Tag Archives: AOFM

$12.5 Billion And Then It’s “Credit Transaction Declined”

31 Mar

From the Australian Office of Financial Management (AOFM), 30 March 2012:

Debt ceiling?

$250 billion.

Typical weekly borrowings?

Around $2 billion.

With any luck, the government will just make it to the May budget before hitting the debt ceiling.

Again.

So you can be certain that, just like last year, there will be a little piece of legislation quietly slipped into the May budget, to raise the debt ceiling.

Again.

For the fourth time in five years.

Looks like I was right:

2 November 2011 – “Australia On Target To Hit Debt Ceiling By Mid-2012”

13 March 2012 – “Australia Debt Ceiling Hit By June”

Oh yes … did I forget to mention that on latest RBA figures, around 84% of our debt is owed to “non-residents”?

UPDATE:

Thanks to Kelly in comments who correctly notes that the title should read “$17.15″ billion till credit transaction declined, as the actual amount issued subject to the Commonwealth Inscribed Stock Act 1911 is $232.85 billion, as noted in the fine print in the last line of the screenshot above. Of course, this begs the question “what kind of debt instrument have they issued to the value of $4.59 billion, that is not subject to the Act”? My first guess would be bonds used to finance the NBN, which I seem to recall reading will be listed Off Balance Sheet in the Budget (to achieve that “surplus”, you see).

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$26bn Till We Hit Debt Ceiling, At $2bn Per Week

9 Dec

Media release – Senator Barnaby Joyce, 9 December 2011:

CO2 Tax to hit H2O Prices

It’s the end of the week. I know it’s the end of the week because we just borrowed another $2.4 billion and Friday afternoon usually brings the news that we have borrowed another $2 billion.

Our gross debt is now over $223 billion, which means there is only $26 billion before we max out the nation’s credit card, which shouldn’t take too long at the rate we are borrowing.

We have borrowed $14 billion over the past two months, almost $200 million per day.

We have also found out today that a report from the New South Wales government’s independent regulatory agency, IPART, has found that the carbon tax will cause a substantial increase in water prices in New South Wales.

This is a fascinating tax we have put on the Australian people. It doesn’t matter whether you are washing your clothes or washing your car, it is going to cost you more money, and the climate will stay exactly the same regardless.

The IPART report shows that the Sydney Desalination Plant’s water prices will increase by 2 per cent next year and by almost 6 per cent over the next 5 years due to the carbon tax.

Water prices have already increased by 58 per cent since the Rudd-Gillard government came to power.

They don’t call desalination ‘bottled electricity’ for nothing. The carbon tax will increase the cost of everything that has to plug into the wall and desalinated water will be no different.

As the hopes for international action on climate change collapse around the beaches of Durban, Australian families can rightly ask why the government is making their living costs higher than they need to be in a futile attempt to change the climate.

If the government were not so focused on Bob Brown they might actually turn their attention to the real issues that face Australian families.

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Barnaby: Labor Downplays Debt Like It’s Only A Little Melanoma

18 Nov

Good for his word. That’s Senator Joyce.

He pledged to never relent in reminding Australians that “if you do not manage debt, debt manages you” (Feb 2010).

Check out his latest and greatest attack on Labor’s melanoma-like growth in debt, in the Canberra Times (my emphasis added):

Forever in debt and Labor still ignores cost cuts

The Labor Party did something remarkable last week: it actually paid back some money after borrowing $11billion over the six weeks before. Our gross debt is now at $215billion. Unfortunately, Labor will probably borrow more again this week.

Recent statements by Penny Wong about cost-cutting and by the secretary of the Treasury, Dr Martin Parkinson, seem to accord with my fears of two years ago that we were taking on too much debt.

On October 21 , 2009, Australia’s gross debt accelerated through $100billion. This was before my unfortunately spectacular and brief tenure as Australia’s shadow finance minister. I was deeply concerned about the trajectory of our debt but it was very hard to find somebody else in government or the fourth estate that held similar concerns.

I remember the date well as I put out a media release at the time which concluded, ‘‘There are lots of ways you can try to pay debt but closing your eyes tightly and crossing your fingers has proven lately to be completely ineffective.’’

