Monthly Archives: February 2014

Help! Australia is Running out of Money!

The UK Guardian have recently set up shop in Australia. I’m not sure why. They’ve just reported that Australia is running out of money.

Lenore Taylor  has just written:

Treasurer Joe Hockey warns we’re “running out of money’ to pay for health, welfare and education”. Health minister Peter Dutton says he wants a “frank, fearless and far reaching discussion on our health system.”

Lenore presumably believes Hockey and Dutton  writing “They’re right about the long term budgetary problem.”

Are they really? When any politician or economist tells you we are running out of money, that the piggy bank is empty, that is just not true. All economists know that’s not true so the question is why do they lie to you? (Acknowledgements to Prof Randall Wray on that one)  

Australia can run out of resources, though, and resources would include human resources. So it is possible that at some time in the future everyone will be flat out doing other things and there just won’t be enough people available to look after the elderly, teach kids in schools, or work as doctors and nurses in hospitals looking after the sick.

Is that the case now? I don’t think so. Australia has just lost its car industry and of course its unrealistic to retrain all unemployed car workers to work as doctors, nurses and teachers. It may be possible to retrain some of the younger workers though. And it should be possible to retrain the children of the car workers who may, at one time, have had ideas of working in the car industry themselves.

But who’s going to pay for it? That’s always the killer question and one hardly anyone gets right. That’s because they think the Australian government is a user of the currency rather than an issuer of the currency. Just on a point of information it is an issuer. No one else is allowed to make Australian dollars except the government in Canberra. The Australian dollar doesn’t have to be borrowed back from China or anywhere else.

Of course if the government issue too many $$ it can generate inflation. But if they don’t issue enough there won’t be enough $$ in the economy to prevent recession. If they were only allowed to issue what they received in taxes there wouldn’t be any dollars at all in the economy. So, just on a point of logic, they have to issue more than they receive back.

Of course, if the government issue too many $$ it can generate inflation Oh I’ve already said that. But it might be worth just saying it more than once in case anyone is thinking of mentioning Zimbabwe or the Weimar Republic.

A Lesson in Economics from Stephanie Kelton !

Stephanie makes it  easy to understand and doesn’t come across as blunt or evangelical. She doesn’t use meaningless terms such as ‘rebalancing the economy’ which you’ll read in the economics columns of various newspapers. You probably won’t see any economic discussion this useful on the TV!

Note to the beancounters of this world: If you plant beans, you can grow more beans!

From purely a common sense perspective, economists and politicians should look at the resources which are available to them to solve many of the problems which are of concern today: crumbling infrastructure, poor delivery of public services etc. If they did that the situation would look far less daunting than it does.

The number of underemployed and unemployed workers should be seen as an unused asset, and a key resource, rather than a problem to be solved.

Instead it’s the bean counters who are in charge. They fail to realise that beans planted and cared for in the correct way leads to the production of more beans. Inflation is only likely to be a problem if the economy is pushed so hard that it runs out of available resources. Keynes had something to say about that!

Want a Budget Surplus? Easy. Devalue the Pound!

The present day Labour Party is keen to be seen as more pro-business having jettisoned the old Clause IV a decade or more ago.  There’s nothing wrong with being pro-business or pro-market economy.  But, with the right management, a market economy is much more compatible with the old Clause IV than is generally supposed. Both main parties, in the persona of Ed Balls (Lab) are George Osborne  (Con) are making the mistake of assuming that the market economy works in the way neo-liberal monetarists, with their austerity economics, claim it does.

For example, austerity economics holds that all deficits are bad. This ignores the simple accounting principle that total assets for all sectors have to add to zero. Therefore, if the government sector is in deficit the non government sector has to be in surplus. And vice versa. Someone has to be in deficit and its either you or I or the government! For my own part, I prefer it to be the government!

