Missing The Key Economic Point, For Dummies

30 Nov

It is rather bemusing to browse around the economic commentaries on Wayne’s MYEFO (Mid Year Economic and Fiscal Outlook) announced yesterday. In particular, the commentaries from those with a leftist bent.

By and large, from these folk we hear the same refrain as that parrotted on down the line from Treasury via their talking head (Wayne Swan). To wit, “strongest economy in the developed world”, “envy of the developed world”, “lower debt-to-GDP than other advanced economies”, “nothing to see here, move along folks”.

Here’s some good examples that caught my eye:

Secondly, let’s tackle the Opposition canard – gleefully recycled by some media outlets – that somehow we are drowning in debt. It doesn’t take much – like five minutes on the Internet – to show that total government liabilities at around around 22 per cent of GDP are the lowest in the OECD and compare extremely favourably to just about every other developed economy.

It appears rather obvious from The Failed Estate’s analysis, that he did indeed spend “like 5 minutes on the internet” researching his momentous piece of groupthink.

And then there was New Matilda’s Ben Eltham. See if you can spot the drive-a-truck-through-it hole in his effusion (hint, emphasis added):

Step back from all the sound and fury about budget surpluses and the European debt crisis for a moment, and have an unbiased look at the latest Treasury figures on the health of Australia’s economy.

Unemployment is expected to peak at 5.5 per cent next year, and remain at the level into 2013. Inflation will be 3.25 per cent. Wages will grow at 4 per cent. Consumer spending will grow at 3 per cent, and the economy as a whole at 3.25 per cent.

These are figures that would make finance ministers in Europe weep. The Australian economy is growing. We’re adding jobs and keeping unemployment low, consumers are still spending, and inflation is modest. And yes, the budget will return to surplus.

Note to Mr Eltham: These are “estimates” and “projections”. Not outcomes. “Expected” does not equal “will”.

Indeed, as regular readers know, both the budget and MYEFO are all about “estimates” and “projections”.  And the Treasury department has a sterling record of abject failure when it comes to getting within a bulls roar of accurately predicting the final budget outcomes. Indeed, in less than 6 months, their “truly extraordinary” growth forecasts underpinning the May 2011 budget “estimates” and “projections”, are already shot to hell.

But our purpose today, dear reader, is not to dissect the ignorant parrotry of “leftist” journalists and bloggers.

Or “rightists”, for that matter.

Our purpose is to identify the key economic point that they are all missing.

One that even respected mainstream economic commentators like Access Economics’ Chris Richardson, here implying that it may not be wise for the government to be cutting spending at this time, have universally overlooked:

Deloitte Access Economics director Chris Richardson said the government planned to cut spending when the Reserve Bank of Australia (RBA) had cut its cash rate in early November.

The RBA cut the cash rate from 4.75 per cent to 4.5 per cent to provide some stimulus for a slowing economy.

“What the government is doing here is actually taking money back out again solely to get a surplus next year,” Mr Richardson told ABC Radio on Tuesday.

“It is not clear that it is smart to have the Reserve Bank tipping money but the government then taking it back out when the outlook especially with Europe is somewhat fraught.”

Let’s help out Messr’s Denmore, Eltham, and Richardson, with a brief guide on how to miss the key economic point.

For dummies:

1. Focus on the Federal government public debt figure.

2. Emphasise comparison of Federal government public debt-to-GDP versus other “developed” countries, praise Labor government for comparatively “low debt-to-GDP”.

3. Downplay importance of return to balanced annual budget / budget surplus. Cite 2. as primary justification.

4. Belittle any who express concern over ever rising government debt trajectory. Cite 2. as primary justification.

Commonwealth Government Securities On Issue | Source: Australian Office of Financial Management (AOFM)

5. Ignore the fact that while Federal Government public debt is “only” relatively small, our total Net Foreign Debt at June 2011 was almost $675 Billion, or over 50% of GDP (RBA Statistics, H5).

6. Ignore the fact that our banking system (thus, economy) relies on international money markets for some 40% of its “wholesale funding”.

7. Ignore the fact that in May 2011, Moody’s downgraded our Big Four banks’ credit ratings, cited their wholesale funding dependence as a key concern, and tacitly threatened the government that without the government’s explicit and implicit Guarantees propping them up, our Big Four banks would have their credit ratings slashed by at least two more ‘notches’.

8. Ignore the fact that in late June 2011, Fitch Ratings warned that Australia’s banks are amongst the most vulnerable in the world to the EU debt crisis, due to their reliance on wholesale funding from international money markets.