Leading the caravan of opprobrium against me was Treasury, acting as an arm of government. Repeatedly, it said Australia had no problems. It avoided that it was not the size that was the concern, it was the rate of growth, a very small active melanoma. We fell into trap of saying we are in a better position than others because our melanoma is tiny compared with theirs.

In a speech last week, Parkinson said ‘‘efforts to reduce government net debt should be the immediate focus’’. I’ll give him a tip, it would have been easier to control back in 2009. It has taken a couple of years, but now Parkinson and I appear to be on the same page.

You can see Australia’s gross debt grow almost every week, like a Chia Pet, by visiting the front page of the Australian Office of Financial Management website. I imagine it is there because the people we borrow from want a fully transparent view of exactly how much we have borrowed. If you start hiding it they get very, very suspicious.

Everything is moving into unfortunate focus as we approach at a rapid rate our third debt ceiling under this Government’s watch, and Europe and America come to the realisation that the problem is debt.

To understand debt ceilings you must understand gross debt. On March 10, 2009, Treasurer Wayne Swan increased our debt limit from $75billion to a ‘‘temporary’’ level of $200billion. According to Swan, we needed this increase because China and India were going to ‘‘slow markedly’’ and the mining boom was ‘‘unwinding’’.

The mining boom didn’t, but we not only hit our new debt ceiling but it is now at $215 billion, or over $17,000 for every Australian taxpayer. Our next ceiling is at a quarter of a trillion dollars. This debt does not include state government debt (heading towards $250billion), the debt of fully owned government entities, such as the National Broadband Network, or the debt of local governments.

To make a budget based on blue, sunny days is not only fraught with danger, it is naive. It is the old adage of keeping money aside for a rainy day. School halls and ceiling insulation are not the only reasons we now have so much debt, it is generally just poor day-to-day cost management. Labor talks of budget cuts now but why did they ignore people such as Productivity Commission chairman Gary Banks and former Reserve Bank board member Dr Warwick McKibbin, who both said Labor should have been cutting spending two years ago?

Those with the purse strings either don’t have the strength, or don’t have the competency, to remain within our means. Labor’s cabinet is lacking the real business experience where what you bill or sell is what you earn, and the cheques you write over the long term better be less than that.

What happened to the $11billion that Labor borrowed in six weeks? Are there new aircraft carriers in Sydney Harbour with the Australian ensign fluttering? Is there a big new freeway somewhere that I am not aware of? Are there big new dams in Northern Australia delivering water to vast new agricultural areas to feed the world?

If you were to go searching for this money, the place I would humbly suggest you start looking is Canberra. Not the people of Gungahlin, but generally to the ministers who are in charge of departments that are just not controlling costs.

Barnaby is right:

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

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Australia On Target To Hit Debt Ceiling By Mid-2012

2 Nov

Click to enlarge | Source: Australian Office of Financial Management (AOFM)

Your humble blogger met Senator Joyce for the first time on 1 July this year.

On introducing myself and mentioning this blog, Barnaby’s very first words to me … were words of humility.

He immediately referred self-deprecatingly to his now-famous warning in late 2009 about the risks of rising US Government debt leading to “possible” default.

You remember. His was the warning that no one wanted to hear; that drew the wrath and mockery of Rudd, Swan, Tanner, Chris Bowen, then Treasury Secretary Ken Henry, and of course, all of our lamestream media economic “experts”. Ignorant, arrogant, foolish ridicule, that prompted the launch of this blog.

Barnaby was quick to volunteer that his warning about US debt was nothing special; rather, in his opinion it was simply obvious that the rising trajectory of US Government debt must eventually run smack into their debt ceiling.

As we all know from the early August kerfuffle over raising the US debt ceiling, a political crisis that threatened to blow up the world economy … Barnaby was right.

Since this blog began in early 2010, we have seen time and time again, that when it comes to matters financial, Barnaby is the only one on the ball.

Doubtless a big contributing factor is that he is an experienced Chartered Accountant, and not a lawyer cum union hack, or a career political hack with an Arts degree.

In May, for example, Barnaby was the first to rail against the Green-Labor minority government quietly sneaking in a budget provision to raise Australia’s debt ceiling by 25%, to a quarter of a Trillion dollars ($250 Billion). Even though no one is supposed to dare question Wayne’s authority:

As Treasurer Wayne Swan was congratulated by colleagues after Tuesday’s budget speech, Assistant Treasurer Bill Shorten introduced draft laws allowing the government to increase the amount it can borrow from $200 billion to $250 billion.

