see it as the most honest and least painful of the options. However it would cause so much pain if implemented now that it, and not the debt-runup and production-rundown of the past 4 decades would be blamed for the pain.
Hi AK,
“Actually I understand very well what may be wrong with high CPI inflation looking from the point of view of a baby boomer. But who said that people have to deposit money in banks, invest in bonds or gamble on real estate in order to save for their retirement?”
So everyone should have their savings invested in companies that you think are immune to inflation. Well that sounds like a great idea, because in the system you advocate I sure as hell won’t have any money deposited in a bank account, and I’m pretty sure not too many other people would either. I’m sure we can just import savings like we currently do, I guess that’s why Zimbabwe has a huge flow of investment capital.
Your system will eliminate savers, who needs them when you can just print deposits and everyone will be forced into greater speculation in the casino stock market.
All I can say is that you are living in a dream world of theory that doesn’t work in reality. Flawse has pointed this out all too well.
As for whether I prefer deflation or hyperinflation, I don’t really care for either, and luckily enough it’s not a choice you or I will have to make. If you want a prediction of which I foresee another large deflation, bigger than 2008 that will take out a few countries/currency’s followed by the printing techniques you advocate destroying the rest returning us to the feudal era where precious metals are money and trade will be at a standstill. By the time you realise your theory is wrong it will already be too late though.
Flawse
Agree with your comments human nature (greed)re the likly results.
My own theory is that rather than debt being issued and having inept governments controlling the printing of money , an independant Reserve bank, not like the American fed system, can substitute equity into a separate financial entity(not a fannie mae) that can both bankroll productive enterprises that actually produces things and can also be used to cleanse the banking system. At present I believe our major banks particularly in respect to small and medium size business are sitting on a lot of Zombie loans, ie they are getting paid the interest, but because there is no growth, particulary in areas like retail, they will be forced to either sit on the debts or take a severe haircut as well as indirectly add to the unemployment ranks.
http://www.theage.com.au/business/sitting-on-a-big-debt-bomb-20100523-w41e.html
The separate RBA bank can purchase the impaired assets at a discount from the majors and thence restructure the debt, probably still causing pain but at least alleviating. The separate RBA bank doesn’t have to make a mega profit, it doesn’t have to pay a divedend and it will keep the wheels turning when all the bad debts clog the fan.
This would give the RBA another tool for financial stabilty and yes it is trying to target unemployment.
This beats the hell out of the Japanese experiment of their banks onselling the bad debts to the Yakusa.
http://www.businessweek.com/magazine/content/02_08/b3771149.htm
The IMF and the big merchant banks would scream, but so what, we could always make the Tiwi Islands into an Isle of Man type tax haven and get support for the dollar that way if it was too big a deal.
We tighten bankrupcy rules after the haircut, but human nature will probably still find a way of rebuilding the sand pile of debt.
Anyway just a thought I agree if we can keep the money away from the politicians we might have a chance.
ned,
I think that you have misinterpreted my words.
Nowhere I (or prof Mitchell) have advocated unchecked money printing. I have advocated allowing for 5%-7% inflation to run for 10 years while interest rates are held low and the excess of liquidity is carefully removed by taxation targeting speculators so that bubbles do not form.
Hyperinflation may be a result of allowing for deflation to take hold as the debt/GDP ratio can increase further if GDP shrinks. Then massive printing money and currency debasement will be the only option left when people start rioting.
Hi AK,
I think it’s great that you believe the “Potentent directors” fallacy. The problem is that in the real world “allowing for 5%-7% inflation to run for 10 years” isn’t possible. This is the point I am trying to make, the market doesn’t allow for what you are trying to accomplish.
The AUD will be dumped on the instigation of this policy, take a huge instant loss (let’s say for 50% argument’s sake) and then keep moving down. This is not hyper inflation but currency collapse.
The RBA/FED/Central bank has two choices, save the currency and suffer deflation or destroy the currency and inflate away debt. These guys aren’t able to orderly print money at 5%-7% per year without the market panicking. Inflation targeting has been attempted by the RBA for years, if they can achieve it then why did we have a GFC at all? These are the questions that theories which rely on the potent directors fallacy always fail on.
