Tag Archives: public debt

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.”

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.

The Real Reason Why Gillard’s A Spinster

1 May

Why is Julia Gillard really an unmarried, childless, career politician spinster?

The answer may surprise you.

Take a look at the following chart, showing Commonwealth Treasury Note auctions from March 2009 through this past Friday (click to enlarge):

Source: Australian Office of Financial Management (AOFM)

Since Ms Gillard took over the nation’s top job, the size of weekly Treasury Note auctions has jumped dramatically.  Under Gillard, the government has auctioned $46.7 billion worth of Treasury Notes in just 10 months.  By contrast, the Fairy Ruddfather sprinkled $50.2 billion in the preceding 15 months, before Gillard banished him to the spare bedroom:

Now, it’s important to understand the special significance of Treasury Notes.  According to the Australian Office of Financial Management (AOFM):

Treasury Notes are short-term debt securities used primarily to meet within-year funding flows. Issuance decisions are made weekly and depend on the Government’s projected daily cash position for the weeks ahead.

Then there’s this:

Treasury Notes are not expected to make a major contribution to overall funding for the 2010-11 financial year as a whole.

Right. With 2 months to go, she’s already auctioned $11.1 billion (31.5%) more in Treasury Notes than the Fairy Ruddfather did in the previous financial year.


Clearly, a Gillard-led government is incapable of managing the weekly cashflow.  The kitchen’s closed, the children are running amok, the House is a shambles, and the budget is out of control, ever since she took over the purse-strings.

Which explains once and for all, why she’s an unmarried, childless, career politician spinster.



P.S.  I thought it apropos to reveal Gillard’s big secret today.  A day so very close to Julia’s heart.  International Worker’s Day.  Labour Day.  Otherwise known as May Day.

That’s also why I’ve changed this blog’s theme colour for today – in honour of the occasion.  Though I’ll admit it was rather difficult to decide whether it was more apropos to go red or …

“Socialist governments traditionally do make a financial mess. They always run out of other people’s money.”

– Margaret Thatcher, 1976

China May Let Banks Fail

9 Mar

From Business Insider:

Last spring, in the midst of China’s huge lending boom, the China Banking Regulatory Commission (CBRC) was reassuring skeptics there was no reason to fear an explosion of bad debt because most loans were going into government-sponsored infrastructure projects and would almost certainly be repaid.  A year later, they’re a lot more worried, and are sending a strong message to lenders that such loans should not be considered risk free.  Even with the guarantees in place, Bloomberg reports that “a few cities and counties may face very large repayment pressure in coming years because of debt ratios [outstanding debt compared to annual revenue] already exceeding 400 percent.”

Whether regulators will really leave banks holding the bag for the loans that have already been made is another matter.  The government has no interest in undermining the balance sheets of the big banks, which it would be forced to bail out in any event.  But I found the Bloomberg article’s allusion the 1998 collapse of Guangdong International Trust & Investment Corp. (GITIC) potentially prophetic.  Besides the “big four” banks, China has literally hundreds of smaller lending institutions, from municipal banks to trust companies to rural credit co-ops.  I wouldn’t be surprised if many of these institutions, with their close ties to local governments, own a big piece of the loans being called into question.  It’s too early to say, but if GITIC offers any precedent, we could see a handful of less-favored institutions cut loose and allowed to implode.

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