The proposed legislation would also remove a requirement that the Treasurer explain why the extra money is needed.

In recent weeks, Barnaby has upped the ante in continuing to make good on his pledge to never rest in pointing to the dangers of rising government debt.  And fair enough too, when they’re continuing to borrow on the national “credit card” at a staggering rate.

Indeed, Wayne and Co have blown out our total Gross Debt Outstanding by over $7 billion a month in September and October, to a new record $215.6 Billion.

Which begs the question, “When will we run into our new debt ceiling of $250 Billion?”

That is, the new one Wayne set only 5 months ago, in May this year.

The chart above tells the story.

Our debt trajectory suggests that our Green-Labor government will bang into our new debt ceiling around mid-2012.

Unless something goes pear-shaped first, of course.

Like, say, a big fall in our Terms of Trade? Due to a big fall in the price of our biggest export, the iron ore sold to Chinese steel mills, perhaps?

Steel China Iron Ore Fines cfr main China port USD/dry metric tonne (MBFOFO01:IND)

Oops.

Like, say, a 32 month low in the latest measure of Chinese manufacturing? (h/t ZeroHedge)

China Manufacturing PMI prints at 50.4, down from 51.2, when consensus was expecting an increase to 51.8. This is the lowest print in 32 months, and the lowest since February 2009. But wait, before concluding that this is very bad news, uh, ahem… well, sorry, we haven’t taken the CNBC spin school yet. It’s bad news and the hard landing is coming. We leave the spin to the professionals.

Click to enlarge

Oops.

And there’s a lot more “oopses” where they came from. Including internal “oopses” … like Australian house prices and sales both falling … and the Reserve Bank starting to cut interest rates again; which means trouble’s afoot, and they are hoping their action will prompt you to be a complete idiot and start borrowing and spending like a drunken sailor Green-Labor politician.

Dear reader, the signs are all there that a real SHTF moment draws near once again, a la 2008.

Only worse.

Much worse.

Can you say “stimulus”?

Wayne can.

Do you think our government will stop spending more than they bring in from taxing us when they smack into our new debt ceiling?

Not if new Treasury Secretary and former student of US Federal Reserve chairman “Helicopter” Ben Bernanke has anything to do with it.

We already know his views on endless debt.

Here’s what happened back in June, when Barnaby kicked up a stink over our government jacking up Australia’s debt ceiling on the sly:

On Wednesday in Senate Estimates, our [new Treasury Secretary] Martin Parkinson was challenged by Senator Barnaby Joyce over this utterly incompetent and reckless Labor/Green government’s decision, just before the Budget, to sneak in new legislation to raise our debt ceiling too.  By $50 Billion – a 25% increase. To a new all-time record debt level of $250 Billion.

Just like America. The only difference is the scale.

And what did Mini-me Parkinson have to say?

Nationals senator Barnaby Joyce wanted to know what would happen if the government was prevented from lifting its gross debt ceiling by a further $50 billion to $250 billion, as proposed in the budget.

“I couldn’t imagine that parliament would be so foolish,” Parkinson replied.

It would have “serious ramifications” for the operation of government.

So, dear reader, you already know what is going to happen in this country.

Green-Labor are firmly on course to bang up hard against our new debt ceiling, in 2012.

Even without another round or two of “stimulus” borrow-and-spending, to prop up the economy.

The all-knowing genius of Treasury Secretary Mini-me Parkinson will (of course) support the government in raising the debt ceiling even higher.

Our interest-on-debt bill of $1.59 million per hour will rise even higher.

And at some point … sooner rather than later, your humble blogger would suggest … the great external debt-driven forces of the USA, Europe, and/or China, will send the wave that collapses our own financial house of cards.

You can bet your falling house price on it.

“If you do not manage debt, debt manages you”
~ Barnaby Joyce, February 2010

Barnaby is right.