I don’t really want to speak for Steve, but maybe it was a mistake to describe the presentation as “Excellent”. But I want to ask, would people have these same complaints (about supposed quality issues)is he had simply described it as an “interesting” presentation? If I was concerned about this play on words (and I am not) then I personally would be prepared to give Steve the benefit of the doubt and interpret his recommendations that way (please correct me if I am wildly wrong on this Steve).
Ken Henry on the RSPT
http://www.treasury.gov.au/documents/1813/HTML/docshell.asp?URL=Secretary_address_ABE.htm
ned,
So finally we are getting to the core of the issue. I have not said that the inflation can be targetted precisely at 7%. It can be allowed to rise a bit. I agree that the scenario when the exchange ratio of AUD against USD falls down quite dramatically is possible because of our sick trade balance (this may happen anyway). My point is that the sooner this happens the better.
This is in my opinion the only feasible way of showing the foreign speculators the door. It is the current setup (relatively high interest rates, expensive AUD, trade deficit, even greater current accout deficit fuelling asset bubbles growing) what destroys the productive economy and creates the massive imbalances.
What I was talking about is not returning to the budget surplus, keeping unemployment low, not increasing interest rates, applying QE if required to control bond rates and at the same time increasing taxes on capital gains, imposing land taxes and taxes on wealth, getting rid of negative gearing etc. (fiscal policy).
Sounds socialist? Not any more. This is what the Tories plan to do in the UK:
http://www.telegraph.co.uk/news/newstopics/politics/7720926/Coalition-government-outcry-over-Capital-Gain-Tax-plans.html
Will this be implemented in Australia? I don’t think so – we have been brainwashed thoroughly enough by the Kev’s New Labo(u)r and the neocons. We will get the recession we deserve to have and then either directly proceed to money printing or suffer other nasty consequences including the nationalisation of our resources sector.
I mean nationalisation by the Chinese not by the Australian government. This is what Austrian school of economics has no answer for. The very existence of China contradicts their theories.
The process you described is not currency collapse. The adjustment now would not be as dramatic as in Argentina. Please be aware that what happened in Argentina was the best (or rather the least damaging) outcome.
Did a similar adjustment damage Polish economy? From 3.2 PLN/EUR to 4.8 PLN/EUR and then back. No, the currency adjustment acted as a shock absorber. Please compare Poland to Greece now.
http://finance.yahoo.com/echarts?s=EURPLN=X+Interactive#chart2:symbol=eurpln=x;range=5y;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
If we save the currency by allowing for deflation we may destroy the country.
Thanks a very valid perspective on it MMitchell–”interesting” would have been better than “Excellent”. But as noted at the time I was rushing, and I certainly wasn’t applying the standards I judge myself against to call it “excellent”.
Hi ak,
I think I see where we differ. You think that the gvt/CB CAN tweak here and there and implement these policy’s. I am strongly of the opinion that they can’t. These guys are not in control of inflation/deflation, everybody is.
This is where I strongly agree with Steve, and we will see deleveraging by the public, they can’t stop this. At that point they will have a choice, QE or not QE. If faced with doing nothing or something people in power will 99% of the time do something, so I believe we will see QE, so many places that are over leveraged are doing it already (US, UK, EU, Japan etc) everybody else will be doing it anyway so why wouldn’t we.
We are conditioned to think these guys are capable achieving this goal or that, like they are a player at a chess table moving all the pieces. I see Bernanke or Stevens more like one of the pieces, the king, he looks good but is slow to move and is always playing defense. Keeping this analogy the way I see it is we have the slow useless king defending the bishops (banks) in a futile endgame. Don’t be fooled into thinking these guys are outside the game just because they usually don’t play by the rules.
By the way I should clarify, I think that this CB interference can effect changes in the short term, my thinking is in the long term.
ned,
I may agree with you that our “king” is slow and as I said we deserve that.
ak,
There is one thing that I do not understand about MMT.
