Shorten Stupid, Swanning Around On Debt

15 Aug

Not only is our Treasurer unquestionably The World’s Stupidest Treasurer (“Wayne: OOPS! I Did It Again”).

The Assistant Treasurer wants his title.

From ABC Insiders (note carefully the emphasis added):

BARRIE CASSIDY: Now what’s happened to the budget bottom line? This promise to reach a surplus by 2012-13, will that now happen?

BILL SHORTEN: Well as our Prime Minister said, getting to a budget surplus is our objective.

And just referring to your earlier questions about the stock market and Australia and how we’re going, when you look at our public sector finance position in Australia compared to the Americans, the Europeans, we are doing very well.

Our net public sector debt at the moment is 7.2 per cent. Or to put it in plain English, if you as the Australian economy were bringing in $100,000 our net public sector debt is $7,000. Our interest payments are 0.4 per cent or $400 off a base of $100,000.

Oh dear.

This is not only the Assistant Treasurer.

This is also the Minister for Financial Services and Superannuation ( “Stealing Our Super – I DARE You To Ignore This Now” ).

As we saw with the RBA Governor, Shorten is either a liar, or a blithering idiot.

Or more likely both.

His “plain english” analogy is manifestly false and stupid.

And whether by accident or intent, it is inexcusably deceptive.

He is of course, obliquely referring to the preferred “standard” measure of government debt – “as a percentage of GDP”.

Regular readers (and Twitter followers in particular) will know my strongly-held views on the politically-convenient falsity of this measure.  I maintain that it is a completely invalid (and deliberately deceptive) measure by which to assess government debt levels.

“GDP” stands for “Gross Domestic Product“, and is supposed to be a measure of the market value of all real “production” of the economy.

The reality is far different.

Rather than actually measuring the actual market value of what is actually produced and actually sold (that is, real products/services that are of real value), the methodologies used for measuring GDP are, to be blunt, fudges. Invented by ivory-towered #JAFA‘s, disconnected from reality, in high-minded belief that they are “approximating” the real world. In the end, what we find is that the “GDP” (and thus, the economic “growth”) figures that we are given, are really nothing more than the grand sum total value of transactions (ie, buying and selling) in the economy.

So, to use a simplistic example – Person A pays Person B $5 for something, and Person B uses that $5 to pay Person C for something; the “GDP” measure considers that to be $10 worth of “GDP”. Note well: nothing new has necessarily been “produced” here. The same $5 has simply churned from one person, to another, to another, in exchange for goods or services. But for the purposes of the false GDP measuring stick, that series of transactions is considered $10 worth of “GDP”.

[Importantly, if the bankstering system creates 5% more new money (credit, ie, debt) out of thin air this year, thus devaluing the buying power of the money already in the system, and as a result, next year the same transaction costs $5.25 from Person A to Person B, and $5.25 from Person B to Person C, then the total ($10.50, versus $10 last year) would be deemed notional “economic growth” of 5%. When in reality, there may still be no new real wealth “produced” in that example … just a churn of more (devalued) money.]

Now most of us would think it quite stupid for a household or a business to measure its debt against the grand sum total of all its buying + selling (or spending + earning).  Instead, for budget purposes we measure our debt versus our income (or for Household Balance Sheet purposes, against our liquid, convertible-to-cash assets)

Likewise, when it comes to the national Budget, the Government should not be permitted to blur over and hide the truth of the issue by talking about the debts it accrues (for the taxpayer to pay back) as a percentage of all the buying and selling in the economy. Instead, it should be required to discuss the debts it accrues, as a measure of government debt versus government income.

Let’s consider a real world example.

In the 2009-10 Final Budget Outcome, we see the following:

2009-10 Final Budget Outcome, Part 1, Table 1

As you can see, the government’s income (Revenue) was $292.8 Billion.

It claims this was 22.5% of GDP. Meaning that the GDP calculation for 2009-10 must have been 292.8 / 0.225 = $1.3 Trillion.

Now, to use Shorten’s false, misleading and deceptive analogy, he would have us all think that the government was “bringing in” $1.3 Trillion.

And so, he would have you focus on the totally irrelevant fact that the government’s net public debt was “only” 7.2% of that $1.3 Trillion churned in the economy (or approx. $94 Billion @ June 2010).

Convenient bit of perception management.

Because it doesn’t sound like very much, when stated that way.