UPDATE: 12:41am

Ummmm, what was that I was saying? … “the signs are all there that a real SHTF moment draws near once again, a la 2008. Only worse. Much worse” …

Greek Prime Minister George Papandreou plunged the euro and stock markets back into crisis on Monday [evening, northern hemisphere time] with a shock announcement that he would put a hard-fought rescue deal to a referendum…

All of Europe’s main stock markets registered sharp falls at the new risk of Greek default and contagion, with the German blue-chip DAX 30 stocks index slumping by more than five percent, French shares were down over four percent and London’s stocks fell more than three percent.

Athens witnessed a meltdown as stocks plunged 6.31 percent amid warnings that a rejection of a deal that is deeply unpopular in Greece would force it to leave the 17-nation bloc which uses the euro single currency.

“This is a referendum, in which they’re effectively voting on Greece’s euro membership,” Alexander Stubb, the Europe minister for Greece’s fellow single currency member Finland, told the commercial MTV3 network.

In a sign of the deep unease in European capitals, French President Nicolas Sarkozy and German Chancellor Angela Merkel were to hold talks by phone.

Italian Prime Minister Silvio Berlusconi, another leader under pressure as a result of the eurozone crisis, registered his sense of shock and annoyance.

“There is no doubt the Greek decision to hold a referendum on the European Union’s rescue plan is having a negative effect on the markets,” he said. “This is an unexpected decision that generates uncertainties after the recent European Council and on the eve of the important G20 meeting in Cannes.”

Italian stocks plunged 6.12 percent, led by big falls for banks…

In an online commentary, the Moneycorp currency broker said Papandreou had presented Greeks with “the ultimate Hobson’s Choice”.”

“They could either have their financial eyes ripped out by austerity measures or by the chaos that would follow the total bankruptcy of Greece and the wipe-out of its financial institutions,” it said.

Nicola Rossi, an opposition senator in Italy, warned the mounting cost of borrowing for the government in Rome had the potential to further scupper attempts to safeguard the euro.

Under last week’s deal, the eurozone plans to increase the stockpile of cash in a bailout fund to some one trillion euros but many observers suspect that it will be an insufficient firewall if a country of the size of Italy collapses.

“The Greek government’s decision has unleashed havoc on the markets. It wasn’t very well thought through,” Rossi, an economist, told SkyTG24.

“The problem is that Italy is the weak link in the euro chain so we are under particular scrutiny.”

“We all know that when our borrowing rate is close to seven percent our debt risks becoming unsustainable. The situation is extraordinarily serious.”

And from Bloomberg:

Greece’s referendum poses a threat to financial stability in the euro region and increases the risk of a “disorderly” default, Fitch Ratings said. Papandreou’s grip on power weakened before a confidence vote on Nov. 4 as six senior members of the ruling party called on the prime minister to step down, state- run Athens News Agency reported, without citing anyone.

“The risk of a Lehman-style disorderly default now looms a bit larger than before, including some residual risk that Greece may leave the euro zone if it rejects the offer of orderly debt relief in exchange for harsh new spending cuts and reforms,” Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London, wrote in a note…

The cost of insuring against default on sovereign debt surged the most in almost four months with the Markit iTraxx SovX Western Europe Index of credit swaps linked to 15 governments jumping 29 basis points to 333 basis points. Contracts on Italy soared 46 to 498 basis points, France was up 16 at 192 and Germany climbed 10 to 94 basis points.

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Barnaby: Wayne’s Double Century Of Debt

26 Aug

Media Release – Senator Barnaby Joyce, 26 August 2011:

Nation’s debt tops $200 billion after Labor borrows $100 million per day

Congratulations Wayne on your double century. We knew if you stayed at the crease long enough you would get there. Actually it didn’t take you long at all; you have been doing a “fine job”.

I have always had “complete confidence” in your ability to give Australia its largest debt in history.

Today our nation’s debt went over $200 billion for the first time ever. We borrowed $3.2 billion over the last week.

Our debt ceiling was $75 billion when this crowd got into government. On 11 March 2009, Wayne Swan invoked “special circumstances” to increase it to a “temporary” level of $200 billion. In the last budget the government has increased it permanently to $250 billion.

If we keep borrowing money like we borrowed last week, we might be able to give this latest ceiling a nudge.

This fiasco that is masquerading as a government has got to end. This relationship cannot go on.

If you go to www.aofm.gov.au you will see that your nation’s “Total Commonwealth Government Securities on Issue” as of today sits at $200.242 billion.