Every single one of your ideas can be implemented in our current monetary system, without exception. It is all basically standard Keynesian thinking. The only difference is that Chartalists want to eliminate the government bond market.
So why is there a need to eliminate the bond markets (ie abolish the voluntary government budget constraint), and fund spending directly through money creation, rather than bond issuance?
Is it because the government requires fewer constraints on their actions, from the public? The bond market acts as just such a constraint.
Given you hold such a dim view of absolute government power in other areas, it is very surprising that you would be so willing to forgo this important check on unrestrained government power that the bond market provides (albeit imperfectly).
Further, regarding your prescription for a target inflation rate of 5%-7% with low interest rates (presumably below 5%), who do you think would keep their money in the bank under such circumstances? Would you, Adam, be willing to accept a negative real return on your money?
Gamma,
1. I do not subscribe to MMT as several questions about long-term stability of the system have not been answered. MMT seems to me to be the economics for rainy days. I would not follow it blindly when it is sunny.
MMT theorists do not mention inflation often and they pretty much ignore the cost-push inflation transmitted to the economy via the cost of imported goods. As you know my attempts to elicit any answers to the questions I asked have been so far unsuccessful. Inflation in fact may be the key element stabilising and rebalancing the unstable global financial system – but somebody would need to analyse and model this. MMT scholars seem to be not interested. They just say: spend whatever it takes. I am not so sure about that.
I am also not fully convinced that the origin and function of money can be reduced to the following statement: “the power of the state to impose a tax liability payable in its own currency is sufficient to create a demand for the currency and give it value”
2. They claim that the natural interest rate is zero: “In a
state money system with flexible exchange rates running a budget deficit—in other words, under the ‘normal’ conditions or operations of the specified institutional context— without government intervention either to pay interest on reserves to offer securities to
drain excess reserves to actively support a non- zero, positive interest rate, the natural or normal rate of interest of such a system is zero.”
http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf
http://bilbo.economicoutlook.net/blog/?p=4656
3. If the natural interest rate is zero, why bother selling bonds?
4. What is the function of the bond markets? To judge the risk of the sovereign default? Government power was almost fully restrained by lobbying of the banking and investment sector anyway so why do they need yet another lever? I don’t want to mention that a lot of trading is done by algos – how much checking of the government can you implement in several “if-else” rules executed in a sub-millisecond time?
I would attempt to restore and streghten the democracy instead.
I would have absolutely nothing against the current financial system if the global economy worked well. But it is broken…
The economic model which was in the 1960-ties gave us the greatest technological achievements of the mankind – space travel, modern computers, communication technology, etc.
The model from the 2000-ies gave us this:
http://thegamersjournal.com/cc/wp-content/uploads/2007/07/icrap.JPG
5. It is obvious that I would not accept negative return on my money and this is exactly the point. I could hold $10k as a buffer if I need travel urgently to Europe. The excess would be invested for example in bonds issued by private companies. ZIRP would stop people hoarding money in banks and force these with the excess of cash to invest. The taxation system should discourage pouring money into speculation.
This is Keynes not Marx.
The end result would be “shortening the buffer” held by people, increasing the velocity of money. Again – this has to be modelled.
MMT is an interesting proposal of chosing alternative operating point of the system. http://en.wikipedia.org/wiki/Biasing
Please do not think that I am naive and I am not aware of the potential side effects of the implementation of MMT – including hundreds of stupid New Labo(u)r politicians controlling everything. But the side effects of the deflation may be much worse, including the rise of fascists or extreme leftists.
If we have to surrender to deflation what will happen to us when we hit natural resource constraints in the not so distant future?
Anyway I agree that the “king” is slow and some of his senators may even be mentally impaired.
This is how much people learn:
1997 okapi.ict.pwr.wroc.pl/powodz/kozanow4.jpg
2010 http://www.wroclaw.pl/powodz/galeria/panoramy/450/kozanow_450.jpg
“So why is there a need to eliminate the bond markets (ie abolish the voluntary government budget constraint), and fund spending directly through money creation, rather than bond issuance?