But … what if you instead compare the actual public debt number, not to the $1.3 Trillion in transactions churned in the economy, but to actual government income?

Using the same 2009-10 example, $94 billion in net debt, versus $292.8 billion in total income (ie, 32%) sounds a lot worse, doesn’t it.

And most importantly of all, it is an honest way of expressing debt that is far easier for average voters to understand.

When you look at it this way, what you see is a very different picture of government debt.

Presented in these terms, it is like a householder who earns only $29,280 in income, with a net* debt of $9,400.

Once you pay for all your costs of living out of your $29,280 in income, that $9,400 debt is not such a “low” figure after all. Servicing the interest and paying off the debt principal is not so easy, as the deceitful politician would have you imagine.

Finally, did you notice the last sentence that Shorten uttered?

Our interest payments are 0.4 per cent or $400 off a base of $100,000.

By now I hope that you can see how false, misleading and deceptive that statement is.

You now know that his analogy is completely false – that the government is not “bringing in” $100,000 with which to pay interest on the debt.  And neither is the economy – because that “$100,000” is simply the grand sum total of all the buying and selling in the economy.  It is NOT a measure of income, or of available cash!

If Mr Shorten were honest – or, had a clue what he was talking about – then what he should have said is this –

“Our interest payments are 3.74 per cent or $13,095 off a base of (an estimated) $349,961 in Income for 2011-12 alone”.

Source: 2011-12 Budget, Paper No. 1, Statement 9, Table 1

Swanning around with false, misleading, and deceptive statements about our economy typifies the gross dishonesty of our political “class”.

It’s not good enough.

I suggest that it is high time for fundamental changes to our system of governance.

A good starting point would be for us all to fully wake up to the reality of the kind of self-serving, short-sighted, dishonest and immature scumbags who populate our Parliament, and demand a change to the rules concerning eligibility for running for public office.

I vote for a Parliament of amateurs – regular people – with no one under retirement age allowed to stand for election –

No More Mañana Or Bananas In A Parliament Of Nanna’s

* “Net” debt” is another misleading and deceptive way in which all our politicians (except Barnaby Joyce) prefer to describe debt.

Referring to public debt in “net” terms (rather than “gross”) is another example of politicians wilfully ignoring reality, in order to gild the lily and make their own piss-poor performance seem better than it is.

“Net” debt is (simply stated) the total of debt actually owed by the government (ie, Gross debt), minus the value of “financial assets” held by the government. Australia uses the OECD definition (emphasis added):

Government net debt comprise all financial liabilities minus all financial assets of general government. Financial assets of the general government sector have a corresponding liability existing outside that sector. The exceptions are monetary gold and Special Drawing Rights, financial assets for which there is no counterpart liability.

Monetary gold and Special Drawing Rights may be included as assets of the general government sector or they may be classified as assets of the central bank, at the discretion of the government.

Source Publication:
The OECD Economic Outlook: Sources and Methods.

It’s important to note the bolded phrase in that definition.

Because in choosing to use “Net” debt as the preferred figure to talk about in public, the government (no matter the Party) is wilfully deceiving themselves, and the community.

Gross debt is what the government owes.

Net debt is gross debt, minus the government’s financial assets. And with the exception of gold and SDR’s, those “assets” are someone else’s liability.

To use the politically-convenient “net” debt figure (because it is lower thus sounds better than Gross debt), a politician must count their chickens before they’ve hatched. That is, by implication they are assuming that the counterparty who is liable for the “assets” they are counting on, can and will actually make good on their liability.

The GFC which never went away is a perfect example of why you can never bank on counterparties.

The only honest way to look at debt, is the simplest way.

What you owe to others, is what you owe. You cannot bank on what others owe to you before you get it, as a false justification for claiming that your own debt burden is less than it actually is.

End of story.

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12 Responses to “Shorten Stupid, Swanning Around On Debt”

  1. Tomorrows Serf August 15, 2011 at 8:28 am #

    It’s punishingly clear that the imbeciles currently running the show have next to Zero business experience, more than likely have never drawn someone else’s paycheck, been responsible for the livelihoods of long-serving employees, have ever had to demonstrate any elemental level of business acumen or fiscal responsibility, or put their own financial balls on the line in order to generate any wealth for the country.

    A collection of “zombies” with their collective snouts in the “inexhaustible??” trough of public finances.