The role of government deficit spending, and its relationship to the external (trade) deficit also is not well understood. Its misrepresented as being purely related to the size of the state. So why does Britain need a government budget deficit when Germany doesn’t? Their state is at least as big, proportionately, as the UKs.

The simple answer is that Germany runs a trade surplus. Money drains out of the UK economy to pay for imports. The government sells treasury securities to get that money back and recycles it into the economy by deficit spending. If it didn’t, the economy , the private sector, would quickly run out of money and an economic slump would follow. Exactly that happened in the USA and Britain following the government surpluses of the late 90’s. In the USA too in 2007.

So, if Britain wants to run an export surplus like Germany, a budget surplus is easily possible too. That would need a devaluation of the pound, to make exports more competitive, which can be engineered by various means, including by reducing treasury security sales, but there is an obvious downside to that.

If that’s what the electorate want then fine, but they should be fully aware of the issues before they decide.

Budget Deficits: a Burden to our Children and Grandchildren?

As explained in previous posts a Government budget deficit is necessary to fund any country’s trade or external deficit. So are these budget and external deficits an inter-generational burden? That’s what we hear all the time in the debates in Parliament and on TV, but is there any real truth in this? There are obvious contradictions in mainstream thought. Mainstream thought has it pretty much as: exports are virtuous,  imports are indulgent.  Surpluses are good, deficits are indulgent. The Germans are virtuous – they have a surplus of 7%. The British and Americans  are indulgent with  deficits of around half that. Lets say 3.5%

German children and grandchildren will have a life of ease, whereas British  and American children and grandchildren will be slaves to debt repayment.

The reality is, as usual, is quite different.  Possibly the US and UK economies of some future time will have to have a surplus of 3.5% to pay for our deficits of 3.5%. Their economies could be more like the present day German one except not quite so export dependent. Which would of course,  be a virtuous state of affairs according to our present mainstream economic thinking.

An alternative way of thinking would be to say that every generation consumes the goods and services which are produced in the economies of their time. Its just not possible for us to steal anything from them. They can’t send anything back in time to previous generations. We can’t leave future generations much that will be directly useful to them except whatever it takes to ensure their future economy is in as good a shape as possible. That is a good education system, a good health system, a good housing stock,  a good transport system, and a clean and healthy environment.

There is certainly no point saving up money on a national level and leaving them a pile of Government IOUs. Those IOUs would be just as inflationary, when used, as if they printed their own.

Whether their economy will have a surplus of 3.5% or a deficit of 3.5% is neither here nor there by comparison to the other problems they will have to face such as resource depletion and the adverse effects of climate change.

Warren Mosler’s Department Store Analogy – An Extension

Warren Mosler suggests in his book ‘Seven Deadly Ionnocent Frauds Of Economic Policy’ that we should:

“Think of the economy as one big department store full of all the goods and services we all produce and offer for sale every year. We all get paid enough in wages and profits to buy everything in
that store, assuming we would spend all the money we earn and all the profits we make. (And if we borrow to spend, we can buy even more than there is in that store.) But when some of our money goes to pay taxes, we are left short of the spending power we need to buy all of what’s for sale in the
store. This gives government the “room” to buy what it wants so that when it spends what it wants, the combined spending of government and the rest of us isn’t too much for what’s for sale in the store. However, when the government taxes too much – relative to its spending – total spending isn’t enough to make sure everything in the store gets sold.”

It’s a good analogy and it’s interesting and instructive to take it a little further. Consumption has to balance production. Goods have to leave the store at the rate they arrive. If the store owner notices goods leave too quickly he’ll start to raise his prices to make extra profit while he can. If they leave too slowly he may drop his prices or he may just leave things on the shelf. Either way the suppliers of those unsold or unprofitable goods aren’t likely to get another order, on the terms necessary to keep those businesses going and the workers in those businesses employed.