The Labor party has increased our gross debt by $140 billion since they came to office in November 2007.

They have been in government for 1371 days and have therefore borrowed over $100 million per day.

There are 12.3 million taxpayers in Australia, so this government has borrowed an extra $11,000 on behalf of each of them.

“What have we got to show for this debt? Fluffy stuff in the ceiling which burned down 190 homes and billions of dollars on school halls which haven’t made our kids any smarter. The debt didn’t save us from a recession, record prices and record volumes of coal and iron ore exports did.”

More information – Matthew Canavan 0458 709433

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Our Government *Officially* Does Not Know Who Owns More Than 60% Of Australia’s Debt

16 Jun

Who owns our nearly $200 billion public debt?

It’s a question we’ve asked before.

Back on the 14th of March last year (“Who Owns Our Debt?“), we discovered that “expert” SMH economic commentator Ross Gittins was wrong. He had claimed –

You thought the pollies had done little else but spar about deficits and debt? Sorry, different debt. They’ve been arguing about the public debt – the amount the federal government owes (mainly to Australians).

A search through the RBA’s Statistics tables easily proved Gittins wrong.  We found that at September 2009, an estimated 63.3% of public debt was held by non-residents of Australia.

On April 24th this year (“Who Owns 73% Of Our Debt?“), we checked again. At December 2010, 72.6% of public debt was estimated to be owed to non-residents of Australia.

The RBA’s data has been updated again. According to them, we owed an estimated 73.13% of our $183.794 billion in public debt (at March 2011) to non-residents.

So, just who are these “non-residents”?

Noone knows.

Not even the Australian Office of Financial Management.  That’s the government department that “manages Australian Government debt, cash and financial assets”.

Apparently, they do not know who owns over 60% of our total public debt.  Even though, according to the AOFM’s website:

The [Guarantee of State and Territory Borrowing Appropriation Act 2009] Act requires the AOFM to establish, and publish on its website each quarter, a register recording the beneficial ownership, by country, of all securities issued by the Commonwealth and any securities guaranteed by the Commonwealth that are issued by Australian States or Territories.

What’s the problem then?

In yet another example of incompetent Labor government bungling (or is it?), the Act mentioned …

… contains no provisions to compel the provision of information to the AOFM by the beneficial owners of securities or by persons holding securities on their behalf.  This has limited the information available to the AOFM to form an opinion on the beneficial ownership of the securities.

Still, they don’t mind having a guess (emphasis added):

The figures in the tables represent opinions formed by the AOFM based on limited information.  The AOFM does not believe that they provide any indication of the likely distribution by country of the beneficial ownership of securities held by custodian and nominee companies, or are representative of the distribution of the beneficial ownership of the total securities on issue.

To ascertain the country of beneficial ownership of the securities covered by the legislation, the AOFM has reviewed where possible the ownership records of the registry or depository systems in which they are held.  The AOFM has reviewed the name of the accounts which are registered as holding these securities and from this information and knowledge of the business identified sought to form opinions on the country of domicile of the beneficial owners.  However this information is insufficient to ascertain beneficial ownership where securities are listed as held by custodians or nominees.

So, the Guarantee of State and Territory Borrowing Appropriation Act 2009, and the Public Register set up in accordance with it … is utterly useless.

But let us take a look at the Public Register’s most recently updated “information” anyway (click to enlarge):

Source: AOFM Public Register

Source: AOFM Public Register

As you can see, according to the AOFM’s “opinion”, 2.5% of our public debt is held “overseas not identified by country of beneficial ownership”.

And according to their “opinion”, a whopping 58.8 per cent of our public debt is held by “domestic custodian and nominee companies”.

In other words, by locally-registered ‘shelf’ companies with a PO Box address. Companies that exist in name only, and are officially owned by ‘nominees’ on behalf of unnamed, anonymous beneficiaries.

What a joke.

It’s official.

Labor has hocked our nation up to the eyeballs to … God only knows who.

Mind you, it is rather curious that the almighty RBA has somehow managed to “estimate” that 73% of our debt is held by “non-residents”.

How could they know that?

Especially when the AOFM’s official “opinion” (with a big disclaimer) is that they can only identify the country of beneficial ownership of just 38.7% of our debt.