    Given long enough in charge, we will be having the farcical “debt-ceiling” debate the US has just suffered through. But we don’t have the exhorbitant privilege of printing the world’s reserve currency…

    Then what Swanny??? Not to worry. IBGYBG!!! (I’ll be gone,you’ll be gone) and no doubt still sucking on the taxpayer’s teat via a big fat parliamentary pension….

  2. JMD August 15, 2011 at 10:06 am #

    “Special Drawing Rights, financial assets for which there is no counterpart liability.”

    This is a load of bulls**t too. SDR’s are issued by the IMF, they are financial obligations of the IMF. Just because the IMF says they aren’t doesn’t make it so.

    Also I note;

    “if you as the Australian economy were bringing in $100,000”. In other words, since we bring in the money, its ok that Bill Shorten spends it.

    • The Blissful Ignoramus August 15, 2011 at 10:23 am #

      Exactly JMD. I thought to mention that (re SDR’s), but decided (perhaps unwisely) not to go down path of attacking that whole system as well in this piece. Thanks for pointing it out though.

  3. JMD August 15, 2011 at 11:24 am #

    From Bloomberg – “U.S. government bond yields are poised to converge with Japan’s for the first time in almost two decades, sparking the biggest returns for investors in Treasuries since 2008.”

    Biggest returns despite a downgrading. Nothing like risk free ‘profit’ to get the bond speculators on your side, the greater the moves the bigger the ‘profit’ & the bigger the market. Central banks will continue to monetise government debt, benchmark interest rates are heading down – depression.

    This will go on until the day it doesn’t.

  4. JMD August 15, 2011 at 3:50 pm #

    More from Bloomberg – “Bill Evans, chief economist at Westpac Banking Corp. (WBC), was Australia’s loneliest forecaster four weeks ago as the first to predict an interest-rate cut.

    Traders acting on Evans’s July 15 prediction would have profited amid the market carnage sparked by Europe’s debt crisis and the first U.S. credit-rating downgrade. The yield on the nation’s three-year government bond dropped as low as 3.41 percent from 4.41 percent, handing investors a 23 percent annualized return.”

    Imagine the return when the 3yr drops to 2.41%

    • The Blissful Ignoramus August 15, 2011 at 4:32 pm #

      One word. Casino.

      • JMD August 15, 2011 at 5:07 pm #

        No, no… In a casino you will lose your money. In government bonds you are a guaranteed winner. Guaranteed by the central bank that is. Benchmark interest rates must move lower to hand the bond speculators their profits otherwise they will bid up commodities.

        The big question I think is whether the central bank will compress credit spreads a la 2000-2007. At present they are not, or doing little of it, which makes me think they are afraid. But wide credit spreads with falling yields is economic depression, government bonds are inflating into a huge bubble while other credit, corporate bonds, stocks are languishing.

    • Twodogs August 15, 2011 at 7:33 pm #

      And this is yet another deception. 3.41% sounds okay until you realise it’s over 3 years. Annualised, it’s not even 1/3 of that if it’s considered compounded! If pushed, will Swanny claim bonds are yielding a still healthy 3.41%? he couldn’t lie straight in bed!

      • JMD August 15, 2011 at 8:31 pm #

        3yr government bonds are marketable securities. I’m not sure what they mean by 23% ‘annualized’ but those who bought at 4.41% & sold at 3.41% made out like bandits.

        This is my point. Those dealing in government bonds are raking it in – like bandits! – this will continue as it is just this ‘profit’ that is driving the whole charade, without it the entire global ponzi scheme, based as it is on ‘risk free’ government bonds, will collapse.

        Of course there is a limit. Bond yields cannot go below zero on a permanent basis. Nevertheless, there is still plenty of ‘profit’ to be had, particularly at the long end of the yield curve.

  5. JMD August 16, 2011 at 10:13 pm #

    And yet more from Bloomberg – “Traders are betting the Brazilian central bank will lower borrowing costs as soon as October in the fastest reversal of monetary policy in 10 years”

    I also read a similar article regarding Mexico this morning. The ‘traders’ are gunning for for ‘profits’. I think central bankers know damn well they have to provide or their obligations will lose any bid.

  6. Tomorrows Serf August 17, 2011 at 10:52 pm #

    Actually, on the topic of Parliamentary pensions, I’m really hoping that the current bloc of Government Labor hacks DON’T get rewarded with pensions.

    I’d prefer to see them rewarded with lengthy Prison sentences………

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