Therefore, for all products to repeatedly clear everything must be sold at a sufficiently good price to pay all the suppliers, all the workers and generate enough profits to make it worthwhile for the investors. The government have spending power which they’ve made room for by taxation and they are a customer of the store. The workers, the suppliers, the investors are also key customers. They need to spend all their wages, receipts and profits. If anyone decides to save part of their wages or their profits there isn’t going to be enough spending power to buy everything which is for sale.

There’s a natural tendency to save everywhere. Be it for a holiday or retirement or whatever. Businesses will save their money too if they don’t see any immediate profit in re-investing it. Apple reportedly has a cash pile of $147 billion. Presumably they they think it’s too risky to use that money developing new products right now.

So what can be done? Germany, China , Switzerland etc solve their own problem by encouraging UK and other foreign customers to shop at their stores. In other words, they use exports to solve their own problem of overproduction. But of course not everyone can do that and it makes the problem worse for the UK and the US stores. (Not to mention the Greek one!). Not only are some goods unsold because their customers are saving rather than spending, some are unsold because their customers have gone elsewhere.

So what else can be done? Yes, that’s where Governments come in with their deficit spending. Governments of countries like the US and the UK who are net importers have to deficit spend not only to enable their own citizens and companies to net save they also have to deficit spend to cover their trade or current account imbalance. Greece is in the unhappy position of not being able to do that, at least not anywhere near to the extent needed to fix its problem.

Countries like the US and the UK have become the World’s bankers. They sell treasury securities to cover their deficit spending. Apple probably don’t actually have $147 billion of real US dollars. Incidentally, real US dollars are just the IOUs of the US government. They can write out as many as they like. Apple probably have most of their $147 billion as commercial bank IOUs which are not at all the same thing. That bank will have used Apple’s money to buy US treasury securities which will have then been spent back into the US economy.

Deficit spending shouldn’t be overdone of course. If too much demand is created inflationary problems will arise.

Many make not like it, but that’s the way the system works. It’s obviously not possible to discuss any government deficit in isolation. It can’t be substantially reduced by just cutting spending and increasing taxation. If any politician promises and tries to do that, they’ll certainly fail.

They may crash the economy in the attempt though. So its probably not a good idea to let them try!

Who’s running the smarter economy: the UK or Germany?

Many economists would make the point that imports are a benefit and exports are a cost to any economy. If you take that argument to its ultimate conclusion then it would appear to make sense to issue as many treasury bonds as the market will accept to finance as many imports as possible. The bigger the trade gap the better! Of course, the wider the trade gap between exports and imports the more the government has to deficit spend to replenish the currency that the economy needs to function. The government budget deficit/surplus and balance of trade deficit/surplus are closely related as a quick check on wiki will show, and as explained on previous posts.

The Trade Balance (In its widest sense = Current account balance*)
The Budget Balance

Germany has a budget surplus of 6.1% and a trade surplus of 7%
The UK has a budget deficit of 3.3% and  a trade deficit of 3.8%
(Incidentally it looks like the budget deficit should be slightly higher)

Of course the UK and Germany aren’t on the extreme ends of the scales as can be seen from the two lists. The United States has similar percentage figures to the UK . Their economy is structured as a net importer too.

Most economists perhaps wouldn’t  push the ‘imports are good’ argument too far, but neither would they say that a trade deficit of 3.8% of GDP was anything to worry about. Essentially the UK , and US,  act as  bankers for the Rest of the World and need to run  trade deficits to give the ROW the necessary ££, and $$ to buy government securities.

But what about Germany? Are the Germans being as smart as they think they are by running a large surplus?  They are working 7% harder than they need to be just to break even and 11% harder than the British!

They should learn to chill out more and enjoy life 🙂

* In economics, the current account is one of the two primary components of the balance of payments, the other being capital account. It is the sum of the balance of trade (i.e., net revenue on exports minus payments for imports), factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers.

Steve Keen Explains why Quantative Easing is not Inflationary and can’t simply be Considered Money Printing.

The actual title is ” Peter Schiff Thinks QE Is Money Printing Into Circulation! LOL! Steve Keen explains.”