Is it because the government requires fewer constraints on their actions, from the public? The bond market acts as just such a constraint”
hi gamma,
well infact why the government needs to issue bonds under the current framework is to manage liquidity in the banking system in order to manage short term interest rates. it is not for financing debt.
in a government deficit environment, there tends to be excess liquidity in the banking system which place downward pressure on short term interest rates, and if the rba wants to hit its mandated interest rate target it needs to have a mechanism of adjusting liquidity. government bonds play such a role.
so expanding upon this theme, under mmt which advocates more or less permanent deficits except under very limited circumstances(such as a trade surplus), interest rates would naturally head towards the risk free level of zero due to system wide surpluses in the banking system, which banks on there own would find it impossible to clear, hence the intervention of the rba. the arguement is the rba should only fascilitate the clearence of settlement balances , and not be involved in the arbitrary setting of short term interest rates , with its attendent perverse distributional impacts.
they ask the question , why set up a bond markket with its attendent cost to the tax payer, in terms of the yield to be paid out . just get rid of interest rate targeting.
hi outback, good to hear from you,
lots to chat about,
the evils of the current account deficit,
here’s my take on it
well it depends on how you look at it,
living beyond our means, or foreigners seeing the investment and production potential in our economy so they desire to hold oz dollar denominated assetts.
i dont think you will get an arguement with me that the current account is a double edged sword.
for as long as ive been around australia has run a current account deficit. not unexpected mind you, given we have only 23 million people. exepecting 23million people to finance the full productive capacity of a nation 70% the size of america with its 300 million people, is a stretch. our productivity levels would have to be worlds best practice and we probably still wouldnt get there.
so foreigners are willing to fill the gap for the time being.
the other side of the arguement is, that the CAD is a reflection of the domestic private sectors dis saving, and as consequence the foreign private sector has filled the financing gap through the banking system,and other direct and portfolio investment in oz.
its probably a bit more complicated than argueing the domestic private sector is dis saving, since part of the reason for the capital inflow is that we just dont have a big enough domestic capital base to really fully exploit the productive capacity of this country perhaps.
and we mustnt discount the fact that some of this inflow has been used to extract economic rents in the fire economy as oppossed to being invested in productive endeavours
where the dis saving arguement can have some traction, is that government fiscal policy has led in part to this dis saving by the domestic private sector. lets not forget, in national income accounting terms the government financial surplus is equal to the private sector financial deficit. nett result is savings being drawn away from the private sector, and to cover the short fall in savings the private sector through the banking system has gone to foreign capital markets to borrow the funds required to meet its savings and investment needs.
so all those costello surpluses may have contributed to the problem.
is all this borrowing by the banking system a problem. hell yes, especially if the banks have borrowed in other currencies and their is a currency exposure involved. roll over risk is also a potential problem if global capital and currency markets become dysfunctional again.
i dont think anyone is argueing that if foreigners decided not hold oz dollar denominated assetts in ever increasing amounts, that this wouldnt cause problems for the currency and problems for the import section of our domestic economy,
but in the same breath exporters may be happier in terms of their price competitiveness, and we may get more import substitution, and more direct foreign investment because our assetts would become cheaper.
but none of this constrains a government from employing discretionary fiscal policy and running appropriately sized deficits to counter anything mentioned above. i think you could very well argue that our obsession with budget surpluses is exacerbating our problems with the current account,at least the nett income deficit, and running larger budget deficits will in fact provide the private sector with the funds to more fully finance its investment and savings desires.
why let the private banking system source non australian dollar denominated financing from overseas when the national government can provide the funds itself.
you have argued that government printing of money(if we can use that term) or spending will lead to more debt.
well yes and no.
the only entity that can create an assett without an equal liability attached to it is the government. whether the creation of this assett is used to re leverage or repair balance sheets in the private sector is a debate about government spending and taxation policy, its not about whether the government is financially constrained, which it is clearly not, in CAD environment.
infact , if foreigners no longer wished to hold oz dollar denominated assetts, it would be up to the government to step in and cover the funding shortfall and maintian the value of the currency by ensuring the level of domestic demand, and productive capacity is maintained.
anyway these are some quick thoughts on the matter.