Is there really such a thing as national debt?
In a recent article by Warwick Smith in The Guardian,
a group of economists refuted three of the government’s claims, namely
that there was a budget emergency, that there was a debt crisis and that
the carbon tax was an economic wrecking ball.
Knowing how difficult it is to get economists to agree on anything,
this seemed like quite a coup and reading it only served to remind me of
some of the government’s ‘over the top’, exaggerated and often
inaccurate outbursts from various ministers in their feverish attempts
to scare us into thinking we have a problem with the economy.
Leaving the matter of the carbon tax to another time, the issue of
debt and deficit is quite another matter and should be pursued
vigorously.
If there is one way to prove or disprove the existence of a national
debt, it is to ask the question: to whom is the debt owed? Government
debt (so-called) occurs when the government places a tender on the open
market. This is done through The Australian Office of Financial Management. They are the ones who place tenders for the sale of Treasury Bonds.
The most recent tender was for $1.5 billion on 18th July 2014 (Tender
705) at 2.75%. This tender attracted 92 bidders who sought to invest a
total of $3.881 billion. The tender, therefore, was oversubscribed and
in the end, 39 bidders were successful, 27 of whom received their
requested allocation and 12 received a partial allocation. So, bad luck
for the 53 bidders who missed out.
Thething is, these bidders were actually competing to buy these bonds. No
one was twisting their arm to provide the money. They were, in fact,
competing to invest in Australia’s future. That doesn’t sound like the
government incurring a debt to me. It sounds much more like people or
companies investing in shares on the stock market. I did something
similar many years ago when Telstra was put up for sale. The same thing
happened then. The offer was oversubscribed and I didn’t get as much as I
asked for.
But, just like the stock market, the buyers of these bonds can sell
them, if they wish, on the bond market. So, if any of those 53 bidders
who missed out on the initial offer, or anyone else, wanted to get in on
Tender 705, they still could. So that suggested to me that the
government didn’t have to repay that bond, it could simply be traded for
the life of the country on the bond market. Except that it does have a
use-by date and in the case of Tender 705, that date is 21st October
2019.
But back to the issue at hand.
So, in this case, the government has just raised $1.5 billion
repayable on 21st October 2019. The question to be asked here is: what
did the government want to do with this money? It looks very similar to a
company wanting to raise capital for an acquisition program by
announcing a new share issue.
WhenI put this question to the nice man I spoke with at The Australian
Office of Financial Management (AOFM), he said the money goes into
consolidated revenue to cover periodic shortfalls in the difference
between revenues and outgoings. All of which sounds similar to me
borrowing twenty dollars from my brother to buy petrol while waiting for
next week’s pension deposit to arrive in my bank account. His answer
was what I expected but it was the wrong answer. The bonds are issued to
soak up the overflow of cash in the banking system, but he was not
going to admit that. It is possible he did not know that.
Every six months the AOFM then issues coupons to the investors
(mostly banks), to the value of the interest rate promised. Then, in
2019, the government will repay the principal together with the value of
the interest for the final six months.
At the end of each financial year, the treasury accountants add the
tax revenues received plus borrowings derived from the bond sales and
treasury note issues and that amount should equal the total expenditure
for the year. All of which means the books are balanced.
That still leaves unresolved the matter of the money borrowed and the
interest payable on these bonds. That is essentially what we call the
Deficit. It has to be repaid, doesn’t it? Where does that come from? My
friend at the AOFM told me that interest and principal is paid out of
general revenue. He pointed out that of the 2014 budget expenditure of
$401 billion, $14 billion represented interest payments. Another wrong
answer. The interest payment is created out of thin air (ex nihilo).
So then I put the question to him: why not just create the money out
of thin air (ex nihilo) to pay both the interest and the money borrowed?
He was aghast. Not a good idea, he said. That causes inflation, he
said. I suggested that the inflationary element could be controlled by
limiting the amount of money in circulation through taxation. Yes, he
said, that’s possible. I further suggested that by creating the money we
would effectively reduce the value of our dollar on world markets.
Isn’t that what we all want for our export industries and local
manufacturers?
At this point my friend suggested I call the Treasurer; he said that
what I was proposing was a policy matter for government not one for the
AOFM to answer. Very true. But his answer betrayed an undeniable truth.
It revealed all too clearly that debt can be extinguished out of thin
air if a government wanted it so, and that such a policy could be
beneficial to Australian export business and local manufacturing.
That then raises the obvious question: why does a government that can
create money ex nihilo (from thin air), feel that it needs to borrow?
This,to me, makes a mockery of Joe Hockey and every other government
minister’s claims of a debt crisis, and pretty much everything else they
say. The government wants us to think, as I once did, that running a
nation’s economy is the same as running household debt.
It isn’t and all it takes to explain this is the will to do it.
No comments:
Post a Comment