Tag Archives: Commonwealth Bank

The Japanese own their own debt so they don’t have a problem. Right?

Wrong.  Even though those of us who argue that National Debts are not quite the huge monsters of popular neo-liberal supposition often point to Japan.  Japan manages to function very effectively with a debt to GDP ratio which is over 200%,  and more than double the US and UK’s national debt ratios.

All debts and deficits are caused by people, organisations, and countries wishing to save ££, $$ or Yen or whatever. If money issued by the US, UK or Japanese governments ends up being held by the central banks of the big exporters, or by their own citizens,  and who don’t wish to spend it, then these countries have to be in debt in accounting terms.

The only solution, if indeed there is a problem of debts owned by foreign countries, is to go back to countries imposing tariff barriers to protect their trade zones and prevent the build up of these kinds of financial imbalances. That caused wars in the past and would again in the future. It isn’t a good option.

It is usually pointed out by supporters of the neo-liberal orthodoxy that Japan manages to have such a high state debt by also having lots of savers who lend the money to the government. It is, therefore, not external debt and so is a lesser problem  True, Japan usually has a trade surplus and “pays its way” abroad.

However, internal debt can be more destabilising than external debt. If Japanese savers get spooked about a potential inflation they would all start over-spending simultaneously which could set off the problem they most fear. It would be politically very difficult for the Japanese government to control that by applying taxes on its own citizens. So whereas the debt isn’t at all a direct problem for the Japanese Government, the ownership of too many financial assets by the Japanese population could give them one.

On the other hand, if their debt were owned by a foreign country, say in the form of Japanese treasury bonds, it would be somewhat different. All that country could do , if it wanted to spend its Japanese Yen, would be to give large orders for real goods and services to Japanese industrial companies. It would boost Japanese exports tremendously. That too could be inflationary, but the situation would be more manageable. The Japanese government would be able to negotiate with its foreign creditors to spend at an agreed rate. As a last resort it could even impose a tax on its own exports.

That’s essentially the position the USA is in with regard to its Chinese creditors. If there is really a problem with debts,  it is China who has the bigger one than the USA. Japan has a bigger problem too. Not so much because it has a larger debt but because it is, rather than isn’t, largely owned by its own citizens.

When Joe says he wants a surplus, he means for government but a deficit for everyone else!

The Australian public have just been told that: The ‘Age of Entitlement’ is over, we have been living beyond our means, we can’t afford to spend more than we earn, we are leaving an unsustainable debt burden for the next generation. Think of a neo-liberal falsehood and the chances are Joe Hockey will have used it in yesterday’s  budget speech. Most of all, we are told “we” need to move to balance the budget and achieve a surplus. Note that Joe means a surplus for government and a deficit for everyone else!

If the governments take more out of the economy than they spend back in, as they would by the definition of a surplus, and at the same time individuals and companies within that economy wish to save some of the money they earn, and if there is a drain of money from the economy to pay for net imports, then isn’t that a recipe for crashing the economy, Greek style?

There won’t even be any ‘improvement’ in the deficit. Joe knows that. All sensible economists know that depressing the economy will make it higher not lower. Tax revenues will simply fall by an equal or greater amount than the cuts he has made, as the economy spirals downwards. If he genuinely wants to reduce the deficit, if that is what is really important to him, he needs to press the fiscal accelerator pedal, not puts his foot on the brake. That way the economy grows, the tax take rises, people are more confident to spend and invest more, and as unemployment falls, workers start to pay tax rather than receive welfare benefits. If Joe hasn’t abolished those completely!

Edit: Further reading

Muddled Thinking Watch #5: “Increase taxes to balance the budget, the revenue well is not dry” Greg Jericho. The Guardian.


With government expenditure set to jump, we need to think about how to pay for it”

It’s not always the neo-liberals who get it wrong. Greg Jericho understands full well that austerity economics is bad news for the economy generally, and has previously written:


The point that Greg seems not to comprehend is that an argument for balanced budgets, in an importing nation like Australia, is also an argument for austerity economics. It would perhaps be just about possible to argue that if the budget were balanced by the imposition of a wealth tax and other high taxes on the high earners and wealthy then the degree of austerity would be slight but no, Greg Jericho makes statements like:

” I’ve been making the case that the budget isn’t just about cutting expenditure, it’s also about raising revenue.”

Greg might want to think about making the case that the budget should be about neither. It should be primarily about ensuring that the Australian economy is working close to its maximum capacity, and that everyone who wants a job is able to find one,  but without generating too much inflation in the process. That’s the economics. Greg also might want to consider if the collection of a pile of its own IOUs through the taxation system can actually be considered Government “revenue”.

In any case if  government expenditure does jump that will nearly all come back as a tax take or be saved in bank accounts. The only possible danger is inflation. Nothing else. That looks a very remote prospect at present.