I say that this Labor government, the AOFM, and especially the “independent” RBA, have an awful lot of explaining to do.

An ancient proverb says, “The borrower is the servant to the lender”.

I for one think that the citizens of Australia have the right to know exactly who our government is rendering us as servants to obey.

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Why They Are Planning To Steal Our Super, Explained In 4 Simple Charts

11 Jun

* All charts click to enlarge

1. Commonwealth Government auctions of Treasury Bonds (long term debt) –

Source: Australian Office of Financial Management (AOFM)

2. Commonwealth Government auctions of Treasury Notes (short term debt) –

Source: Australian Office of Financial Management (AOFM)

3. Australian Banks’ $15 Trillion in Consolidated Off-Balance Sheet “Business” (92.3% derivatives) versus $2.66 Trillion in On-Balance Sheet “Assets” –

$2.66 Trillion in "Assets" versus $15 Trillion in Off-Balance Sheet "Business" (derivatives)

4. Interest-on-debt, versus government headline budget surplus/deficits –

Sources: RBA Statistics; Commonwealth Final Budget Outcomes; Budget 2011-12

A quick, important note about that last chart.

The last 4 sets of columns (year 2010-11 through 2013-14) are only Labor’s “Estimates” (E) and “Projections” (P).

Since Labor came to power, every year their official budget “estimates” and “projections” have ended up, in the Final Budget Outcome, worse than originally “estimated” and “projected”.

For example, their “estimated” and “projected” Interest-on-debt blew out by $5.69 Billion in just 6 months, between the Mid-Year Economic and Fiscal Outlook (MYEFO) report in November 2010, and the recent May Budget 2011-12.

For more detailed information showing why we’ll never get to see all of our super, please read the following:

“Liberal Party’s Sneaky Plan To Steal Your Super To Pay Labor’s Debt”

“No Super For You!!”

“Budget Blowout: Interest-on-debt $1.59m Per Hour”

“How Gillard’s Use Of The Credit Card Makes Rudd’s GFC Spending Spree Look A Model Of Financial Prudence”

“How Wayne ‘Franked’ Another $20 Billion”

“Our New Treasury Secretary Is America’s Mini-me”

“Fresh Evidence Our Banks In ‘Race To The Bottom’ Means You Can Kiss Your Super Goodbye”

“How Australia Will Look When The SHTF”

“Tick Tick Tick – Aussie Banks’ $15 Trillion Time Bomb”

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How Much More Debt Next Week, Wayne?

4 Jun

$2.5 Billion.

Great, isn’t it.

Over the past 6 weeks since I began tracking the AOFM’s government debt auctions, Wayne’s pack of lunatics have borrowed no less than $2 Billion, and as much as $2.75 Billion.

Every single week.

And we can see here, that ever since JuLIAR Gillard knifed KRudd, she has been on a borrow-and-spendathon that puts even the jet-setting Mr Stimulus to shame.

The following chart shows only the value of Treasury Notes auctioned by Labor. These are “short term” debt “instruments”, that typically must be repaid within 30-90 days.  They are supposed to be issued only when necessary to “smooth” cashflow requirements of the government.

Most of the government’s primary funding comes, instead, from the auction of Treasury Bonds, which are longer term debt “instruments”, that must be repaid over durations of anything up to 20+ years.

We take particular interest in the blowout in borrowing using Treasury Notes, because it indicates a government that has completely lost the plot.  An utterly incompetent government, that has no idea what it is doing.  Has no planning.  Cannot even manage to balance the weekly cashflow needs of government.  And so is constantly going back to the international debt markets, to borrow $2+ billion per week on the “short term” national credit card (click to enlarge):

Source: Australian Office of Financial Management (AOFM) - to end April 2011

Note carefully that this chart only goes up to end of April this year. During May, the government borrowed another $5.8 Billion using Treasury Notes. To picture this – since I’m too lazy to update the chart right now – just imagine another blue line on the end of that chart, one that is double the height of the tallest blue line.

So far in June – a mere 3 days in – they have already borrowed another $500 million using T-Notes.

And next Thursday 9th June, they will borrow another $1 Billion using T-Notes.

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What’s Another $2 Billion Anyway, I’ll be Retired On A Taxpayer-Funded Pension

28 May

How’s that borrow-our-country-into-endless-servitude-to-foreign-lenders caper going, Wayne?