9. Ignore the fact that the spread on bond yields for Australia’s Big Four banks (versus non-financial institutions) have just hit record highs (from Bloomberg via SMH):

 Yields on bonds of Australian banks reached a record high relative to debt of the nation’s nonfinancial borrowers as Europe’s debt crisis threatens to freeze credit markets

Lenders including Commonwealth Bank, Westpac, ANZ and National Australia Bank Ltd., may need to sell about $144 billion of bonds in the 12 months ended June, 2012, according to a July research report from Deutsche Bank …

Trading conditions in the euro area have deteriorated this month as the region’s sovereign debt crisis deepens. Germany failed to get bids for 35 per cent of the 10-year bonds offered for sale on November 23 and traders were left seeking prices in the aftermath of a Spanish debt sale on November 17.

10. Ignore the fact that due to the very real vulnerability of our banking system, it is near-inevitable that the government will need to reinstate the Government (taxpayer) Wholesale Funding Guarantee to prop up our Too Big To Fail banks.

11. Ignore the fact that the government’s present “low” public debt comparison versus other countries is largely rendered a moot point, because the credit ratings agencies have already effectively served notice that they will have a lower tolerance for anything less than pristine government finances – and thus, a genuinely convincing case for return to surplus – due to the compulsion upon the Australian Government to (continue to) prop up a highly vulnerable banking system.

12. Blithely skip merrily through cherry-strewn intellectual fields, hand-in-hand with fellow groupthinkers, picking fruit and singing la la la la, wilfully ignoring the reality that (in the words of Senator Joyce) …

… “If you do not manage debt, debt manages you.”

5 Responses to “Missing The Key Economic Point, For Dummies”

  1. Andrew Richards November 30, 2011 at 2:52 am #

    Both sides of politics will try and shy away from this one. The problems have all stemmed from the Campbell/Martin report (let’s face it, it’s the same report regardless of whether you take the Coalition version of it, or the Labor version of it), and the complete financial and trade deregulation which came from it.

    The $675 Billion isn’t our problem here so much as the end result of the ACTUAL problem.

    The problem is that in the 30 years of the financial reforms initially proposed by Fraser and Howard and then adopted by Hawke and Keating; our dollar has been shot to hell through the destruction of our manufacturing and agricultural sectors, and the economic rationalisation and privatisation of our infrastructure.

    People say that Lyndon LaRouche is nuts, but the fact is that the less you produce (manufacturing) and the lower your capacity to produce (which is your infrastructure) then the less your currency is worth.

    That’s not even getting into corruptly legalised gambling like mortgage backed securities and other forms of derivatives trading.

    Our system has gone from investing in actual goods to investing in debt, as it has for the past 30 years. It doesn’t take a genius to see that if you invest your currency in $#!+ then that’s exactly what your currency will be worth.

    This is why physical economics trumps the British Monetary (parasitic) model. The British system, like any parasitic scenario, only works while the host still has nutrients to feed off of- once the last ounce of nutrients are sucked out of the system, the parasites have nothing left to feed on, and so they also die out, leaving a dead husk of a host in their wake.

    But while both sides of parliament are controlled by institutions of the British Oligarchy; neither side is going to cal this out (that includes the Nationals as they are under the thumb of the Libs).

    People asked about the British history, well here are 2 good starting points: http://cecaust.com.au/main.asp?sub=pubs&id=NC-07-01.html and

    It’s a political party publication, but the CEC always reference their stuff so it also makes a good launching pad- plus there’s no way you can fit the history of the British Empire into even a few posts like this- not without them being 10 A4 pages long each anyway.

  2. Betty Whiffin November 30, 2011 at 9:19 am #

    But” look at all the triple AAA ratings!!!! “Australia has nothing whatsoever to worry about, we can ride any global financial crisis”. What with our net foreign debt of over half a trillion rising every day!. Added to (just two things) by all the boat people arriving to receive succour and nothing mentioed about cost of NBN! I and others must be a “dummies” to believe Wayne Swan. I am no economist but have been financial officer of a company and just an ordinary person but anyone using their brains can see this is as hogwash.

    • The Blissful Ignoramus November 30, 2011 at 9:40 am #

      And those would be triple-A ratings “given” by the very same folks that rated Mortgage-Backed Securities as AAA in 2001-2008.

  3. Twodogs November 30, 2011 at 3:58 pm #

    Wow. Forecast becomes “expected”, which in the blink of an eye becomes “will”! That is enhancing government spin rather than countering it. When the government only uses the term “expected” for “forecast”, but the media change “expected” to “will”, then the only reasonable conclusion is that they are even more pro-government than the government itself!!

  4. kelly liddle November 30, 2011 at 9:52 pm #

    One forecast I find interesting is really good weather with the allowance for natural disaster relief less than was with the last MYEFO of the coalition. Can see on my link.

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