In the last few weeks gardening has entered the macroeconomic discourse again. All over the place – apparently – little green shoots are emerging which bode well for the future. But are there any actual signs? Recent data releases from the US and today’s Index of Economic Activity in Australia suggest that the green shoots are still somewhat subterrainean in inclination. The latest data confirms the message that last week’s Labour Force data sent very loudly – the product and labour markets are now starting to align in a very ugly way and much more fertiliser (organic) is needed in the form of government stimulus …. sorry to repeat it, but, preferably in the form of direct job creation.
Several readers have asked me to demystify the processes involved in issuing Australian government debt. They also sought an explanation for the sort of scare-mongering that various commentators have been engaging in about the increasing budget deficit causing higher future tax and interest rates because the “mountains of debt” will have to be paid back somehow. Well anyone who is worrying about saddling your kids (and their kids) with mountains of debt and punishing levels of taxation should “just take a Bex, have a good lie down” … and stay calm. All of these claims are of-course mythical and are designed to perpetuate the neo-liberal view that governments should refrain from interfering in the private market. So its time to arm yourselves with the weapons (arguments) that you can use when your mates start up with this nonsense. Yes, its time to debrief!
The only nautical analogy that I have carried through my days as a professional economist is the one that apparentely John F. Kennedy coined – A rising tide lifts all boats. It was used by famous American progressive economist Arthur Okun in the 1960s to motivate his research on upgrading benefits of what he called the high pressure economy. It was an aspirational term used to goad national governments into fiscal action to ensure that the economy was always as close to full employment (high pressure) as possible. Accordingly, when the economy is at high pressure, both the strong and the weak prosper. Labour participation is strong, unemployment is at the irreducible minimum, labour productivity is high, wages are high and a number of upgrading effects across social classes and generations occur. Children from disadvantaged families get a chance to transcend poverty and workers who are displaced by global economic changes are able to be re-absorbed into productive work. Direct public sector job creation is a significant part of the national government’s responsibilities in this regard. If the private sector is incapable of providing enough jobs then there is only one sector left, ladies and gentlemen. Today I read of a new nautical analogy and my how times have changed! Its time to debrief again!
Can a city or state become a sovereign nation? We know what a sovereign nation is – one that has the capacity to issue its own currency and oblige its residents to pay their taxes in that currency. We also know that a state or city is thus not a sovereign nation because it uses the currency of the sovereign nation it “lives within”. So a state or a city is financially constrained in much the same way as a household. In that context, spending has to be financed either from higher taxes or debt issues which clearly places some limits on what programs a city or state can pursue. Further, a city can go bankrupt (become insolvent) in the local currency whereas a sovereign government cannot. So how might cities solve their infrastructure and social needs when they are so constrained?
I rode my bike 80 kms early this morning (usual Sunday) in the beautiful Autumn weather that Newcastle (NSW) enjoys this time of year. The Pacific Ocean looks superb (although there is nothing surfable in sight – maybe tomorrow morning). The sun was out and we were heading for 26-27 degrees. Then it had to happen. When I returned home I opened this morning’s newspaper and came across an authoritative headline: US faces huge deficit blow-out, with the sub-line “Program cuts, tax hikes likely.” The journalist (added to my bogan list) probably got 0 out of 5 on last night’s quiz. Well the truth is that almost everything the journalist wrote is wrong if he is talking about the real world. Anyway, I thought so. Its that time again. Time to debrief.
Some readers have written to me asking to explain what quantitative easing is. Some of them had heard an ABC 7.30 Report segment the other night which interviewed the Bank of England Governor who outlined the BOE’s plan to “print billions of pounds” as its latest strategy to stimulate lending and hence economic activity in the very dismally performing UK economy. Once again we need to de-brief and learn what quantititative easing actually is. We need to understand that it is not a very good strategy for a sovereign government to follow in times of depressed demand and rising unemployment. We also need to get this “printing money” mantra out of our heads.
After yesterday’s shock admission that our Federal Finance Minister Lindsay Tanner was losing sleep because he was worried about the Federal debt buildup, there he was on the ABCs 7.30 Report last night giving us more cause for concern that his sleeplessness is having a negative effect on his ability to conduct reasonable dialogue on economic matters.
Today I heard that our Federal Finance Minister Lindsay Tanner is suffering from insomnia because of the growing Government debt burden. Poor thing. Why is he worrying himself sick? Well I have the cure. If he reads this blog and understands it I think he will back in slumberland sooner rather than later.
This is Part 3 in Deficits 101, which is a series I am writing to help explain why we should not fear deficits. In this blog we consider the impacts on fiscal deficits on the banking system to dispel the recurring myths that deficits increase the borrowing requirements of government and that they drive interest rates up. The two arguments are related. The important conclusions are: (a) deficits introduce dynamics which put downward pressure on interest rates; and (b) debt issuance by government does not “finance” its spending. Rather debt is issued to support monetary policy which is expressed as the desire by the RBA to maintain a target interest rate.
Lat night’s ABC 7.30 Report had a segment titled Australian economy resilient in tough times. It was so bad I was prompted to write to the ABC complaining of their neo-liberal bias. All the commentators were the usual coterie of investment bankers and private consultants all of who have particular vested interests which are not disclosed when they are held out by the ABC as so-called experts! Not one independent researcher was included in the segment. In another world, this might have been the way the show evolved.
A lot of people E-mail and ask me to explain why we should not be worried about deficits and why they do not have to be financed by debt (even if the government does typically increase its debt when it goes into deficit). So in the coming weeks I will write some blogs to explain these tricky things. First, I will explain how deficits occur and how they impact on the economy. In particular, we have to disabuse ourselves of the notion that when governments deficit spend they automatically have to borrow which then places pressure on the money markets (which have limited funds available for lending) and the rising interest rates squeeze private investment spending which is productive. This chain of argument is nonsensical and is easily dismissed. So this is Deficits 101. Next time I will detail the reason why the central bank issues bonds (government debt).
In the UK Financial Times article by Darryl Thomson, Dollar falls to fresh lows in thin festive trade posted December 24, the continued slide of the USD against the Euro is put down to “disappointing US economic data” (mostly sharp slowdown in new home sales). However, a so-called currency strategist claims it is the “deficits rather than the data which were weighing on investors minds”. The hoary old neo-liberal twin deficits attack on public spending is making a comeback.