I’m not sure why Peter Schiff rates a mention in the title. QE = Money Printing = Inflation  is the simplistic conventional wisdom. It’s what we hear all the time in the media.

You might want to skip to 2mins 30 secs. You’ll probably have heard enough of  the usual nonsense about QE already!

Steve Keen gives a more intelligent analysis than anything you’ll see in the MSM. Even the BBC don’t get this right.


Why Governments Can’t Choose to Run Balanced Budgets #2

I’ve been banging on recently about the importance of a country’s trade balance, which is usually overlooked, in any discussion about the government’s budget balance. If we look at countries who do have a strong trade surplus, like Germany, Norway and China,  then invariably they have a government budget surplus too.

So, it could be argued that Governments can choose to be like Germany and China if not Norway. However, I would argue that the economic composition of any country is not entirely within governmental control. Conceivably it would be possible for the US or UK governments to end the sale of their treasury bonds , to overseas buyers, but it certainly is not realistic. Neither would it be realistic for either the British or US Governments to impose trading restrictions in contravention of international agreements.

I did receive this comment:

“But your point  {the link between the trade  and budget balance} is nonsense anyway.  Y=C+I+G-T+X-M. You are not accounting for C and I in your comment. You learn this in A Level economics -which is pretty basic.”

Anyone can Google this equation to establish its validity. It is OK

(Y=national income , C=domestic household consumption of goods and services , I=domestic real investment, G=government spending, T= Taxation, X, = exports of goods and services , M= import of goods and services)

I must say that it’s not immediately apparent, at least to me,  why this equation settles the argument one way or the other, but let’s see:

We can define S=Y-C where S is the level of savings
Then rearrange the terms to give

(I – S) + (G – T) + (X – M) = 0

or by multiplying throughout by -1 we get:

(S-I) +(T-G) + (M-X) =0

This now makes the equation much easier to understand. We can now say:

Domestic Private Balance + Government Balance + Rest Of World Balance = 0

This relationship holds for any time period, and it may help to think of changes during a one year span. So the word balance can be read as either deficit or surplus.

For the UK we can say:
The second term is negative (the Govt have a deficit)
The third term is positive  (the ROW sell more than they buy)

For countries like Germany and Norway:
The second term is positive (Govts have a surplus)
The third term is negative ( ROW buy more than they sell)

Of course the Government and ROW surpluses don’t have to be exactly equal and opposite, Slight out of balance amounts can be accounted for by the private sector increasing or decreasing their balance.

So we can say that the second and third terms when added together have to produce a small number which is within the capabilities of the private sector to correct. If it is too large a negative number the private sector accumulates financial assets but that leads to high inflation.

If too large a positive number, which it would be if the UK tried to run a budget surplus, or even too small a budget deficit, without addressing the trade imbalance, the private sector would quickly become impoverished leading to recession.

Big Scary Numbers #2: Everyone in the UK owes £34,281.54

This figure comes from a comment made on John Redwoods blog:

And is obtained by dividing the National debt by the UK Population. I haven’t checked the arithemetic. We’ll assume it is right. Again that’s not really at issue.

No-one in the UK owes anything to anyone unless they are overdue on their credit card, have a bank loan,  haven’t paid their rent or whatever. There is no personal responsibility for any part of the so-called “National Debt”.

A large part of the National Debt is due to the long standing UK trade imbalance with countries like Japan and China. Everyone is probably responsible for part of that £34,281.54.  If , say, they’ve ever bought a Japanese car, that alone could be £10,000 or so.

But that person would have had their car and the Japanese car company would have been paid in full. There’s no debt there. So what’s the problem? Everyone’s happy. Someday the Japanese holders of £10k worth of treasury bonds will decide to cash them in and spend the proceeds.

They may well decide to spend them with a company the car buyer works for and the car buyer will end up getting back £10k as salary. The UK ‘debt’ will be smaller, and everyone will be even happier than they are now.