There is the secondary consideration of the social effect of how taxes are levied and spending is conducted. If we want people to consume less alcohol for example then we tax it more. If we want to reduce the income and wealth differences in society we have a greater degree of graduated tax on incomes, a lesser dependence on regressive taxes like GST, and possibly add in a wealth tax too.  We spend more on public education and the public health sector and remove any tax loopholes, or anomalies,  which allow the private sector to benefit. Conversely, if we want to bring about a greater degree of inequality, we do the opposite. These are political questions.

It is important to separate the economics from the politics. IMO.  Or at least try to!


Want to make your business card worth something? Easy. Start a protection racket!

An interesting experiment is take out a bank note from your wallet or purse and ask your friends and family , “Why does this piece of paper have value?” You’ll get a range of answers. Some people may think “gold”. They will be completely wrong. There was a time when they would have been right. Once you could demand a fixed weight in gold in exchange for a pound or a dollar, but those days are long gone. Some may say “ Because you can buy things with it” — an answer that only begs the question! “Faith” will be another possible answer. Everyone will accept it because everyone else will!

There is the “because it is legal tender” argument. But, do we all do what we are supposed to purely because the law may require it? Do drug dealers happily accept cash, in dollars or pounds, for their wares because they are concerned to comply with legal requirements?

There must be another reason.

Suppose I wanted to establish my own currency. I’d start with a collection of business cards or even old Christmas cards, and write on the back of each one, 1 Martin, 5 Martins , 10 Martins etc. How would I ensure they were worth anything?. I could promise everyone that each ‘Martin’ would be redeemable for $1 or £1. If I was sufficiently well regarded in the neighbourhood then that would work, up to a point. That’s exactly what some countries do. They peg their currencies to another currency, usually the US$ or the Euro. These currencies work on the basis of an IOU.  However, if confidence is insufficient in the ability of that country to maintain the peg then speculators move in to try to make a killing by forcing its value down. It can be a dangerous game to play as many countries have found to their cost. If I can’t redeem the IOU at what I promise then technically I’m in default.

So what else could I do? Legally not much. But, if I were unscrupulously, not to say criminally, inclined, I could start a protection racket. I’d tell all my neighbours there was a problem with gangs of hooligans who came into the area at night to break windows and damage cars etc. I’d offer to protect everyone but the cost would be a signed business card of 5 Martins or however much I considered each person and household could afford. They would want to know how to acquire my signed business cards and I’d suggest they could paint my house, mow my lawn or clean my car or whatever. My signed business cards would acquire a value to me. I’d get work done for nothing! People from out of the area, who weren’t covered by any offer of protection would also work for me to acquire the Martins and either sell them to those who were in need of protection, or exchange them for an agreed value of goods and services. My business cards would be just like money. I’d be have to issue just enough Martins to enable my neighbours to acquire the cards at not too great a cost but not too many that they started to lose their value!

Martins would have an exchange rate! I would naturally keep an eye on what that was and use fiscal policies to control its value. My business card would still be an IOU but this time it would be a much vaguer IOU. There would be no guarantee that a ‘Martin’ would be worth anything other than 10% of 10 Martins.

Whereas everyone else would think of Martins as money, to me, as an issuer they would be useful but I wouldn’t view them in the same light as users of Martins. There would be no point in saving them up, for example, just in case I was short of them at some time in the future. I’d always be in debt in the sense that I’d always have issued more Martins than get returned to me. Would I have to balance my budget and only spend, in Martins, what I received in Martins? No of course not!

If I were arrested and thrown into jail then my cards would be instantly worthless. If another racketeer took over my patch he might, to establish some form of ‘customer relationship’, offer to redeem some of them but he would not have to.

My neighbours will be pleased to know that protection racketeer isn’t exactly my choice of profession. I’m not confident I’d be able to frighten people sufficiently to keep their mouths shut!   But governments aren’t similarly constrained. They send us tax bills so we can pay for their protection from all sort of threats, both real and imagined. If we don’t pay we don’t get our windows and cars damaged but we do run the risk of being jailed! Libertarians probably like the idea that Governments run legalised protection rackets. Liberals and Socialists less so but that’s essentially the way things are. It is the power of the State which gives the $$ and ££ their value.

So whereas Bob will take a £5 note or a $5 bill in payment from Ann because Bob knows that Col will take it from him, it cannot be an infinite chain. The chain is possible because at the end of it, Zoe has a tax bill to pay. It maybe a TV licence or car registration, and she needs that £5 note to help pay it.

If a government ceases to exist, for any reason, as happened when East Germany dissolved itself in 1989, its currency becomes worthless. There’s no need to pay the protection money, sorry taxes, any longer! The new racketeers, sorry the new unified German Government, weren’t completely heartless though. They did offer to exchange Ostmarks for Deutschmarks up to a certain value!