Four weeks ago – $2.2bn more debt.

Three weeks ago – $2.4bn more debt.

Last week – $2.75bn more debt.

This week – $2.5bn more debt.

Next week – $2bn more debt.

Wayne’s well on track to shatter the glass of Labor’s newly revised $250 Billion debt ceiling by around the 3rd week of August.

That’s just after Aug 2nd, when the US Treasury reckons the US could default on its debts.

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Guest Post – The ‘Moneyness’ Of Debt

27 May

Submitted by reader JMD.

I will express a view here that is, as far as I can tell, being laid out by few others. I can’t claim the idea as my own, rather I have put this together based on the thoughts of Doug Noland, my favourite economic analyst by a country mile, who publishes the Credit Bubble Bulletin. I have taken the liberty of lifting quotes directly from his articles, they are in italics throughout my article, though I may have changed his wording just a little to fit in with the flow.

Readers of the Gold Standard Institute know that money is what extinguishes all debt, nevertheless, credit1 can be considered a monetary equivalent or ‘money good’, take for example, Real Bills that mature into gold. Inextinguishable debt, as in irredeemable dollars and dollar denominated debt, are not money since they are, well… inextinguishable debt. Despite this contemporary irredeemability, credit is still considered to be in a dynamic state of ‘moneyness’, driven by the marketplace’s perception of safety and liquidity, and any meaningful definition of contemporary ‘money’ must include government debt instruments.

The situation prevailing today is that key developed economies are locked into a perilous cycle of massive non-productive government debt expansion. Rather than the global money markets being composed of Real Bills, generated through the drawing of short term bills against consumer goods actually required by consumers, we have money markets where for nine quarters now, government finance has completely dominated system credit creation. These ‘marketable’ debt securities now absolutely dominate the world.

Just how massive has this increase in government debt issuance been? I draw your attention to the charts below.

As you can see, government debt issuance has reached levels never heretofore imagined. UST issuance reached almost $1.5 trillion in 2009. While the dollar amount of Australian government debt issuance is small in comparison to the US, the pattern of expansion is the same. I have included Australian government debt issuance back to 1985 to give some perspective of historical issuance. I don’t have figures pre 1996 for UST’s, nor 2010. Nevertheless, you get the picture.

Why the fuss? Because it is the ‘moneyness’ nature of government obligations that they enjoy special treatment in the marketplace. Readers of the Gold Standard Institute also know that when it comes to the ‘moneyness’ of credit it’s not just quantity but quality that counts. I think it safe to presume that government debt has not improved in quality since 2008, yet issuance has exploded with little perception that government debt is being mispriced, over-issued, and misdirected. There is an ever expanding gulf between market perceptions of ‘moneyness’ and the true underlying state of government credit. In simpler terms, government credit is a bubble, a precarious Credit Bubble at the heart of our monetary system. Just as the US financial system doubled total mortgage debt in just over six years during the mortgage/Wall Street finance bubble with little perception of the underlying quality of U.S. mortgage credit, the financial system is now on track to double federal debt in about four years. The situation is no different in Australia and I doubt it would be different in most other ‘developed’ countries.

There is only one true arbiter of the value of government debt, its only extinguisher… gold. Irredeemable dollars, being the obligation of the central bank – not money, cannot extinguish government debt. Is gold reflecting the expanding gulf between perceptions of moneyness and the true quality of government credit? Should holders be loaning their money – gold – for irredeemable government obligations, as if ‘buying’ mortgage credit at the height of the Wall Street bubble? Should the dollar price of gold be falling?

I think not. And we all know what happens to bubbles.

Note: 1. Remember, one person’s debt is another’s credit. I use the terms interchangeably.

Source - Australian Office of Financial Management (AOFM)

Source - Prudent Bear (prudentbear.com)

Disclaimer: The views expressed in the above article are the author’s own. They should not be interpreted as reflecting any views held by Senator Barnaby Joyce, The Nationals, or by the barnabyisright.com blog author.

* Stay tuned for JMD’s follow up post, on the Reserve Bank of Australia’s sale of 2/3rd’s of Australia’s gold during the Asian Financial Crisis of the late nineties.

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